Decided 15 September 2026. The Bengaluru Bench of GSTAT has set aside section 74 penalties imposed by the first appellate authority on audit issues relating to excess ITC and transitional credit, where the taxpayer had paid the agreed tax and interest months before the show cause notice. Applying the Supreme Court's Tata Steel ruling, the Tribunal held that audit detection is not suppression and treated the payments as made under section 73(5).
Case at a glance
| Case | Conduent Business Services India LLP v. Commissioner of Central Tax, Bengaluru East |
| Forum | GSTAT, Bengaluru Bench, Court II |
| Appeal No. | APL/10/BUR/2026 |
| Date of order | 15 September 2026 |
| Pre-SCN payments | Tax Rs 7,78,693 and interest Rs 5,77,235 via DRC-03 |
| Result | Appeal allowed; s.74 penalty on Issues 1 and 3 set aside |
Facts of the case
An audit for July 2017 to March 2020 raised three issues: excess ITC in GSTR-3B over GSTR-2A, ITC blocked under section 17(5), and irregular TRAN-1 credit. The appellant paid the agreed tax and interest through DRC-03 in June and July 2022, before the notice of 25.01.2023 under section 74.
The adjudicating authority dropped section 74 penalty on the first and third issues and confirmed it on the second, which the appellant paid at the reduced rate. On the department's appeal after review, the first appellate authority imposed section 74 penalty on all issues on 01.10.2024.
Issue before the Tribunal
Can section 74 penalty be imposed on audit-detected mismatches where the records were on the portal and tax with interest was paid before the notice?
What the Tribunal held
- The plea of institutional bias because a Joint Commissioner heard an appeal filed on a Commissioner's review was rejected; under V.K. Khanna, a real likelihood of bias, not mere suspicion, is required.
- Section 74 requires fraud, wilful misstatement or suppression with intent to evade. Under Tata Steel v. Union of India (2026 INSC 920), these cannot be recited mechanically; foundational facts must be in the notice and an audit observation does not by itself mean suppression.
- All returns and TRAN-1 were on the portal. The appellate authority wrongly held that a section 74 penalty must follow once tax is confirmed under that section.
- Tax and interest were paid before the notice, so sections 73(5) and 73(8) apply (Adecco Flexion Workforce Solutions, Karnataka High Court). The order was set aside and the payments on Issues 1 and 3 treated as payments under section 73(5).
Practical takeaways for taxpayers
- Paying agreed audit amounts with interest before the notice strengthens a plea against section 74 penalty.
- Challenge notices that invoke section 74 only because the issue was found in audit.
- A bias objection needs concrete facts; mere departmental hierarchy is not enough.
Frequently asked questions
Does an audit finding automatically justify section 74?
No. GSTAT Bengaluru, applying Tata Steel, held audit detection alone is not suppression.
What happens to tax paid before the notice?
It was treated as payment under section 73(5), which can conclude proceedings without penalty.
Facing a similar GST dispute?
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This summary is based on the order of the GST Appellate Tribunal, Bengaluru Bench (Court II) in Appeal No. APL/10/BUR/2026. It is general information, not legal advice; the outcome of any case depends on its own facts and the full text of the order.