GST Audit Additions Demystified

 By CA Surekha S Ahuja

Why Procedural Lapses, Reconciliation Differences & Mechanical Section 74 Allegations Collapse on Law

GST audit additions today are increasingly driven not by undisclosed supplies, but by process-centric objections, reconciliation variances, and routine invocation of penal provisions.
This note demonstrates—through statutory construction, burden of proof analysis, and settled judicial principles—that such additions do not meet the legal threshold of a valid tax demand.

I. Procedural Lapses: Why Non-Compliance Is Not a Charging Event

Statutory Framework (Foundational Law)

• Tax under GST arises only upon:

  • existence of a taxable supply (Section 7), and

  • levy under Section 9.

No provision under Chapters VIII or IX (returns, payments, procedures) creates tax liability by itself.

Core Legal Fallacy in Audit Additions

Audit objections often adopt the following flawed chain:

“Procedure breached → inference of evasion → tax demand.”

This approach is ultra vires the Act because:

• GST law does not recognise deemed evasion from procedural lapses,

• compliance provisions are facilitative, not determinative.

Judicial Discipline (Settled Principle)

Courts have consistently held that:

• Procedure is a handmaiden of justice, not its master;

• Substance prevails over form, especially in fiscal statutes.

Where tax is otherwise reflected in returns or books, demand collapses for want of jurisdiction.

Assessment-Stage Objection (Must Be Raised)

The proper officer must specifically establish:

1. What taxable supply escaped assessment,

2. How the lapse caused revenue loss,

3. Exact computation of tax short-paid.

➡ In absence of these findings, the addition is void ab initio.

II. Reconciliation Differences: Why Accounting Variance Is Not Evidence of Tax Evasion

Nature of Reconciliations under GST

Reconciliation differences commonly arise due to:

• timing differences,

• accounting vs return architecture,

• credit notes, reversals, adjustments,

• system-driven limitations of GSTR-2A/2B.

These are structural consequences, not indicators of suppression.

Critical Legal Principle

There is no statutory presumption that:

difference between books and returns equals undisclosed supply.

Reconciliation is an explanatory mechanism, not a charging tool.

Burden of Proof (Non-Negotiable Rule)

The department must independently prove:

• actual outward supply,

• consideration received,

• tax payable on such supply,

• failure to discharge such tax.

The burden never shifts merely because a difference exists.

Judicial Position

Courts have repeatedly held:

• reconciliation statements are not admissions,

• arithmetical differences require corroborative evidence,

• additions without invoice-level correlation are arbitrary.

Assessment-Stage Objection

Unless the department:

• identifies specific invoices,

• establishes supply-wise linkage,

• demonstrates consideration flow,

➡ reconciliation-based additions cannot survive law.

III. Section 74: Why Mechanical Allegations of Suppression Are Legally Unsustainable

Statutory Threshold of Section 74

Section 74 can be invoked only when all elements co-exist:

1. suppression or wilful misstatement,

2. intent to evade tax,

3. direct nexus between intent and tax loss.

Intent is the sine qua non — and intent cannot be presumed.

What Cannot Constitute Suppression (As per Law)

• Disclosure in returns,

• Data available on GST portal,

• Audited books of account,

• Reconciliations submitted,

• Interpretational or classification disputes.

When facts are on record, suppression is legally impossible.

Judicial Reasoning

Courts have consistently ruled:

• extended limitation demands strict construction,

• penalty provisions require strict proof,

• disagreement with taxpayer’s interpretation is not fraud.

Routine invocation of Section 74 is a colourable exercise of power.

Assessment-Stage Objection

The order must specifically record:

• what fact was concealed,

• how it was concealed,

• how intent to evade is established.

➡ Absence of recorded satisfaction vitiates proceedings entirely.

Integrated Legal Impact

Where additions are founded solely on:

• procedural lapses,

• reconciliation differences,

• mechanical Section 74 allegations,

they suffer from:

• absence of charging foundation,

• failure of burden of proof,

• violation of natural justice,

• lack of jurisdiction.

Such additions are unsustainable at every appellate level.

Final Legal Conclusion

GST is a tax on supplies — not on imperfections.
It penalises evasion — not explanations.
And it demands proof — not presumptions.

Any audit addition unsupported by evidence of supply, computation of tax, and proof of intent is doomed to fail in law.