"Section 74 Isn't a Magic Wand": Allahabad High Court Pulls the Plug on 'Circular Trading' Allegations Made on Guesswork
In a significant GST ruling with real-world impact for trade and industry, the Allahabad High Court in M/s Raghuvansh Agro Farms Ltd. v. State of U.P. & Ors. (2025(12)LCX0270) set aside proceedings initiated under Section 74 on the ground that the foundational ingredients of fraud / wilful misstatement / suppression to evade tax were missing, and the case was built largely on assumptions (like demanding toll-plaza receipts) instead of statutory evidence.
The judgment is a timely reminder that Section 74 is not a default setting for every mismatch, suspicion, or survey-based allegation-especially when authorities cannot record clear, evidence-backed findings.
1) The backdrop: a survey, a Section 74 notice, and a familiar allegation
The petitioner, M/s Raghuvansh Agro Farms Ltd.(2025(12)LCX0270), claimed it was maintaining books properly and paying tax regularly. A survey was conducted on 22.01.2019, following which a notice under Section 74 was issued in Form GST DRC-01 dated 07.04.2021. The petitioner replied on 07.05.2021, and later another notice dated 13.05.2022 followed; despite replies and documents, the petitioner alleged no proper opportunity of personal hearing, and ultimately an adverse order dated 31.05.2023 was passed, followed by dismissal of appeal (order dated 10.01.2025).
What was the department's core narrative? The evergreen GST accusation: "circular trading"-i.e., paper transactions and ITC without actual movement of goods.
2) The petitioner's defence: "My paperwork isn't fiction"
The petitioner's stand was straightforward: purchases and sales were supported by tax invoices, e-way bills, bilties, and payments were routed through banking channels; transactions were reflected in statutory returns (GSTR-1, GSTR-2A/2B, GSTR-3B).
Some specific factual points from the record (important because the Court later relied on the "evidence trail"):
Purchases were made from suppliers (the judgment references, among others, Sadguru Traders and Sibri Traders), and the petitioner argued that supplier-side problems discovered later cannot automatically contaminate the buyer when the supplier was registered at the time of transaction and statutory conditions were complied with.
For movement/transport, the petitioner relied on e-way bills + bilty + tax invoice, and argued that there is no specific GST provision requiring "toll plaza receipts" as mandatory proof of movement.
On weight-related allegations, the petitioner explained it had a weighing machine at business premises, and in the ordinary course of business (supari bags), the vehicle was not sent for weighbridge slips-arguing that absence of weighbridge slips cannot itself prove "no movement".
3) Two legal flashpoints in the case
(A) Can Section 74 be invoked without pleading/proving "fraud/wilful misstatement/suppression to evade tax"?
This is the heart of the decision.
Section 74 is designed for a specific class of cases-those involving fraud, wilful misstatement or suppression of facts to evade tax. The Court emphasized that jurisdiction to proceed under Section 74 arises only when these core ingredients exist and are recorded with supporting material.
(B) Jurisdiction of State GST vs Central GST (cross-empowerment issue)
The petitioner also raised that it fell under Central jurisdiction, and therefore State authorities could not initiate proceedings absent proper legal authorization/cross-empowerment. The Court noted that despite the plea, no material was shown (even in counter affidavit) to justify acquisition of jurisdiction by State GST authorities in this case.
This point matters because jurisdictional defects can be fatal-you cannot cure a lack of authority with a strong suspicion.
4) The State's stance: "No toll receipts, no movement, hence bogus ITC"
The State argued the petitioner was engaged in circular trading and had claimed ITC without actual movement. It pressed that the taxpayer failed to produce toll plaza receipts and other "cogent material" to prove movement. The State also relied on the Supreme Court decision in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. (2023).
But the High Court carefully distinguished the situation on facts-because here, there was a substantial documentary chain: returns, e-way bills, banking trail, and ledger records, and the department could not show statutory backing for insisting upon toll receipts.
5) The High Court's reasoning: Section 74 needs "ingredients", not "imagination"
(i) Absence of Section 74 ingredients = lack of jurisdiction
The Court's logic is sharp: if a show cause notice and subsequent order do not record (with evidence) the existence of fraud/wilful misstatement/suppression to evade tax, the very foundation of Section 74 collapses. It held that once the basic ingredient is missing, proceedings become without jurisdiction, because authority to proceed under Section 74 is triggered only when those ingredients are present.
It is not enough to use the label "circular trading" like a rubber stamp. Section 74 is not a headline; it's a threshold.
(ii) No categorical findings; evidence brushed aside
The Court recorded that the adjudicating authority had not recorded specific categorical findings supported by evidence, and in such absence, the proceedings were vitiated.
Equally important: the record reflected that transactions were on the portal and in returns, bank statements were furnished, yet "merely on the basis of survey", evidence was brushed aside.
(iii) Toll plaza receipts are not a statutory requirement
A particularly practical part of the judgment: the Court said the adverse inference drawn for not producing toll receipts was apparently perverse, since the revenue failed to show any GST Act/Rules provision compelling production of toll receipts as proof of movement, especially when e-way bills, bilties and invoices existed.
This is a crucial point for trade: GST is a statutory regime; compliance must be judged on statutory requirements, not departmental wish-lists.
(iv) If supplier-side proceedings are dropped, you can't keep "guilt by association" alive
The Court noted that proceedings against one supplier (referred in the record) had been set aside and not reversed, and once proceedings are dropped against the supplier itself, adverse inference against the purchaser on that basis becomes unsustainable-especially without independent material.
(v) Blind reliance on "inputs/intelligence" is not adjudication
The Court relied upon its own precedent (notably Safecon Lifescience) to reiterate that information received from intelligence formations must be verified and materials relied upon should be provided to the taxpayer; authorities cannot proceed "with closed eyes".
6) The outcome: orders quashed; refund directed
Given the above, the High Court held that the impugned orders could not be sustained, quashed the appellate and adjudication orders, allowed the writ petition, and directed that any amount deposited be refunded within one month of producing a certified copy.
7) Why this judgment matters: practical implications for GST litigation
A. Section 74 vs Section 73: the "mental switch" authorities must make
Many GST disputes escalate unnecessarily because the department starts with Section 74even when facts align more with Section 73 (non-fraud cases). This judgment strengthens the argument that:
Section 74 requires a higher threshold
The department must show mens rea-like indicators (fraud/wilful misstatement/suppression to evade) and record findings
Otherwise, the very proceedings can be struck as without jurisdiction B. Evidence hierarchy: documentary trail beats "suspicion"
The judgment reinforces what genuine businesses bank upon:
E-way bills, invoices, bilties, bank payments, GSTR trail are primary proof
Departments cannot insist on non-statutory proofs (like toll receipts) as if they are mandatory compliance artifacts
C. Jurisdiction objections deserve serious handling
Where taxpayers fall under Central jurisdiction and State authorities initiate proceedings, this case supports a strong procedural objection if:
There is no demonstrated legal authority / cross-empowerment basis on record
The State cannot justify how it assumed jurisdiction despite the plea
8) A quick litigation checklist inspired by this case
If your client is facing a Section 74 "circular trading" allegation, check these immediately:
1. Does the SCN explicitly plead fraud/wilful misstatement/suppression to evade tax?
2. Is there a clear, evidence-backed finding of those ingredients in the order?
3. Have they relied on third-party "reports/inputs"? Were those documents supplied to you?
4. Have you produced the statutory trail? (Invoice, e-way bill, bilty, banking trail, GSTR-1/3B, 2A/2B)
5. Are they demanding "extra" documents not mandated by law? (toll slips, CCTV, etc.) Challenge the legal basis.
6. Supplier-side issues: Was supplier registered at transaction time? Were proceedings against supplier later dropped/modified?
7. Jurisdiction: Is the notice issued by the correct "proper officer"? If cross-empowerment/jurisdiction is disputed, press it early and repeatedly.
Closing note
This ruling doesn't give a free pass to fake billing-but it delivers something equally important: the rule of law. If the State wants to use the sharp tool of Section 74, it must first show that the case fits the tool-with evidence, findings, and statutory discipline, not with assumptions and afterthoughts.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.