The Orissa High Court addressed a case involving M/s Manoja Kumar Nayak, who had availed Input Tax Credit (ITC) from a supplier later identified as fake. Upon receiving a departmental letter, the petitioner voluntarily reversed the entire ITC amounting to ₹4.39 lakh in GSTR-3B before any Show Cause Notice (SCN) was issued and informed the department. Despite this, the authorities issued an SCN under Section 74, demanding tax, interest under Section 50, and a penalty, alleging fraudulent ITC.
The High Court considered whether Section 74, interest under Section 50, and penalties could be imposed when ITC is voluntarily reversed before the issuance of an SCN without evidence of fraud. The Court determined that Section 74 is applicable only in cases of fraud, wilful misstatement, or suppression of facts, and mere allegations based on third-party statements are inadequate without independent evidence against the recipient.
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Since the petitioner had reversed the ITC before the SCN, demonstrating bona fide conduct, the continuation of proceedings under Section 74 was deemed unjustified. Moreover, interest under Section 50 is applicable only when ITC is wrongly availed and utilized. As the ITC was reversed and a sufficient balance was maintained in the electronic credit ledger, no real utilization occurred, and therefore, no interest liability existed. The Court criticized the authority's reliance on a DGGI alert without independent inquiry, labeling the approach as mechanical and arbitrary, thus invalidating the order.
Order Date - 08 April 2026
Parties: M/s Manoja Kumar Nayak & M/s Babamani Roadways & Borewells Vs GST & Central Excise Authorities (Rourkela Commissionerate)
Facts -
- M/s Manoja Kumar Nayak, engaged in transport business, availed ITC from a supplier later found to be fake (Auxesia Traders).
- On receiving a departmental letter, the petitioner voluntarily reversed entire ITC (₹4.39 lakh) in GSTR-3B before issuance of SCN and informed the department.
- Despite reversal, the department issued SCN under Section 74, demanding tax, interest under Section 50, and penalty alleging fraudulent ITC.
- The adjudicating authority ignored the reply and passed order confirming demand, leading the petitioner to approach the High Court.
Issue -
- Whether Section 74, interest under Section 50, and penalty can be imposed when ITC is voluntarily reversed before SCN without proof of fraud?
Order -
- The Court held that Section 74 applies only when there is fraud, wilful misstatement, or suppression of facts. Mere allegation based on third-party statements (supplier) is insufficient without independent evidence against the recipient.
- The petitioner had already reversed ITC before issuance of SCN. This showed bonafide conduct, and therefore continuation of proceedings under Section 74 was unjustified.
- Interest is applicable only when ITC is wrongly availed AND utilised. Since sufficient balance existed in electronic credit ledger and ITC was reversed, no real utilisation occurred → no interest liability.
- The authority acted solely on DGGI alert without independent inquiry. The Court criticised this approach as mechanical, arbitrary, and without application of mind, rendering the order invalid.
