Keep the ITC, demand and prosecution questions separate
A genuine purchase can be disputed if the department alleges invoices without supply, upstream fraud or non-payment by a supplier. Establish the actual transaction first. The claimant bears the burden of proving eligibility for input tax credit under section 155. Section 16 imposes distinct conditions, including receipt of goods or services and the tax-payment condition, plus supplier reporting and communication requirements where applicable for the period. Invoices and payment evidence matter but do not by themselves prove supply or discharge every statutory condition.
A civil credit dispute does not establish a criminal offence. Read the alleged conduct, amount, period and evidence separately. Apply sections 73 or 74 for the periods up to FY 2023–24 to which they apply, and section 74A for FY 2024–25 onward. Do not infer a fraud finding or personal liability from a mismatch.
| Section 132 issue | What to check |
|---|---|
| Clauses (b) and (c) | Issuing an invoice without supply that leads to wrongful credit or refund; and availing credit using such an invoice or fraudulently without an invoice, respectively. |
| Clause (d) | Collecting an amount as tax and failing to pay it to government beyond three months from the date payment becomes due. |
| Clause (l) | Attempting or abetting the offences to which the clause applies. Analyse the specified conduct; do not assume the same punishment as the principal offence. |
| Amount bands and bail | For relevant offences the ordinary bands above ₹5 crore and above ₹2 crore through ₹5 crore carry maxima of five and three years respectively, with fine. The above-₹1 crore through ₹2 crore band in clause (iii) applies to invoice issuing under clause (b). The cognizable and non-bailable category under subsection (5) is limited to offences in clauses (a) to (d) punishable under clause (i); other offences are generally non-cognizable and bailable. Check the operative version and any repeat-offence rule. |
Section 69 requires the Commissioner’s reasons to believe that the specified offence and applicable punishment conditions are met, and authorization. Its scope is not limited to the above-₹5 crore band. In Radhika Agarwal the Supreme Court explained safeguards for arrest, including grounds in writing. A section 70 summons is not itself an arrest order; follow the summons terms, verify applicable document authentication and seek a written extension if needed.
Use the cases for the propositions they decided
In Suncraft Energy, the Calcutta High Court addressed a FY 2017–18 reporting mismatch and directed action against the supplier first on the facts, with exceptional cases treated separately. The Supreme Court declined to interfere in view of the facts and low demand; it did not affirm a universal rule that buyers retain ITC or that recovery against the supplier must always be exhausted. Older VAT authorities are not direct interpretations of section 16. Ecom Gill Coffee Trading, under Karnataka VAT, illustrates why proof of actual movement can matter in addition to the invoice and payment.
A retrospective cancellation or a remote supplier allegation calls for an invoice-level inquiry, not a presumption that ITC is either valid or invalid. Prove dealings with the actual supplier and satisfy the applicable statutory conditions. If a statement is relied on, seek the underlying material, a hearing and, where material, cross-examination with reasons. The effect of any refusal depends on the reliance, facts and prejudice; section 136 does not grant an unconditional adjudication right.
Preserve the transaction trail
| Evidence | What it shows |
|---|---|
| Supplier and contract | GST registration history, identity, purchase terms, counterparties and actual communications. |
| Invoice and filing | Invoice, applicable IRN and e-way bill, supplier return information for the period and reconciliation of corrections. |
| Physical or service performance | Carrier, vehicle and loading records, independent weighments, gate and stock entries, consumption or onwards sale; for services use deliverables and acceptance. Toll logs help trace a vehicle but do not establish what it carried. |
| Settlement | Bank advice, supplier ledger and any returns, credits or adjustments. Investigate inconsistencies and possible circular transfers without treating banking channels as conclusive. |
Worked illustrations
1. Steel movement and ₹57.60 lakh of credit
At an assumed 18%, ₹3.20 crore of taxable steel value gives ₹57.60 lakh. Over 22 trucks, 500 tonnes averages about 22.73 tonnes a truck; check actual payload by vehicle rather than assuming equal loads. Match the claimed 48-hour transit to weighments, e-way bills and independent carrier records. Tie stock to production and sales; no enforcement outcome is assumed.
2. Operating account attachment
For an attachment during a section 67 inquiry, obtain the DRC-22 order and check the authority, proceedings, ownership, necessity and supporting material under the version of section 83 in force. Evidence of ₹25 crore in land may support a request for narrower security or release but does not mandate relief in 48 hours. Radha Krishan Industries addresses a prior version of section 83 and emphasizes statutory conditions and tangible material. Check Rule 159 objection procedure and the attachment’s one-year limit from the original order; rejection does not restart it.
3. ₹45 lakh credit restriction still shown after 14 months
Under Rule 86A as applicable in November 2026, a restriction ceases after one year from imposition; 14 months is about two months beyond that point. Obtain exact order and ledger dates and seek correction if the portal still shows the old restriction. A show-cause notice does not extend it. Notification 05/2026 provides the DRC-26 restriction, DRC-27 objection and DRC-28 decision procedure from 1 April 2027; use the procedure applicable to the date.
4. Summons in an above-₹5 crore investigation
Attendance, identity and the alleged role are separate issues. Identify the amount attributable to the alleged offence and the material concerning the individual. Obtain the summons and, if an arrest is made, the written grounds and arrest documents. The value alleged by itself does not prove an offence or justify arrest.
5. Third-tier supplier allegation
Trace the actual direct supplier, provenance, movement and stock and test section 16. Lack of a contract with a distant supplier is relevant context but not a statutory safe harbour.
6. Transporter statement in a ₹75 lakh proposed penalty
Request the complete statement and the documents that corroborate it. Explain why questioning the witness matters, produce the weighment and carrier records, and request a hearing under section 75(4) where applicable. Preserve the response and the decision on the request.
7. Listed manufacturer with a ₹2.40 crore notice
Apply Ind AS 37 where required. Recognise a provision if a present obligation, probable outflow and reliable estimate exist; measure the best estimate, not automatically the notice amount. Otherwise disclose a contingent liability unless the possibility of outflow is remote, subject to applicable disclosure rules. A non-remote possible outflow and a remote one are different conclusions.
Respond on the record
Index the disputed invoices and evidence, meet the actual response deadline and request the relied-on materials. A voluntary payment has a separate statutory basis; do not treat a search as requiring an on-the-spot deposit. Preserve the order or intimation, grounds, dates, response and available remedy for each enforcement action.
Frequently asked questions
1. Does an upstream allegation establish arrest grounds?
No. Check the specified offence, punishment conditions, individual role, material, authorization and safeguards.
2. Can an operating bank account be attached?
Only where the applicable section 83 conditions are met. Check necessity, authority and the Rule 159 response route.
3. Does a notice extend a Rule 86A restriction?
No. Check the one-year endpoint and the procedure in force at the relevant time.
4. Is cross-examination automatic?
Request it where an adverse statement is material and explain why. Evaluate the decision and resulting prejudice on the facts.
5. Does later registration cancellation decide ITC?
No. Review the order, period, actual supplier, evidence and statutory eligibility conditions.
6. What is the strongest evidence package?
Combine statutory invoices and filings with independent performance, stock or service records and financial settlement evidence.
Sources
- India Code: CGST Act
- Supreme Court: Radhika Agarwal, GST arrest safeguards
- Supreme Court: Radha Krishan Industries, provisional attachment
- Supreme Court: Ecom Gill Coffee Trading, evidence under Karnataka VAT
- Calcutta High Court: Suncraft Energy, MAT 1218/2023 (judgment copy)
- Supreme Court: Suncraft Energy, 14 December 2023 (order copy)
- Gazette Notification 05/2026–Central Tax: Rule 86A and Rule 159 changes
- CGST Rules: Rule 86A and related procedure
- MCA: Ind AS 37, provisions and contingent liabilities