The Allahabad High Court has delivered a significant ruling settling — at least for the Allahabad jurisdiction — the contentious question of whether scrutiny under Section 61 of the CGST Act is a mandatory precondition for issuing a show cause notice under Section 74A. In a detailed judgment running into 50 paragraphs, the Division Bench of Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary has held that Section 61 and Section 74A "lack commutative property" — Section 61 may lead to Section 74A, but the reverse is not true. The ruling comes in M/s Neelkanth Entrepreneurs Pvt. Ltd. v. State of U.P., decided on 09.09.2026.
The petitioner, a works-contract company executing sub-contracts for NCC Limited, had its ITC challenged through a Section 74A(5)(ii) SCN alleging that eighteen sub-contractors from whom the petitioner had availed ITC were bogus and non-existent. Without filing any reply to the SCN, the petitioner rushed to the High Court arguing that Section 61 read with Rule 99 created a mandatory pre-scrutiny safeguard, and that the department was obligated to first issue an ASMT-10 notice, consider the response, and only then proceed under Section 74A. The petitioner relied on a string of High Court decisions — Goverdhandham Estate (Rajasthan, 2024), Pepsico India Holdings (Gauhati, 2025), Ramhari & Brothers (Rajasthan, 2026), Qualicum Solutions (Orissa, 2024), and Amex Services (Calcutta, 2024) — all of which had held Section 61 compliance mandatory.
The court distinguished every one of these precedents on a single crucial factual ground: in each of those cases, the department had admittedly initiated scrutiny under Section 61 and then jumped to Section 73/74 without completing the scrutiny process. In the present case, no scrutiny was ever undertaken — the SCN traced its genesis to independent verification revealing bogus sub-contractors. The court held that Section 74A(1) opens with the words "where it appears to the proper officer" — an "unfettered and unbound formulation which is not tethered to any one source of information, be it scrutiny under Section 61, audit under Sections 65/66, inspection under Section 67, or independent verification." The word "appears" has a wider amplitude subsuming all these sources jointly or severally.
The court also dismissed the petitioner's challenge to Section 16(2)(c) as ultra vires, noting that the issue had been settled by the Supreme Court's recent dismissal of the SLP in Bhandari Scrap Traders (2026), affirming the Gujarat HC's judgment in Maruti Enterprises. On the question of whether the SCN satisfied the jurisdictional threshold for Section 74A(5)(ii), the court held that specific allegations of fictitious entities and fabricated invoices are "on their very face, an allegation of a fraudulent claim of ITC" and meet the statutory requirement. The writ petition was dismissed with liberty to file reply within four weeks, with all contentions on merits kept open.
2026-juristway.com-1199-HC(Allahabad)-GST | High Court of Allahabad | Writ Tax No. 1024 of 2026 | 09.09.2026