The Allahabad High Court ruled that scrutiny under Section 61 is not mandatory before issuing a notice under Section 74A when the department independently verifies transactions suspected to be bogus. This decision came in the case of M/s Neelkanth Entrepreneurs Private Limited, which had claimed Input Tax Credit (ITC) for services from 18 sub-contractors for the fiscal year 2025-26. The company argued that the sub-contractors were legitimate, with payments made through banking channels and transactions reflected in GSTR-2A/2B.
Read more: Calcutta High Court - ITC cannot be automatically denied to a bona fide purchaser merely because the supplier defaulted or invoices were absent in GSTR-2A; mechanical invocation of Section 74 to overcome limitation was held impermissible [Order attached]
Challenging the Show Cause Notice (SCN) dated July 9, 2026, which proposed denying ITC on grounds that the sub-contractors were non-existent, the petitioner sought the court's intervention, arguing that procedures under Section 61 and Rule 99 should have been followed first. The court clarified that Section 61 is a pre-adjudicatory scrutiny mechanism but not the sole method for initiating Section 74A proceedings, which can also be based on independent verification or credible information.
As the petitioner's returns were not selected for scrutiny under Section 61, and the department had independently verified the sub-contractors as bogus, the court found sufficient grounds for invoking Section 74A(5)(ii). The court dismissed the writ petition, allowing the petitioner to file a detailed reply to the SCN within four weeks, keeping all factual and legal contentions open for adjudication.
Order Date - 09 September 2026
Parties: M/s Neelkanth Entrepreneurs Private Limited Vs State of U.P. through Principal Secretary, Department of State Tax, U.P. & Another
Facts -
- M/s Neelkanth Entrepreneurs Private Limited, engaged in works-contract services, had claimed ITC on services received from 18 registered sub-contractors for FY 2025-26.
- M/s Neelkanth Entrepreneurs Private Limited stated that the sub-contractors were registered and active, payments were made through banking channels, and the transactions were reflected in GSTR-2A/2B.
- M/s Neelkanth Entrepreneurs Private Limited challenged the SCN dated 09.07.2026, which proposed denial of ITC along with tax, interest and penalty on the allegation that the sub-contractors were bogus/non-existent.
- M/s Neelkanth Entrepreneurs Private Limited had not filed a reply to the SCN and instead approached the High Court, contending that Section 61 and Rule 99 procedure should have been followed before issuing the notice.
Issue -
Order -
- Section 61 is a pre-adjudicatory scrutiny mechanism, but it is not the only route through which the department can arrive at material for proceedings under Section 74A. Independent verification, audit, inspection or other credible information can also form the basis of a SCN.
- Since the petitioner’s returns were never selected for scrutiny under Section 61, Rule 99 was not attracted. The department stated that independent verification had revealed that the 18 sub-contractors were allegedly bogus/non-existent.
- The Court found that the allegation of fictitious entities and fake invoices, resulting in wrongful ITC, contained the foundational allegations necessary for invoking Section 74A(5)(ii). Whether those allegations were actually correct was a matter requiring evidence and adjudication, not determination at the writ stage.
- As the petitioner had not yet replied to the SCN, the Court declined to interfere under Article 226 and dismissed the writ petition. However, it permitted the petitioner to file a detailed reply within four weeks, with all factual and legal contentions remaining open
