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The Allahabad High Court has allowed GST proceedings against Neelkanth Entrepreneurs to continue because the show-cause notice alleged facts capable of invoking the fraud provision in Section 74A. It did not find that the subcontractors were fake or decide whether the company was entitled to input tax credit (ITC). Those questions remain for the tax authority to determine after considering the company’s reply and evidence.
What was the Allahabad High Court case about?
In M/S Neelkanth Entrepreneurs Private Limited Thru. Its Director v. State of U.P. Thru. Principal Secretary, Department of State Tax, U.P., Lucknow and Another, Writ Tax No. 1024 of 2026, the Allahabad High Court considered a challenge to a show-cause notice dated 9 July 2026. The notice was issued under Section 74A(1) of the CGST Act. Justices Abdhesh Kumar Chaudhary and Shekhar B. Saraf dismissed the writ petition on 9 September 2026. (Taxscan case summary; reproduced judgment.)
Neelkanth, a works-contract service provider, said it carried out substantial subcontracting work for NCC Limited and engaged 18 registered subcontractors during financial year 2025–26. It relied on work orders, tax invoices, measurement and work-completion records, bank statements, GST registration-status documents, GSTR-2A/B2B material and signed undertakings.
The department alleged that the subcontractors were bogus or non-existent and that Neelkanth had wrongly claimed ITC. These were allegations in the notice, not findings that the High Court made after deciding the underlying facts.
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Can GST issue a Section 74A notice for fake invoices?
The court held that the notice’s allegations were capable, on their face, of supplying the foundational facts needed to invoke Section 74A(5)(ii). The notice alleged that the subcontracting chain and corresponding invoices were built around fictitious entities, with fake documents or invoices, inward supplies without actual movement of goods, and deliberate use of the resulting ITC.
“An allegation that the entire chain of sub-contracts and the corresponding invoices were engineered around fictitious entities is, on its very face, an allegation of a fraudulent claim of Input Tax Credit and is squarely capable of attracting Section 74A(5)(ii).”
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The court’s conclusion was about whether the notice stated allegations capable of engaging the fraud provision—not whether those allegations were true. Section 74A(1) was the stated basis for issuing the notice; Section 74A(5)(ii) was the fraud-linked provision discussed in assessing the alleged conduct.
Does a GST officer have to issue a Section 61 notice first?
No, not as an invariable legal precondition, the bench held. Sections 61 and 74A operate independently, so return scrutiny under Section 61 and Rule 99 does not have to precede every Section 74A notice.
The judgment also identified an important qualification: if the proper officer has only discrepancy material drawn from returns and no independent source of information, non-compliance with Section 61 and Rule 99 may expose the proceedings to challenge. The ruling therefore does not establish either that scrutiny is always required or that it can never matter.
What did the court decide—and what did it leave open?
| Question | What the judgment says |
|---|---|
| Did this notice state allegations capable of invoking the fraud provision? | Yes. The High Court found the allegations described in this notice capable of invoking Section 74A(5)(ii). |
| Were the subcontractors actually fictitious? | Not decided by the High Court; this factual issue remained for adjudication. |
| Was Neelkanth entitled to claim the disputed ITC? | Not decided. The taxpayer’s legal and factual contentions remained open. |
| Was the writ petition allowed to stop the notice proceedings? | No. The challenge was dismissed, while an opportunity to reply to the notice was preserved. |
The court distinguished an absence of foundational allegations from a dispute over whether pleaded allegations are factually correct. The latter requires the adjudicating authority to consider evidence, potentially including the taxpayer’s records and physical verification of the subcontractors’ existence and capacity.
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What evidence can a taxpayer submit against an allegation of bogus subcontractors?
In this case, Neelkanth said it had relied on records that could help address whether subcontracting work occurred and whether the suppliers were genuine. The court did not rule that any particular document proves entitlement to ITC; it indicated that evidence belongs in the adjudication process.
- Subcontract work orders and tax invoices.
- Measurement sheets and records of work completion.
- Bank statements relating to the transactions.
- GST registration-status documents and GSTR-2A/B2B material.
- Signed undertakings from the subcontractors.
- Evidence relevant to the subcontractors’ actual existence and capacity, including any physical verification considered in adjudication.
What happens next in this case?
Neelkanth had not filed a reply to the show-cause notice before approaching the High Court. Although the court dismissed the writ petition, it said the company could submit a detailed reply within four weeks. If filed within that period, the authority was to consider it on its merits, provide a hearing and remain uninfluenced by the High Court’s observations. The merits of the company’s case were left open.
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The ruling concerns the notice and procedural posture before the court. It does not guarantee how another taxpayer’s challenge or adjudication will be decided.
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