Adjudication process, Goods and Services Tax - GST

[Sudhir Kumar]

A Show Cause Notice has been issued Under Section 74 of the CGST Act. Can adjudicating authority change it into section 73 on merit of the case while adjudicating the same case?

Posts / Replies

[Alkesh Jani]

Shri

Please mention for which tax period Show Cause Notice is issued, this will help our experts to reply best.

Thanks

[KASTURI SETHI]

(i) The SCN issuing authority can issue corrigendum to this effect before the adjudication of the SCN.

OR

(ii) If the extended is not applicable, the demand for the normal period can be confirmed.

OR

(iii) The Adjudicating Authority may direct the SCN issuing Authority to issue corrigendum invoking Section 73 before the adjudication of the case. There is no time limit for issuance of corrigendum but it should be issued before the adjudication of the case.

[Ganeshan Kalyani]

I agree with the view of Sri Kasturi Sir.

[Padmanathan Kollengode]

In my opinion, the Adjudicating authority has to drop the proceedings under 74 if he is convinced that the ingredients to invoke the same are absent, and has to issue a fresh notice under section 73, if the limitation period for 73 has not expired.

However where Appellate Authority or tribunal or court holds that section 74 cannot be invoked, the law itself deems the notice u/s 74 to be a notice u/s 73. This is explicitly provided in section 75(2):-

(2) Where any Appellate Authority or Appellate Tribunal or court concludes that the notice issued under sub-section (1) of section 74 is not sustainable for the reason that the charges of fraud or any wilful-misstatement or suppression of facts to evade tax has not been established against the person to whom the notice was issued, the proper officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of section 73.

Even in the above situation, if the limitation for invoking section 73 is expired, then the entire demand has fail.

I am open to different views.

[Padmanathan Kollengode]

Technically speaking also, when Adjudicating Officer issues the SCN u/s 73 or 74, he has to electronically serve FORM GST DRC-01, which requires the section under which SCN is issued to be mentioned. I understand that once DRC-01 is electronically served in the portal, it cannot be modified as such.

[Amit Agrawal]

Please treat this as part of pure academic discussion:

I broadly agree with Shri PadmanathanJi, though issue raised have multiple facets and legal jurisprudence will evolve over time.

Lets take a situation where SCN is issued today i.e. 28.10.2023 u/s 74 covering a period from FY 17-18 & FY 18-19. After considering reply to SCN & representation during hearing, original adjudicating authority came to conclusion that case booked is fit for taking action under Section 73 & not Section 74.

Now, only legal option left for original adjudicating authority is to drop entire SCN u/s 74 and then, issue new SCN u/s 73 but for covering period for FY 18-19 (assuming all this is happening before 31.12.2023 - current deadline to issue SCN u/s 73 for FY 18-19 as per Notification No. 09/2023 – Central Tax).

But, practically speaking, chances of above-said happening are extremely rare. And it is quite likely that original adjudicating authority confirms entire demand with interest and penalty u/s 74.

In appeal (either at first appellate level or at tribunal level), lets assume that demand u/s 74 get set aside though not on merits sometime in year 2025. Now, Section 75(2) gets set in.

Now, questions coming to my mind are multi-fold, some of which are as follows:

1. Whether option u/s 73(5) will be available for the assessee and if yes, how considering the SCN is for FY 17-18 & 18-19 and demand for FY 17-18 cannot be confirmed being time-barred.

2. If option u/s 73(5) will be available for the assessee for FY 18-19, how 30 day's time-limit will be calculated for payment us 73(5)?

3. What is date of SCN for the purpose of Section 73(5) as well as deadline to pass order u/s 73(10) (read with Section 75(10)) when such SCN is deemed to be issued u/s 73(1) as per Section 75(2), though was originally issued u/s 74. And on what legal grounds?

4. What happens to all above question if assessee does not agree with appellate order on merits and files appeal against such order?

Interesting times ahead .............

These are ex facie views of mine and the same should not be construed as professional advice/suggestion.

[Amit Agrawal]

Please read Point No. 4 from my above post as follows:

4. What happens to all above question if assessee or Dept. does not agree with appellate order on merits and files appeal against such order?

It is also worth noting that Section 75(10) deals with 'An issue ... in some other proceedings" and not the very same proceedings.

These are ex facie views of mine and the same should not be construed as professional advice/suggestion.

[Padmanathan Kollengode]

Learned Friend Amit Ji,

Pls treat this as purely academic discussion in response to your deep posers:-

1. Whether option u/s 73(5) will be available for the assessee and if yes, how considering the SCN is for FY 17-18 & 18-19 and demand for FY 17-18 cannot be confirmed being time-barred.

Scenario 1

Lets assume, the tax payer had already paid tax and interest (pertaining to both 17-18 & 18-19 or even 18-19 alone*) before the issuance of 74 notice. Since he did not pay the 15% penalty, the order u/s 74 was passed. Now in this case, when 75(2) operates, no penalty u/s 73 can be levied as he will be saved by 73(5).

My posers to you sir:-

Situation A

After issuance of SCN u/s 74 but within 30 days, the person had paid the tax and interest (pertaining to both 17-18 & 18-19 or even 18-19 alone^##). In this case, when 75(2) operates, can the person get the benefit of 73(8)?

Situation B

Suppose the person had paid the tax and interest (pertaining to both 17-18 & 18-19 or even 18-19 alone^##), after 75(2) operates but within 30 days, can the person get the benefit of 73(8)?

In my opinion, 73(8) may be available in situation A above since the words used in 75(2) are "the proper officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of section 73." i.e. 75(2) presumes notice u/s 74 to be notice issued u/s 73 and only determination of tax is taking place after 75(2).

* reading with 73(7) since the amount which falls short (being tax and interest for 17-18) becomes time barred.

^## because the demand itself is now for only 18-19 u/s 75(2)

2. If option u/s 73(5) will be available for the assessee for FY 18-19, how 30 day's time-limit will be calculated for payment u/s 73(5)?

Did you mean 73(8) here?

3. What is date of SCN for the purpose of Section 73(5) as well as deadline to pass order u/s 73(10) (read with Section 75(10)) when such SCN is deemed to be issued u/s 73(1) as per Section 75(2), though was originally issued u/s 74. And on what legal grounds?

As explained date of SCN will be date of SCN u/s 74. Date of passing order u/s 73(10) can not change due to 75(2).

Under 75(11) it is interesting to note time between the date of decision of Proper officer and the date of decision of appellate authority is not excluded. So what happens when the 75(2) operation due to decision of appellate authority? Can we not say there is no extension to department here? But agree, on further appeals to Tribunal or Courts, the time limit to order u/s 73(10) is extended by 75(11).

[Amit Agrawal]

@ Shri PadmanathanJi,

First, correction in my earlier post. I meant Section 78(8) & not 73(5) while drafting my earlier post. My apologies for the inadvertent error, though I suppose you understood it anyway. Also, SCN dated 28.10.2023 - in the hypothetical scenario taken by me in my earlier post - is time-barred even for FY 18-19 due to Section 74(2) & there is no need to defend such SCN on merits at all. Kindly ignore that mistake too, for this academic discussion, as issue raised by me are on different footings.

Now & just to continue this as pure academic discussion:

A. When SCN is initially raised u/s 74, there was no option available to the noticee of payment of taxes with interest either u/s 73(5) or u/s 73(8). And there is no legal provision to presume so, IMHO.

B. If the noticee indeed paid taxes with interest for both years i.e. FY 17-18 & FY 18-19 within 30 days of SCN issued u/s 74 (OR before issuance of such SCN), he, if he wants, can definitely claim benefit of Section 73(8) (or Section 73(5) where such payment of SCN was made before SCN) when such SCN u/s 74 gets turn into SCN u/s 73 due to operation of Section 75(2).

But, question is whether this is right strategy for any noticee (i.e. to pay taxes with interest either before SCN u/s 74 or within 30 days of SCN u/s 74) to follow? This is more so (though need not be exclusively), when the noticee feels that he got good case to defend on merits.

B1. But, If the noticee indeed paid taxes with interest only for FY 18-19 within 30 days of SCN issued u/s 74 (OR before issuance of such SCN), he can not definitely claim benefit of Section 73(8) (or Section 73(5)) when such SCN u/s 74 gets turn into SCN u/s 73 due to operation of Section 75(2). This is because, the noticee has not paid entire taxes demanded in the SCN with interest. I do not think operation of Section 75(2) automatically eliminates demand for FY 17-18 itself. SCN demanding taxes for FY 17-18 still remains, same cannot be "legally" confirmed being time-barred.

B2. However, If the noticee did not any taxes with interest for FY 18-19 (or for both years) within 30 days of SCN issued u/s 74 & legally specking, such option was never made to the noticee due to Para A, question is whether such noticee can be permanently deprived of such benefit when such SCN u/s 74 gets turn into SCN u/s 73 due to operation of Section 75(2) and obviously, till then, time-limit of 30 days prescribed u/s 73(5) is already lapsed. And if yes, whether such situation can be termed as grossly discriminatory & hence, unconstitutional'

C. Lastly, in the hypothetical scenario taken by me in my earlier post & for the reasons mentioned therein, I do NOT see any legal provision which allows Dept. to confirm demand u/s 73 in year 2025 just because of Section 75(2).

C1. Section 75(2), if anything, actually bars "first appellate authority / tribunal" to treat SCN issued u/s 74 as being issued u/s 73 and put that responsibility on proper officer. I find this part as very hard myself to digest, but I am not able to come with better answers here.

C2. And if so, let me repeat question put earlier: whether this is right strategy for any noticee (i.e. to pay taxes with interest either before SCN u/s 74 or within 30 days of SCN u/s 74) to follow when it is clear that Dept. is not willing to give him benefit u/s 73 at first stage. And if yes, why & in which situation?

Last but most important, I understand implications of what I am saying here which is very drastic & very very detrimental to Revenue. And I need much more time to crystallize any of my views on these subjects. It is quite possible I am missing something very elementary here. Hence, Lets treat this strictly as pure academic discussion only & nothing more

These are ex facie views of mine and the same should not be construed as professional advice/suggestion.

[Amit Agrawal]

Correction in my last post: SCN u/s 74 for FY 18-19 is not time-barred, in my hypothetical scenario taken by me in my earlier post (as time-limit to issue SCN u/s 74 for FY 18-19 is not yet lapsed).

[Padmanathan Kollengode]

Learned friend Amit JI,

whether this is right strategy for any noticee (i.e. to pay taxes with interest either before SCN u/s 74 or within 30 days of SCN u/s 74) to follow when it is clear that Dept. is not willing to give him benefit u/s 73 at first stage. And if yes, why & in which situation?

When a person is sure that on merits the tax and interest is payable but at the same time sure that there is no fruad/willful misstatement/ suppression etc, he can opt to pay tax and interest and then litigate on 74 penalty alone. If he succeeds in getting out of 74, then he does not have to pay penalty in line with 73(5).

There is always a presumption of constitutionality and it will be extremely hard to hold a provision as unconstitutional, especially when there is a possibility of harmoniously reading 75(2) with 73(5).

please treat this as part of academic discussion only.

[Amit Agrawal]

@ Shri PadmanathanJi,

While I understand what you are saying, I can agree with you as an effective risk mitigation strategy (which is dependant upon factual & legal aspects of a particular case, risk appetite of my client & so on). But, my core issue - from purely law point - remains open.

Hence, core question remains ...... If (& its big if) its is clear that Dept. cannot pass order u/s 73 in future (i.e. say in year 2025 for FY 17-18 & 18-19) despite Section 75(2) and such proceedings are deemed to be completed u/s 73(10) read with Section 73(10), why to pay anything (i.e. to pay taxes with interest either before SCN u/s 74 or within 30 days of SCN u/s 74) when & if it is clear that Dept. is not willing to give the noticee the benefit u/s 73 at first stage & nothing will be payable in future despite loosing the case on merits?

In other words, if above position is correct (which I am not sure at this stage, though I also currently do not have any good reasons for my doubts), why to pay anything at this stage even if case is very weak on merits if SCN is issued u/s 73 and case is very strong if SCN is issued u/s 74 (i.e. if there is NO fraud, or any wilful-misstatement or suppression of facts to evade tax & the noticee is sure that demand u/s 74 will not stand) when Dept. either wants to issue SCN u/s 74 or has already issued the SCN u/s 74.

Also, I am not sure if benefits of Section 73(8) can be denied in future (i.e. when SCN gets converted under Section 73 from Section 74 due to Section 75(12)). I ex-facie feels that such denial is grossly discriminatory because it is Revenue who had wrongly denied such option to the noticee by issuing SCN u/s 74 in the first place. And if so, why not to give one's best try to defend on merits as well and if unsuccessful, demand the benefits of Section 73(8) by paying taxes with interest within 30 days after Section 72(2) comes into play.

Lastly, I do not think that there is a possibility of harmoniously reading 75(2) with 73(5) when Dept. specifically demands payment of taxes, interest & penalty u/s 74 either while raising audit objections or otherwise (say, during scrutiny u/s 61). In all these communications, Dept. is supposed to put Section (either 73 or 74) while communicating amount to be paid to avoid action u/s 73 or 74.

For reasons explained earlier, lets treat this strictly as pure academic discussion only & nothing more. I have not made up my mind what-so-ever on any issues under discussion here. It is just me thinking louder .... nothing beyond that.

These are ex facie views of mine and the same should not be construed as professional advice/suggestion.

[Amit Agrawal]

*...................and such proceedings are deemed to be completed u/s 73(10) read with Section 75(10) ..................

[KALLESHAMURTHY MURTHY]

To all the participants in issue 118828 dated 26-10-2023.

Dear Sirs,

I went through the discussions about the SCN issued u/s 74 and can change it into Sec. 73 by the Adjudicating Authority.

In my opinion, Sec. 74 of the CGST Act-2017, is more effective in enforcing revenue recovery than any other sections. Once it is decided to take up the case u/s 74 and issue notices as per procedures, the Proper Officer cannot go back to Sec. 73 unless the situation arises u/s 75(2), but it can be vice versa. Proceedings initiated u/s 73 can be taken up u/s 74 at a later stage on finding it fit for Sec. 74.

Time-barring questions do not arise if the process is going on in the usual course of action by the Proper Officer. The period spent under Stay, if any, u/s 75(1) will be excluded from counting the period of adjudication. Furthermore as per Sec. 75(3) a period of 2 years is provided to pass the order. I mean the time fixed for passing the order u/s 73 automatically postponed.

When the case is to proceed u/s 73 (1) due to the direction u/s 75(2), all the subsections of Sec. 73 will be operative. The proper Officer cannot deny the benefits provided as per Law. If Sec. 75(2) is operated to the stage of Notice, the procedures will apply as provided u/s 73 or after the order passed, the procedures as provided u/s 73 will apply.

These are purely my opinions as to my understanding of the relevant sections in the adjudication process. Learned persons can correct me if there are any legal issues.

[KASTURI SETHI]

Sh..Kalleshamurthy Murthy Ji,

(i) Section 75 is not in picture.

(ii) The decision is to be taken between Section 73 and 74. Can Section 74 cover normal period, especially in the event of the absence of the ingredients of Section 74 ? Will you please reply ?

 

[KALLESHAMURTHY MURTHY]

 Reply to Sl. No. 15 dated 29-10-2023

Dear Sir,

I have quoted Sec. 75 for the occasion of changing Sec. 74 to 73.

The proceedings u/s 74 are initiated on the selection basis of specific issues of fraud, evasion of tax, wrongly availed input tax or refund, wilful misstatement or suppression of fact etc. Sec. 73 is on general issues other than those mentioned above. When a specific issue is taken up u/s 74, it may not be possible to go for general observances u/s 73. In the event of the absence of the ingredients, it may not be possible to take up the case u/s 74. Then there is no room for changing Sec. 74 to 73 and the sub-sections of Sec. 74 will be in play. The period of proceedings will remain as per the provisions provided for in the respective sections of 73 & 74. So, in my opinion for query 118828 of Sri Sudhir Kumar, The adjudicating authority cannot change the case proceedings from 74 to 73, even on merits independently. This is my humble submission before Sri Kasturi Sethi Ji.

The above opinion is not to be treated as a suggestion.

[KASTURI SETHI]

Dear Sir, O.K. Thank you very much for your response.

[Padmanathan Kollengode]

Dear Kalleshamurthy Sir,

In response to your post no. 14, I humbly disagree with the following point:-

but it can be vice versa. Proceedings initiated u/s 73 can be taken up u/s 74 at a later stage on finding it fit for Sec. 74.

1. Unlike previous tax regime, both demand proceedings are contained in completely different sections i.e., Section 73 and 74 of CGST Act. Proceedings under section 74 can be initiated only when there is fraud, suppression or willful misstatement etc involved. In short, there must be an element of mens rea for section 74, which is not required under section 73.

2. In Nizam Sugar Factory vs Collector Of Central Excise - 2006 (4) TMI 127 - SUPREME COURT Supreme Court has held that:

9. Allegation of suppression of facts against the appellant cannot be sustained. When the first SCN was issued all the relevant facts were in the knowledge of the authorities. Later on, while issuing the second and third show cause notices the same/similar facts could not be taken as suppression of facts on the part of the assessee as these facts were already in the knowledge of the authorities. We agree with the view taken in the aforesaid judgments and respectfully following the same, hold that there was no suppression of facts on the part of the assessee/appellant.

3. Further, as per Section 75(7) of CGST Act:

Section 75(7) The amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.

So there are many facets in this issue, and conversion from 74 to 73 or vice-versa is not yet tried and tested before Courts under the GST Law.

[KALLESHAMURTHY MURTHY]

Dear Sri PadmanathanSir,

Many thanks for your response. I do agree with the contents and the case law referred to.

But under GST, even if the case is initiated u/s 73 and any incriminating material is found at the time of processing the books of accounts so that the case is fit to take up u/s 74, the Adjudicating Authority can go to issue an SCN u/s 74 before issuing the SCN u/s 73. But not from Sec. 74 to Sec. 73. I am sorry to use the words vice-versa in my previous answer.

Further, in some cases of SCN issued, the penalty amount is not specified but indicated in the notice as the penalty will be applicable u/s 122. The difference between the adjudication u/s 73 and 74 is the imposition of penalty. Interest cannot be the same as mentioned in the SCN while the order is passed since the interest is payable up to the date of payment. Tax liability will remain the same. Even though SCN issued u/s 73 may convert into sec. 74. In such cases, The Adjudicating Authority received the assignment from the higher authorities to proceed under section 74. This is my view on the adjudication process under GST. But Jurisprudence may differ views depending upon the circumstances of the case.

This attempt is for knowledge purposes only.

[KASTURI SETHI]

Sh.Kalleshamurthy Murthy Ji,

I agree with your views at serial no.19 dated 30.10.2023. Everybody knows that the A.A. cannot go beyond the scope of a SCN. Any A.A. will not take interest to convert Section 74 to 73. This is the practical and legal position. Rather, he/she may prefer to confirm the demand under Section 74. An A.A. has many legal arrows in his/her 'legal armoury' . It is a cake-walk for him/her and that too will be in the interest of the revenue.

[KALLESHAMURTHY MURTHY]

Sri Kasturi Sethi Ji

Thank you very much for concurrence with my views.

[Padmanathan Kollengode]

Dear KALLESHAMURTHY MURTHY Sir,

The "jurisdictional facts" required for both section 73 and 74 are different. Proceedings under section 73 is for determination of tax, interest and penalty in case where no fraud/ suppression/ misstatement/ intention to evade tax is present. It is not an exercise to find incriminating evidence to issue another SCN u/s 74.

The power to find such incriminating evidence is vested under section 65, 67, 70 and so on. After such exercise, if the department issues notice under section 73 demanding tax, interest and penalty thereunder, then in the course of the proceedings they cannot change to section 74.

Further, under the GST regime SCN is closely linked to electronic service of DRC-01 in the portal. Once SCN is issued and DRC-01 is served electronically selecting a particular section 73/74, my understanding is it cannot be Altered/modified in the portal.

[KALLESHAMURTHY MURTHY]

Dear Padmanathan Ji,

Sir,

I welcome your response to my answer, and thanks for the same.

You are absolutely right that Sec. 73 is for the determination of tax, interest and penalty where there was no fraud, suppression, misstatement or intent of evasion of tax. However, in case at the time of verification, the adjudicating authority finds fraudulent activity, suppression of tax, misstatement or evasion of tax, he may not proceed to issue notice u/s 73, but AA is at liberty to take up the issue to the extent of findings liable to initiate u/s 74. This practice is in vogue in the department.

It is a trite principle of law that when a particular procedure is prescribed to perform a particular act then all other procedures/modes except the one prescribed are excluded. If the AA is of the opinion to pursue the case with the appropriate section, he can proceed to do so with the statutory provisions. I mean, obtaining an assignment from the competent authority to proceed further. Under such circumstances, the question of the exercise of finding the incriminating ingredient won't come in the way.

However, once a penalty is imposed on a particular issue u/s 73, it cannot be imposed under any other sections including Sec. 74.

With regards.