BONAFIDE MISTAKES Vs.PENALTY UNDER SECTION 74.

[Sadanand Bulbule]

Section 65 of the GST Act, 2017 provides to conduct audit of the records and the books of account of the registered person and to verify the documents on the basis of which the books of account are maintained and the returns and statements furnished under the provisions of the GST Act and the Rules made thereunder to ascertain the correctness of the turnover, exemptions and deductions claimed, the rate of tax applied in respect of the supply of goods or services or both, the input tax credit availed and utilised, refund claimed, and other relevant issues. So the essential purpose for the audit team is to examine the records and the books of accounts maintained in the usual course of business and also as prescribed under Section 35 of the GST Act read with the GST Rules 55, 56 and 57.

2. The procedure to conduct proper audit is narrated under Rule 101. The intention of the legislature such as the one under audit under Section 65 is to focus the fact of loss of revenue and to provide a legal remedy for such loss in a cordial manner. Therefore audit is supposed to be friendly from both the sides to settle the queries harmoniously in the interest of satisfactory compliance of civil obligations by the tax payers imposed under the GST laws.

3. During the course of audit under Section 65, there may arise some instances where tax under the GST Act is either not paid or not paid correctly or short paid. The incidence of short payment of tax or erroneous refund or wrong availing of Input Tax Credit may be because of an inadvertent bonafide mistake or it may be a deliberate attempt to evade tax. The determination of tax in all cases where there is an element of mens rea has to be done under Section 74 and in all other cases the determination has to be done under Section 73 of the Act. In order to distinguish whether mens rea is present, intent to evade tax by way of fraud or through willful misstatement or through suppression of facts has to be established. Law is very clear on this aspect.

4. The provisions of sections 73 and 74 respectively of the GST Act deal with the 'demands and recovery' to be made by the adjudicating authorities. While adjudicating the returns, if the adjudicating authority finds that the amount of tax has not been paid or erroneously refunded, or where the input tax credit has been wrongly availed or utilized for any reason, either with malafide intention or without the same, as the case may be, the provisions of Section 73 or 74 of the Act would be invoked.

5.  Determination of tax under Section 73 of the SGST/CGST Act, 2017:

The law makers being aware of the modern business practices in their wisdom have framed two distinct adjudication compartments; one is for bonafide mistakes and the other one is where the intention evade tax is established. The following situations where the person chargeable with tax has no intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts, the determination of tax by the Proper Officer shall be done under Section 73 of the SGST/CGST Act, 2017.

i.    Tax is not paid or short paid.

ii.    Any erroneous refund.

iii.  Input Tax credit is wrongly availed or utilized.

6. Determination of Tax under Section 74 of the SGST/CGST Act, 2017:

 In the following situations where the person chargeable with tax has intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts, the determination of tax, by the proper officer, shall be done under Section 74 of the SGST/CGST Act, 2017.

i.    Tax is not paid or short paid.

ii.   Any erroneous refund.

iii.  Input Tax Credit is wrongly availed or utilized.

7. Thus the phrase “intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts" in Section 74 of the Act assumes abundant importance. When the law requires an intention to evade payment of tax, then it is not mere failure to pay tax. It must be something more. The word "evade" in the context means defeating the provisions of law of paying tax. It is made more stringent by use of the word "intent". The taxpayer must deliberately avoid the payment of tax which is payable in accordance with law. For the purpose of issuing a proposal under Section 74 of the Act, the case has to be of such a nature that on the face of the records, the authority concerned should be convinced that the contravention is with a definite intent to evade payment of tax. In other words, the authorities need to make out a very strong case. A fundamental postulate of jurisprudence is the presumption of innocence, meaning thereby that a person is believed to be innocent until found guilty. Unfortunately, some of these basic principles appear to have been lost sight of with the result that more and more persons are being penalised despite being innocent.

8. Further it is gathered that, in many cases where there is no allegation against the dealers of wilful suppression or mis-statement though Section 74 of the Act has been used. However some audit officers are using Section 74 to impose penalty without the fault of wilful suppression. Such audit officers are not pointing out as to on what basis they have come to the prima facie conclusion that, there is wilful mis-statement or suppression of facts. Therefore, mere use of Section 74 cannot validate the audit query as regards to levy of penalty. Factual and legal position being so, the proposal to levy penalty under Section 74 is untenable in the eyes of law in the absence of any material evidence to establish the intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts. Every additional tax liability doesn’t fit into the frame of Section 74, which obviously covers the malafide intention to evade tax. Penal provisions being quasi-criminal in nature are to be invoked with judicious mind with cogent evidence.

9. It is pertinent to mention here that, proposing penalty under Section 74 of the Act on minor additional tax liability due to bonafide mistake means, it is directly denigrating tax payer of guilty of intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts. This being a charge belittling the integrity and honesty of tax payers has to be based on cogent evidence before tarnishing the image of tax payers on records. Therefore, such uncalled and unwarranted proposal under Section 74 causes hassles the concept of ease of doing business and also resulting in wastage of time for the department as well as for the taxpayer. The superior judicial courts have held that, the Proper Officer is supposed to consider the nature of business and the complexities of the business while issuing notices and undertaking audit under Section 65 of the Act. In other words, the audits shall not be conducted in a mundane manner.

10. In view of the well settled law as regards to the invocation of penal provisions under Section 74 of the GST Act, it is manifest that until and unless there is willful or deliberate or intentional evasion of any tax or attempt to evade any tax is established, there cannot be any punishment under the provisions of the Section 74 of the CGST Act. Mere omissions or bonafide error cannot be construed as an offence. In other words, intention on the part of the person to defraud the GST is sine qua non for penal action under Section 74 of the GST Act, 2017.

11. In a way it is like pushing innocent tax payers in the compartment of fraudsters alike. If this is the pre-determined approach, then absolutely the provisions of Section 73 of the GST Act are redundant. The Hon’ble Supreme Court and the State High Courts time and again have come heavily on inequity towards the honest tax payers. This is high time for the top brass administering audit wings to widen the insight to admire the law to achieve the embedded intent of two independent and exclusive purposes of Section 73 and Section 74 in a distinguishable manner.

12. It is informed that the Government has issued administrative directions as regards to conducting of proper audit under Section 65 to bring uniformity. It is fine. However the concerned authorities are requested to re-examine the mandatory parameters to invoke “Section 74” whenever additional tax liability is found during the audit involving bonafide mistakes. Being quasi-judicial authority, let the Proper Officers function with sensible freedom and not controlled by other actors behind the curtain.

13. End of the day, audit proceedings have to pass through the “litmus test” in the court of law to attain legal sustainability, when questioned. Therefore compliance of necessary ingredients/conditions is sine qua non and it has to be done in letter and spirit, not in a cryptic and casual manner.

14. At the same time, Section 73 cannot be allowed to remain as a soothing provision on paper. Therefore audit under Section 65 is a friendly intimation of additional tax liability upon scrutiny of books accounts/financial statements maintained and furnished by the tax payer himself. Basically it is a pre-emptive move against the disagreeable adjudication proceedings. But this does not mean that every additional tax liability found during audit is coupled with malafide intention falling under the scope of Section 74 alone. This kind of inference is worrying in the way of cordial audit. Section 73 has the same significance the way Section 74 is enjoying the popularity on one side.

 15. Thus, the overall analysis of the facts and circumstances of each case and also having regard to the settled legal proposition that 'fair and just audit’ is a hallmark of any audit. To achieve this purpose, positive change in the behavioral attitude on the part of the audit officers is equally significant. Or else mere change in any law cannot bring the noble results desired by the law makers. Let the law be implemented the way it is legislated in the best interest of all stake holders.