M/s. Santhome Latex Enterprises v. The Commissioner of CGST, Thiruvananthapuram

GSTAT, Thiruvananthapuram Bench (Division Bench, Court No. I) | Final Order No. 04/TVP/KERALA/2026 | Dated 21.08.2026

By CA Chandrasekhar Kutty, Founding Partner, Sashthi Taxlegal Advisory Services LLP

Why This Ruling Matters

In one of the early substantive rulings from the newly functional GST Appellate Tribunal, the Thiruvananthapuram Bench has delivered a decision that every taxpayer facing an audit-driven Section 74 demand should read closely. The Tribunal has held, in categorical terms, that the mere availment of ineligible self-assessed Input Tax Credit (ITC) in the Electronic Credit Ledger does not, by itself, amount to “suppression of facts” under Section 74 of the CGST Act, 2017 — and that a taxpayer’s failure to reply to an audit enquiry or Final Audit Report cannot be converted into a suppression charge either.

The decision is significant for three reasons. First, it reaffirms that Section 74 is an exceptional provision whose invocation demands material evidence of fraud, willful misstatement, or suppression with intent to evade tax — not inferences drawn from return mismatches. Second, it enforces a strict discipline on appellate authorities: a demand cannot be sustained on grounds that never figured in the Show Cause Notice. Third, it demonstrates that the GSTAT is willing to apply the settled Supreme Court jurisprudence on “suppression” from the Central Excise era — Cosmic Dye Chemical and Ballarpur Industries — with full rigour in the GST regime.

The Facts in Brief

M/s. Santhome Latex Enterprises, a manufacturer of centrifugal rubber latex used in medical and pharmaceutical applications, underwent a departmental audit of its records for the period July 2017 to March 2022. Arising from the audit, a Show Cause Notice dated 20.01.2024 was issued under Section 74(1) of the CGST Act (read with the KGST Act and Section 20 of the IGST Act), proposing recovery of alleged excess ITC of Rs. 8,56,877 for FY 2017-18 to 2021-22, with interest under Section 50 and penalty under Section 74(9) read with Section 122(2)(b).

The foundation of the notice was strikingly thin. The SCN alleged that the taxpayer had taken self-assessed ITC in the Electronic Credit Ledger “without actually verifying the eligibility thereon” and asserted that availment of ineligible or excess credit “would amount to suppression of facts” with malafide intent to evade tax.

The Adjudication: A Well-Reasoned Order Dropping the Demand

By Order-in-Original dated 24.01.2025, the Superintendent, Pattom Range, dropped the entire demand. The adjudicating authority recorded three critical findings: the taxpayer had availed ITC on the basis of supplier invoices and had filed self-certified reconciliation statements in Form GSTR-9C each year, uploading the supporting documents on the GST portal; the returns themselves showed that ineligible or blocked credit had been reversed on self-assessment; and mere contravention of Section 16(2) or Section 42(1) could not be treated as fraud, willful misstatement or suppression. Since “non-declaration of facts or information” under Explanation 2 to Section 74 was not established — and the notice left no option to confirm the demand under Section 73 — the demand was dropped in its entirety.

The Reversal in First Appeal — On a Ground Never Raised in the SCN

The Revenue appealed to the Joint Commissioner (Appeals), Kochi, arguing that the taxpayer had not furnished information called for during the audit and that the facts surfaced only through audit. By Order-in-Appeal dated 02.12.2025, the appellate authority reversed the adjudication order, holding that failure to furnish information to the proper officer when called for is tantamount to suppression under Explanation 2 to Section 74.

The difficulty was obvious: non-response to the audit enquiry was never a ground in the Show Cause Notice. The taxpayer carried the matter to the GST Appellate Tribunal.

The Tribunal’s Findings: A Point-by-Point Demolition

1. The SCN itself made out no case for Section 74. On an independent perusal of the notice, the Tribunal found that no evidence whatsoever had been adduced to show that the taxpayer knew a particular credit was ineligible yet took it in a contumacious act. The Bench held:

“Every act of transgression of section 16(2) / 42(1) of the CGST Act cannot be termed as a violation inviting proceedings under section 74 of the CGST Act unless clear and categorical evidence has been adduced to the effect that the said transgression was the result of fraud, or willful-misstatement or suppression of facts with an intent to evade tax.”

The entire notice, the Tribunal observed, was founded on the “questionable assertion” that availment of ineligible or excess credit would by itself amount to suppression, coupled with the unproven assertion of malafide intent — “vague / bald assertions” unsupported by any evidence.

2. The onus is squarely on the Department. As the law stands today, the Tribunal held, it is for the Department to establish that the taxpayer knew a particular ITC was not eligible and still went ahead and took the credit. No such assertion or evidence appeared in the SCN.

3. New grounds at the appellate stage violate natural justice. The Revenue’s appeal rested on alleged non-response to the audit enquiry and Final Audit Report — grounds absent from the SCN. Raising such additional grounds at the appellate stage, the Tribunal held, is against the fundamental principles of natural justice, and on this ground alone the appellate authority ought to have rejected the Department’s appeal. The Bench did not mince words: the Department’s appeal left it “flummoxed”, and the Order-in-Appeal “done one better and left us totally dumbfounded”. The OIA did not specify what information was sought, when it was called for, or under which statutory provision — it was, in the Tribunal’s memorable phrase, “delightfully vague”.

4. Non-reply to an audit enquiry is not suppression. It “strains our credulity”, the Bench observed, as to how a failure to reply to the audit enquiry and final audit report would amount to suppression under Section 74 — particularly when the invoice-wise reconciliation explaining the alleged ITC difference had already been uploaded through GSTR-9C and annual return filings and was available on the common portal, and Section 65 does not contemplate a statutory reply to the Final Audit Report.

5. CBIC’s own binding instruction was ignored. The Tribunal invoked Instruction No. 05/2023-GST dated 13.12.2023, which mandates that Section 74(1) may be invoked only where the investigation indicates material evidence of fraud, willful misstatement or suppression to evade tax, and that such evidence must be made part of the show cause notice. The SCN — issued after the Instruction — failed all the tests: it was not based on any investigation worth the name, and no material evidence of fraud or suppression was indicated.

6. The Supreme Court’s jurisprudence applies with full force. Relying on Cosmic Dye Chemical v. Collector of Central Excise, Bombay [1995 (75) E.L.T. 721 (S.C.)] and Commissioner of C. Ex., Nagpur v. Ballarpur Industries Ltd. [2007 (215) E.L.T. 489 (S.C.)], the Tribunal reiterated that misstatement or suppression of facts must be willful — made with intent to evade duty — and that mere omission to give correct information does not constitute suppression unless it was deliberate. When facts are known to both parties, omission by one party is not suppression.

The Holding

Answering both questions framed for decision in the negative, the Tribunal held that, in the absence of any other evidence to the contrary:

• The mere act of taking ineligible self-assessed ITC in the Electronic Credit Ledger in terms of Section 42(1) would not amount to suppression of facts falling within Section 74(1) of the CGST Act; and
• Mere failure to reply to the audit enquiry or Final Audit Report would not amount to suppression of facts in terms of Section 74 of the CGST Act, 2017.

The impugned Order-in-Appeal was set aside and the appeals allowed with consequential relief.

Practical Takeaways for Taxpayers and Practitioners

• Test every Section 74 notice against the evidence threshold. A demand that rests on GSTR-2A/3B/9C mismatches, without material evidence of willful conduct, is vulnerable at the threshold. The CBIC Instruction of 13.12.2023 is a powerful shield — cite it.
• Disclosure on the portal is your best defence. Santhome Latex succeeded largely because its invoice-wise reconciliation was already on record through GSTR-9C and annual returns. Meticulous, contemporaneous filing converts a suppression allegation into a disclosure narrative.
• Watch for demands travelling beyond the SCN. Any order — adjudication or appellate — that sustains a demand on a ground not found in the notice is open to challenge on natural justice grounds alone.
• Silence during audit is not an admission. While responding to audit enquiries remains sound practice, this ruling establishes that non-response cannot be alchemised into “suppression” where the underlying data is already available to the Department.
• Limitation strategy matters. Once Section 74 fails, demands for earlier years may be time-barred if tested under Section 73 — a without-prejudice argument worth preserving in every reply.

Our Perspective

This is the jurisprudential line taxpayers have long argued from High Court precedent, now speaking through the GSTAT itself — and with unusual candour. The Bench’s appreciation of the adjudicating authority’s courage in dropping the demand (“separating the grain from the chaff”), and its pointed criticism of the mechanical review and appellate process, signal that the Tribunal intends to hold the Department to the discipline that Section 74 demands. For the large volume of audit-driven Section 74 notices issued on bare return mismatches, this ruling — read with CBIC Instruction No. 05/2023-GST — provides a robust framework of defence.

It must, however, be noted that the Tribunal did not hold the ITC to be eligible; indeed, the adjudicating authority had recorded that the noticee was not eligible for the credit in question. The ruling turns on the machinery of Section 74 — the absence of proven willful suppression — and on natural justice. Taxpayers should therefore treat this as a decision on the limits of Section 74, not as a charter for casual self-assessment.

Disclaimer: This article is for general information only and does not constitute professional advice. Readers should seek specific advice on the facts of their own case.

Sashthi Taxlegal Advisory Services LLP | GST Litigation, Advisory and Compliance | Hosur • Bengaluru | sashthitaxlegal.com