Appellate Authority cannot uphold tax demand under Section 74 while substituting penalty under Section 73; revenue cannot improve upon deficient show cause notice at second appellate stage: GSTAT Thiruvananthapuram

The Tribunal held that a penalty under Section 73(9) can follow only a determination under Section 73(1), and that a Section 73 penalty riding on a subsisting Section 74 demand has no foundation in law; further, the revenue cannot introduce new grounds not found in the show cause notice at any appellate stage.

The Goods and Services Tax Appellate Tribunal, Thiruvananthapuram Bench, has allowed the appeal of a manufacturer of nuts and bolts and set aside the entire order-in-appeal, holding that the Appellate Authority's order was self-contradictory and travelled beyond the scope of the show cause notice [Chelco Bind Grips v. Commissioner of CGST & CE, Thiruvananthapuram].

The appellant's ITC of ₹3,96,295 had been denied under Section 74 on the ground that invoices were not reflected in GSTR-2A and the supplier's GSTIN stood cancelled. The First Appellate Authority found that there was no fraud, wilful misstatement, collusion or suppression on the part of the appellant, since the appellant could not have known whether her supplier had defaulted on taxes. Having made this clear finding against the applicability of Section 74, the Appellate Authority nevertheless upheld the tax demand confirmed under Section 74(1) of the adjudication order, while substituting the penalty from Section 74(1) to Section 73(9) — a provision that was never invoked in the show cause notice.

The Bench of Vice-President Subramanya Rayaprol and Ramamoorthi Sriram (Technical Member) identified two independent jurisdictional infirmities. First, the order was internally self-contradictory: having found that Section 74 was not applicable, the Appellate Authority could not simultaneously uphold a tax demand that continues to stand under Section 74(1). A penalty under Section 73(9) can follow only a determination under Section 73(1), which no authority had made. A Section 73(9) penalty riding on a subsisting Section 74(1) demand was a classic case of non-application of mind. Second, the show cause notice proposed penalty only under Section 74(1), and the Appellate Authority's suo motu substitution of penalty under Section 73(9) — a charge never put to the appellant — went beyond the scope of the notice.

The Tribunal placed strong reliance on the Supreme Court's recent judgment in GR Infra Projects Limited v. State of Madhya Pradesh (2026), where the Court refused to look at the Revenue's counter affidavit to supplement a deficient show cause notice, holding that the requirements to make a notice or order valid should be contained in the notice or order itself and cannot be supplanted at a later stage. The Tribunal observed that howsoever meritorious the Revenue's submissions may be, they cannot help when no case for penalty is made out in the show cause notice. The decision reinforces that the show cause notice is the foundation of every proceeding, and neither the adjudicating authority nor the appellate authority can travel beyond its four corners.

2026-juristway.com-2872-GSTAT(Thiruvananthapuram)-GST  |  GSTAT Thiruvananthapuram  |  APL/46/TVP/2026  |  08.10.2026