Section 74 is applicable only if there is concrete evidence of fraud, willful misstatement, or suppression of facts to evade taxes. Vague allegations without supporting evidence are insufficient.
Section 74 of CGST Act: The Goods and Services Tax (GST) system was introduced to simplify tax estimation, reporting, claiming input tax credits (ITC), and other compliance processes. However, numerous Micro, Small, and Medium Enterprises (MSMEs) continue to struggle with compliance, often facing tax demand notices under CGST Act, 2017. Among these, show cause notices (SCNs) under section 74(1) alleging fraud, willful misstatement, or suppression of facts to evade taxes are among the most controversial.
This article explains Section 74(1) of the CGST Act and provides case laws and guidelines to help taxpayers challenge such notices. It also highlights critical aspects of SCN issuance, including how improper investigation can undermine the department’s claims.
Understanding Section 74 of the CGST Act, 2017
Under Section 74(1), a proper officer may issue a show cause notice if they believe taxes have been:
- Not paid,
- Short paid,
- Erroneously refunded, or
- ITC wrongly availed/utilized
due to fraud, willful misstatement, or suppression of facts to evade tax.
This section requires evidence of intent to evade taxes. An SCN under Section 74(1) cannot be issued for mere non-payment or short payment of tax without clear proof of fraudulent intent or deliberate suppression of facts.
Key Requirements for Issuing a Valid SCN Under Section 74
1. Evidence of Fraud or Suppression:
As per the CBIC’s Instruction No. 05/2023-GST dated 13 December 2023, Section 74(1) is applicable only if there is concrete evidence of fraud, willful misstatement, or suppression of facts to evade taxes. Vague allegations without supporting evidence are insufficient.
2. Thorough Investigation:
- The department must conduct proper investigations, such as:
- Examining invoices, ledgers, and returns.
- Verifying books of accounts and other records at the taxpayer’s premises.
3. Specific Findings in SCN:
SCNs must clearly outline:
- The alleged fraudulent transactions.
- Evidence to substantiate claims of fraud or suppression.
Generic statements like “irregular ITC utilization would have escaped if not investigated” fail to meet this requirement.
Common Flaws in SCNs Issued Under Section 74
In many cases, SCNs are issued without proper inquiry or evidence, relying solely on assumptions. For example:
- No independent search or physical verification of premises.
- Lack of examination of taxpayer records to substantiate allegations.
- Vague allegations without specific instances of fraud or intent to evade tax.
Such SCNs may lack legal standing and can be challenged before appellate authorities or courts.
Relevant Case Laws to Challenge SCNs Under Section 74
Several judicial decisions have reinforced that SCNs under Section 74 of the CGST Act must be supported by evidence of fraudulent intent or deliberate suppression. Here are a few notable cases:
1. S. G. Jayaraj Nadar and Sons Vs State of Madras [1971(9) TMI 156- SC]:
“Certain items which had not been included in the turnovers shown in the returns filed by the assessee were discovered from his own books of accounts and the assessing authority included those items in his total turnover. For these reasons, the High Court was justified in holding that the assessment of the first and the third items could not be regarded as based on a best judgement. The penalty thus, could not be levied in respect of those two items.”
2. M/S Rr Financial Consultants Ltd vs Union Of India And Ors- WP (C) No.990/2013- Delhi HC:
“When the proposal contained in a notice issued under Section 74 merely reflects a preliminary opinion and does not constitute a final determination, there should be no obstacle for the proper officer to withdraw the proposal based on valid material facts. The officer retains the discretion to rectify the proceedings without waiting for appellate intervention.”
3. Pushpam Pharmaceuticals Company vs Collector of Central Excise Mumbai [1995 (3) TMI 100 – SC]:
“A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact, it is the mildest expression used in the proviso. Yet the surrounding in which it has been used, it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning, that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties, the omission by one to do what he might have done and not that he must have done, does not render it suppression.”
4. Kalya Constructions Pvt Ltd vs Commissioner of Central Excise [2023 (12) TMI 1211 – CESTAT New Delhi]:
“It is a matter of fact that all the details were available in the records of the appellant. It is for the Superintendent to scrutinize the returns and ascertain if the services tax had been paid correctly or not. The fact that the alleged short payment came to light only during audit does not prove the intent to evade payment of service tax by the appellant, but it only proves that the Range Superintendent had not done his job properly. For these reasons, we find that the demand for the extended period of limitation cannot be sustained.”
5. CC, CE and ST – Bangalore (Adjudication) vs M/s Northern Operating System (2022 (5) TMI 967 – Supreme Court:
In this case law, the Supreme Court gave the verdict that Section 74(1) can be invoked only when material evidence is available to substantiate the occurrence of fraud, wilful misstatement or suppression of fact. The officer has to make such evidence part of the tax demand notice.
6. Gayathri Cloth and General Stores, Vijayawada Vs State of Andhra Pradesh (45 APSTJ 133):
In this case, the appellate tribunal, Hyderabad, observed that the officer cannot ignore his responsibility of producing material evidence of fraud, wilful misstatement or suppression of fact. Without proper evidence, the office cannot establish a claim based on personal whim or perception.
7. M/s. Uniworth Textiles Ltd. Vs. Commissioner of Central Excise, Raipur – 2013 (1) TMI 616 – Supreme Court:
In this case, the SC held that the mere non-payment of duties does not necessarily indicate collusion, wilful misstatement, or suppression of facts.
8. Pahwa Chemicals Pvt. Ltd. v. Commissioner of C. Ex., Delhi 2024 Taxo.Online 184-SC:
Wherein, it has been held that “there must be some positive act, with an intent to evade payment of duty or taxes, of the assessee to establish either wilful mis-declaration or wilful suppression. All facts were within the knowledge of the Department. Therefore, there is no justification for invoking the extended period of limitation.”
Also Read: Delhi High Court Rules Against 2 Adjudication Orders for a Single Show Cause Notice
9. Shivraj Associates vs. Commissioner of Central Tax:
The court held that issuing an SCN without proper investigation and evidence of fraud is unsustainable.
10. M/s G-Tech Industries vs. Union of India (2020):
It was emphasized that generic allegations without specific findings are insufficient to sustain an SCN under Section 74.
11. Bharti Airtel Limited vs. Commissioner of GST (2021):
The court invalidated an SCN for failing to establish deliberate suppression of facts or fraudulent intent.
12. Swaraj Foundries vs. CGST Department:
Reinforced that the burden of proof lies on the department to demonstrate fraudulent intent before invoking Section 74.
How to Defend Against SCNs Issued Under Section 74
1. Request Detailed Investigation Reports:
If the SCN lacks proper documentation or investigation, request detailed evidence from the department.
2. Challenge Vagueness:
Highlight the absence of specific allegations or concrete findings in the SCN.
3. Cite Relevant Case Laws:
Refer to judicial precedents where courts ruled in favor of taxpayers for similar flaws in SCNs.
4. Engage Professional Assistance:
Consult legal or tax experts to draft a strong response to the SCN.
Further, various judicial authorities in various other cases across the country had held that the burden to prove that there is wilful suppression or malafide intent to evade payment of taxes is on the department. Reliance in this regard is placed on following judicial pronouncements –
- Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, cited in 2016 Taxo.online 185
- Simplex Infrastructures Ltd. v. Commissioner of S.T., Kolkata, cited in 2016 Taxo.online 3
- Chattisgarh State Industrial Development Corporation Ltd. v. C.C.E. & S.T., Raipur cited in 2016 Taxo.online 188
- Anand Nishikawa Co. Ltd. v. CCE cited in 2016 Taxo.online 186
- Collector of Central Excise v. Chemphar Drugs & Liniments reported in 2016 Taxo.online 187
- Godrej Foods Ltd v. Union of India, cited in 2016 Taxo.online 42
Conclusion
Tax demand notices under Section 74 of the CGST Act, 2017 can be daunting. However, the law is clear that allegations of fraud or suppression must be supported by concrete evidence. Arbitrary SCNs lacking proper investigation or specific findings can be effectively challenged in court.
By understanding the legal framework and leveraging relevant case laws, businesses can protect themselves against unwarranted tax demands. Always consult with tax professionals for tailored advice and to ensure compliance with GST regulations.
Ref: CBIC Instruction No. 05/2023-GST dated 13 December 2023
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