A supplier's registration got cancelled after you bought from them. The Allahabad High Court says that alone isn't enough to cost you the credit — and the Supreme Court declined to disturb it

A recurring GST demand pattern is a Section 74 notice landing years after a genuine purchase, triggered not by anything the buyer did but by the supplier's GST registration being cancelled — long after the invoice, e-way bill and payment were real. The Supreme Court has now let stand a High Court ruling that draws a firm line around when that notice can actually succeed.

What happened

M/s Safecon Lifescience Private Limited, a pharma trading and manufacturing business, bought medicines in April 2021 from M/s Unimax Pharma Chem, based in Bhiwandi, Thane (Maharashtra). The purchase was backed by tax invoices, e-way bills, transport documents and payment through banking channels — the ordinary paper trail of a real transaction. The UP GST department later issued a notice under Section 74 of the UPGST Act (the State mirror of Section 74 of the CGST Act) — the fraud, wilful-misstatement or suppression demand provision — alleging wrongly availed ITC, on the ground that the supplier's GST registration had since been cancelled and that irregularities were alleged in the supplier's own upstream purchases. Orders confirming the demand followed: the Deputy Commissioner on 12 January 2022, upheld in appeal by the Additional Commissioner on 20 December 2022. Safecon challenged both before the Allahabad High Court.

What the courts actually held

The Allahabad High Court (Writ Tax No. 389 of 2023, 9 September 2025) quashed both orders. Its reasoning: Section 74 can be invoked only where its own ingredients — fraud, wilful misstatement or suppression of facts, with intent to evade tax — are established against the recipient itself. A supplier's registration being cancelled after the transaction, or allegations confined to the supplier's own upstream chain, don't substitute for that finding. The Court's reasoning tracks CBIC Instruction No. 05/2023-GST, dated 13 December 2023, which it quotes: Section 74(1) "cannot be invoked merely on account of non-payment of GST without specific element of fraud or wilful mis-statement or suppression of facts to evade tax." Safecon had discharged its burden of proving a genuine transaction through invoices, e-way bills, transport documents, banking-channel payment and matching returns; absent any specific finding of fraud against Safecon, and absent cogent material rebutting that evidence, the demand could not stand.

The Revenue took the matter to the Supreme Court (SLP(C) No. 23993 of 2026). On 17 July 2026, a bench of Justices Aravind Kumar and Vipul M. Pancholi condoned the delay in filing but declined to grant leave, dismissing the petition at the admission stage. The effect is that the Allahabad High Court's ruling stands undisturbed.

What this changes for a reconciliation team

Registration cancellation happens for reasons that have nothing to do with whether a specific past invoice was real — a supplier can stop filing, get flagged for unrelated conduct, or be cancelled months or years after selling you genuine goods against a genuine invoice. The Revenue's default move has often been to treat the buyer's ITC on every historical invoice from that supplier as tainted and reach for Section 74, which carries a longer limitation period and steeper penalty exposure than the ordinary Section 73 demand (5 years and up to 100% penalty under Section 74(10)/74(9), against 3 years and 10%-or-₹10,000 under Section 73(10)/73(9)). This ruling narrows that default: Section 74 needs its own ingredients proved against you, not borrowed from your supplier's later problems.

Keep this mechanism distinct from the two more common ITC-blocking situations reconciliation teams already track. It has nothing to do with a supplier who simply hasn't filed GSTR-1 — there the credit was never communicated to your GSTR-2B in the first place, so nothing has been claimed and nothing needs defending. And it is a different question from working out which vendor is currently blocking your ITC under Rule 37 (your own non-payment to the supplier within 180 days) or Rule 37A (the supplier not having filed GSTR-3B by 30 September). This ruling is about a credit you already validly claimed, years ago, being reopened under a fraud allegation that traces back to your supplier's status, not your own conduct.

What the ruling doesn't do

• It doesn't touch the forward-looking gate. A cancelled supplier generally stops filing GSTR-1, so nothing new reaches your 2B from them — Section 16(2)(aa), read with Rule 36(4)(b), still governs whether a fresh claim is available. This ruling protects credit already claimed and evidenced against a fraud allegation raised years later; it doesn't create a route to claim new credit from a supplier who's gone dark.
• The protection is conditional on your paperwork, not automatic. The Court's reasoning turns on Safecon having actually produced tax invoices, e-way bills, transport documents and a banking trail — not on a blanket rule that a supplier's cancellation is always irrelevant. A recipient who can't produce that evidence is in a different position.
• It's a different question from whether the credit was ever legally available in the first place. One week after this case, the same Supreme Court — in Bhandari Scrap Traders v. Union of India (SLP(C) No. 23931 of 2026, dismissed 24 July 2026 — a different SLP number from Safecon's 23993/2026) — left standing the Gujarat High Court's ruling in Maruti Enterprise v. Union of India upholding the constitutional validity of Section 16(2)(c): ITC is unavailable to a recipient unless the tax on the supply actually reached the government, and VAT-era "bona fide purchaser" precedents don't transplant into GST. Leave wasn't granted in either case — both are dismissals affirming a High Court, not fresh Supreme Court judgments — but they answer different questions. Safecon decides whether Section 74's fraud ingredients can be pinned on a recipient; Bhandari decides whether Section 16(2)(c), a substantive eligibility condition, is valid at all. One taxpayer-favourable detail survives in Bhandari: the courts left the Section 41(2)/Rule 37A re-availment route intact, so a reversal for a supplier's non-payment is restorable once the supplier cures it, not a permanent loss of credit.
• Winning on Section 74 doesn't automatically make every demand disappear. Where an appellate authority or court finds a Section 74 notice's fraud/wilful-misstatement/suppression charge isn't established, Section 75(2) ordinarily requires the proper officer to re-determine the tax as if the notice had been issued under Section 73(1) — bounded by the Section 75(3) two-year window, which is itself confined by Circular 185/17/2022-GST to roughly the same ~2-years-9-months limit that applies to a fresh Section 73 notice; a notice originally issued later than that has to be dropped entirely on redetermination. Section 75(2) is the provision that applies to Safecon's case, since its April 2021 supply falls in the pre-FY2024-25 period governed by Sections 73/74 — the newer Section 74A regime has its own parallel provision, Section 75(2A), which steps down the penalty rather than converting the demand, and doesn't apply here. On the record so far, the Allahabad High Court quashed both orders outright and no liberty was reserved for the department to proceed afresh — so this particular case doesn't appear to leave a Section 75(2) redetermination open — but the provision is worth knowing before assuming any Section 74 defeat ends the matter for good.
• Section 74 is the provision for periods up to FY 2023-24. Section 74A — inserted by Section 138 of the Finance (No. 2) Act, 2024, effective 1 November 2024 per Notification 17/2024-Central Tax — governs FY 2024-25 onwards, which is where Safecon's April 2021 supply does not fall. Whether the same reasoning — fraud ingredients must be established against the recipient specifically — carries across to Section 74A hasn't, as far as we could find, been tested in a reported ruling yet (as of August 2026).

The evidence that actually protected the buyer

What decided Safecon's case is the exact reconciliation trail every buyer should already be holding for every vendor: the tax invoice, the e-way bill, the transport/goods-movement document, and a bank payment that matches the invoice value. That is precisely the invoice-level record that is painful to assemble by hand across a large vendor base, months or years after the purchase, once a notice like this one arrives with a reply clock already running. The teams that come out of a Section 74 notice cleanly are the ones who could already produce that trail on demand — not the ones reconstructing it from scratch under deadline pressure.

Recoup ties every claimed ITC line to its invoice, its GSTR-2B entry and its matching bank payment as a matter of course — so if a notice built on a supplier's later registration status ever lands, the genuine-transaction evidence this ruling says defeats a Section 74 invocation is already assembled, not something you're building for the first time under a reply deadline.

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