An attempt to understand sub section (1) of section 73/74 under GST

[Sunil Vengaldas]

Introduction:

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.”

If we ever gave a plain reading of this section, we may not be in a position to understand the intentions of the lawmakers, interpretations and reason for drafting manner. The best way to understand the true interpretation of the section is to break it into parts, read and analyse. So let’s break it up:

• Where it appears to the proper officer
• that any
  • tax has not
    • been paid or short paid or
    • erroneously refunded, or
  • where input tax credit has been wrongly
    • availed or utilised
• for any reason, other than the reason of
  • fraud or
  • any wilful-misstatement or
  • suppression of facts
• to evade tax,
• he shall serve notice on the
• person chargeable with tax
• which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit,
• requiring him to show cause
• as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.”

Before understanding, the section in parts, it important to know the significance of

• provisions of
  • Chapter XII - Assessment
  • Chapter XIII - Audit
  • Chapter XIV - Inspection, search, seizure and arrest and
• Provisions of chapter XV – Demands and Recovery.

Brief overview of provisions of chapter XII, XIII and XIV and how it is different from the chapter XV are explained below:

• Assessment related
  • section 61 - Scrutiny of Returns,
  • Section 62 - Assessment of Non filters of returns,
  • Section 63 - Assessment of unregistered person,
  • Section 64 - Summary assessment in certain special cases

There is an element of pin pointedness for each section. Like for invoking section 61, the proper officer has to observe discrepancy between the information submitted in returns furnished (E.g., GSTR 1 and 3B) or for invoking section 62, the registered person has failed to furnish the returns continuously. Unless these pinpointed elements were not noticed, the said section cannot be invoked

• Audit related
  • Section 65 – Audit by tax authorities
  • Section 66 – Special Audit

Audit is conducted as to examine the compliance of the taxpayer so as to ensure there is no revenue leakage to the government. It may be noted that the intention to conduct the audit to just ensure the taxes have been paid in accordance with provisions of the GST and intimate the discrepancies, if any, to the taxpayer. An audit shall never be conducted with a pre-determined mindset of revenue leakage. Audit conducted on taxpayers in such frequency and in such manner by the proper officer in his jurisdiction. However, sometimes the audit may arise on account of investigation or otherwise.

• Inspection, Search and seizure related

Even though the section has not referred any specific condition, the proper officer cannot invoke the section as per wish because the section uses the word “Reason to believe”. The term “Reason to believe” is associated with suspect of serious offence with material evidence in writing. Unless “Reason to believe” is established, the proceedings under this section cannot be invoked.

From the above, it is clear that to invoke the respective section, the element has to be present. Without such element, the section cannot be invoked. However, mere absent of such element does not mean that the taxpayer is at compliance and discharging the tax. There might be as scenario where the taxpayer is following a carefully designed plan to evade the tax. In such cases, it may not be possible to unearth the tax evasion.

On plain reading of the section 73/74, one can observe that the section does not specify any condition. It uses the words “Where it appears to”, “to evade tax”, “Issue a notice”, “Show cause as to why he should not pay the amount specified in the notice” “person chargeable with tax”

In simpler manner, the section empowers the proper officer to impose an allegation on a person where it appears to the officer that there is likely revenue leakage or incompliance and seeks an explanation from the taxpayer to prove that the allegations imposed on him were wrong i.e., Show cause as to why he should not issue the notice.

Few illustrations where the proper officer might doubt revenue leakage are as follows:

1. Analysis of trend ratio of ITC (Payment of liability through ITC only and rarely via cash)
2. Comparison of ITR and GSTR outward liability
3. Taxability of the supplies or availment of ITC requires critical analysis (availability of ITC on food expenses)
4. On information received from Intelligence department.

Understanding the term “Where it appears to the proper officer”

Unlike the erstwhile indirect tax regime provisions of Finance Act, 1994 wherein the provisions of SCN were dealt uses the wordings “Where any service tax has not been ………….”, the provisions dealing with SCN under GST uses the wordings “Where it appears to the proper officer….”. Likewise, the procedure under GST has variance when compared to erstwhile indirect tax regime.

It may be noted that the term “it appears to” cannot be understood as interchangeable with the terms “Opinion” & “reason to believe”. In a simple language, the meaning of these terms is as follows:

1. Opinion: Opinion is an conclusion drawn from facts which are known.
2. Reason to believe: It is a suspect with material evidence
3. It appears to: which can be seen on prima facie with open mind

These terms is not defined under this law. This has to be understood from common parlance and various judicial pronouncements. 

In case of ORYX FISHERIES PRIVATE LIMITED VERSUS UNION OF INDIA - 2010 (10) TMI 660 - SUPREME COURT, it was held that  

"In the instant case from the underlined portion of the show cause notice it is clear that the third respondent has demonstrated a totally close mind at the stage of show cause notice itself. Such a close mind is inconsistent with the scheme of Rule 43 which is set out below." 

Since, the entire notice is made with predetermined mindset, the notice was quashed.

In case of Sheo Nath Singh vs Appellate Assistant of Income tax, calcutta, Hon'ble Supreme Court of India held that:

"There can be no manner of doubt that the words "reason to believe" suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour."

Hence, the notice must be made on some evidences but not mere suspicion.

In case of M/S RR FINANCIAL CONSULTANTS LTD. VERSUS UNION OF INDIA AND OTHERS -  2013 (9) TMI 792 - DELHI HIGH COURT vide para 6, it was held that

“A show cause notice must and should make prima facie allegations and facts have to be pointed out and confronted for answer. Paragraph 10.4 in the first line uses the words “it appears that” which is indicative of a prima facie opinion and not final determination. No doubt the cause title of the show cause notice uses the words "show cause cum demand notice" but a reading of the notice would reveal that it is not a demand notice but a show cause notice calling upon the petitioner to make submissions. Final determination on various aspects will be after hearing, if requested and considering the submissions of the petitioner”

From the above, it is clear that the Notice must be made with an open mind and not with an closed or predetermined mindset. Hence, the issuance of notice itself does not create liability or charge against taxpayer rather imposes an allegation to prove his innocence. 

Meaning of “tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised”

Tax has not been paid or short paid: It may be noted that “taxes not paid” is different from “amount collected as tax but not paid” which is as follows

Particulars	Taxes not paid	Amounts collected as tax but not paid to government
Section	73/74	76
Meaning	Taxes not paid on the supplies made whether collected or not.	Amount collected as tax whether the supply is made or not
Example 1	A sold goods to B by charging 18% GST but not filed his GSTR 3B (Not paid to government)	A sold goods to B which are not liable to GST. However, A charged GST @ 28% on the same and did not pay to government.
Example 2	A sold goods to B but not collected GST on the same. Still A has to discharge GST liability on the supplies made to B.	A sold goods to B which are not liable to GST by charging GST @ 28%. However, subsequently A neither supplied the goods to B nor didn’t return the GST collected nor paid the same to the government

Hence, it clear that the scope of the section is restricted only to taxes not paid in respect of supplies made within the purview of section 7 of CGST Act, 2017.

Notes:

• Mere difference in the tax liability declared in Returns (GSTR 1 and GSTR 3B) cannot be basis for issuance of Notice under this Section. Notice under ASMT 10 can be issued in case of difference between GSTR 1 and GSTR 3B. In case unsatisfactory reply, the proper officer may proceed to issue a notice under section 73/74. However, in some cases proper officer may proceed to issue the SCN directly under section 73/74 depending upon facts and circumstances.
• Delay in payment of taxes as a sole basis for the issuance of notice under this section is not warranted, as the delay in payment can be out of various reasons. Not every delay in payment of taxes is intentional and intent to evade tax. The proper officer has to do enough groundwork to assure himself that there are fair chances of under payment of taxes before the issuance of Notice under this section.

wrong availment or utilisation of ITC: The scope of the section is restricted only to Wrong availment or Wrong utilization. The scope of the section cannot go beyond the two aspects. Once it is established that the subject matter is not within the purview of the above two criteria, then the issuance of the SCN shall not warrant. ITC availment is a subjective concept and it requires a critical analysis.

The possible scenarios are as follows:

ITC wrongly availed	Utilised wrongly availed ITC	Applicability of Section 73/74
Yes	yes	Yes
Yes	No	Yes
No	yes	Not possible scenario
No	No	No

The section can invoke only where it has been established that the ITC availed is

1. wrong availment
   1. Does not qualified under section 16
   2. Qualified under section 17 (1) to (5)
2. wrong Utilisation
   1. Utilisation of wrongly availed ITC

Both the criteria need a critical analysis

Does not qualify under section 16:

Section 16 places the criteria for availing of ITC which are as follows:

• • The recipient should be in the possession of the valid document
  • The goods or services as the case may be received by the recipient
  • Taxes have been paid to the government by the supplier
  • Return under section 39 has been filed by the recipient.

Even though the criteria look simple, it itself has created a number of hardships for the taxpayers. For example, section 16(3) says the recipient is not eligible to claim the ITC unless the supplier has paid the taxes to the government by filing his GSTR 3B return. There might be a scenario where the supplier does not file the returns and does not pay taxes to the government due to various reasons. Such cases may not come under the purview of section 73/74 unless it is established that the supplier is not traceable or fictitious. Moreover, the recipient cannot be held responsible for the actions of the Supplier. Even with respect to Rule 36(4), the same analogy would continue. In the case of M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. - 2021 (3) TMI 1020 - MADRAS HIGH COURT, the Madras High Court held that:

“In case of default in payment of tax by the seller, recovery shall be made from the seller. However, reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by the supplier or the supplier not having adequate assets etc.”

Qualified under section 17(5)

Section 17(5) lists out various items on which ITC cannot be availed. However, this needs more critical analysis. For example, the section places restrictions on ITC in respect of food expenses for employees. However, in cases where the employers exceed 50 number, there is a statutory obligation under the Factories Act to provide the canteen to the employees, and the same is covered under the exception to the section.

From the above, it is clear that the SCN under the said section can be issued only in cases where the ITC has been availed against the provisions of Section 16 and the said supply is specifically covered under section 17(5) of the Act.

Erroneously refund:

3 broad scenarios where the refund can arise under GST are as follows:

1. Excess taxes paid in respect of the outward supply
2. Refund on account of Inverted duty structure or Zero rated supply in respect of inward supplies
3. Any other amounts paid.

Since the refund arises either on account of outward tax liability or inward supplies, the earlier discussion would squarely apply here.

Show Cause Notice (SCN): The section empowers the proper officer to issue a notice. A few important aspects with respect to SCN are as follows:

1. Issuance of Notice: Before issuing a notice, the proper officer has to ensure that the proper officer has complied with sub-section (2) to (11) i.e., the Time limit for issuance of Notice, a statement of grounds on which the notice is being issued, etc.,

2. Serving of Notice: The duty of proper does not end with the issuance of notice until the notice issued reaches the intended person. The notice issued shall not have any purpose if it is not served to the intended person. There are various ways of serving a notice as defined under section 169.

3. Qualities of Notice:

There are no grounds rules as to how SCN should be rather there are various ground rules as to how a SCN should not be.

A SCN can be issued in any manner and on any grounds as long as the SCN is clear and not vague. The section has discussed the same under subsection (2) but not in detail. This has to be understood from judicial pronouncements. In various judicial pronouncements, it was held that where an SCN issued lacks the proper grounds, the entire proceedings shall be dropped. In the case of Pazhayidom Food Ventures (P) Ltd. versus Superintendent Commercial Taxes, Addl. R2. Superintendent CGST, Pala. Wherein the Hon’ble Kerala High Court held that

“Learned counsel appearing on behalf of the petitioner submits that the show cause notice in Form GST REG-17 did not mention about the date, month and year as well as the time for appearance of the petitioner. The contents of the same are vague and do not commensurate with the format prescribed in Central Goods and Service Tax Rules, 2017 where a column of day, month and year has been prescribed. It is on that account this Court had issued notice and sought the comments thus impelling to invoke, the extra ordinary jurisdiction of this Court as the order under challenge is without jurisdiction.”

4. Time limits

In the earlier regime, there is a time limit for the Issuance of Notice and once the notice is issued, the adjudication may last for an indefinite period depending upon the facts of the case and circumstances. However, the current regime does not speak about the issuance of notice but rather speaks about the adjudication. In other words, the time limit in which the SCN should be issued and the order has to be passed. The time limits under sections 73 and 74 are as follows:

In case of Section 74 – Fraud or wilful misstatement: at least 6 months prior to the time limit specified under sub-section 10

In case of Section 73 – Fraud or wilful misstatement: at least 3 months prior to the time limit specified under sub-section 10 

5. No SCN shall be issued under this section in the case where the liability, if any, has been discharged by the taxpayer before the same is noticed by the proper officer. Example: short payment of tax of current month is paid off along with interest in next month GSTR 3B.

Differentiating factor between sections 73/74 - reason of fraud or any wilful misstatement or suppression of facts to evade tax.

The SCN under the GST can be categorized into two, one being the General SCN and the other being the SCN on the grounds of Fraud or any wilful misstatement or suppression. Now it is important as to what is “Fraud” and “Wilful Misstatement” and “suppression”.

The Act has not defined the terms “Fraud”, “Wilful Misstatement” and “Suppression”. However, the explanation of section 74 of the Act has been provided to outline the intention of the section which is as follows:

“Explanation 2. ––For the purposes of this Act, the expression ―suppression‖ shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.”

From the above, it is clear that the explanation used the term “Shall mean” which is restricting the scope of “Suppression” and can be invoked only in the following cases:

1. Non-declaration of information by a taxable person
2. Failure to furnish the information being asked.

Once the taxable person falls out of the ambit of the above conditions, Suppression cannot be invoked.

In case of IN RE : OMSAI PROFESSIONAL DETECTIVE AND SECURITY SERVICES PVT. LTD. - 2019 (8) TMI 1572 - THE APPELLATE AUTHORITY UNDER GST, ANDHRA PRADESH wherein it was held that “The appellant has submitted a detailed statement and copies of the returns in Form GSTR-1 filed by it and asserted that the turnovers and taxes shown in this statement are actually scored outward supplies. Since the returns in Form GSTR-1 filed by it are found to be not rejectable due to lack of any additional contra evidence, hence the turnover & tax liability disclosed through these GSTR-1 returns, is to be confirmed as the real turnovers of the appellant.”

Conclusion: The provisions of the section 73 or 74 needs critical analysis on part of the department before initiating proceedings under respective section, otherwise this may results in the hardships to the taxpayers.