2025 (6) TMI 1149 - HC - GST

Challenge to SCN - challenge to notice on the ground that neither the ingredients as required u/s 74 of the Act are present nor have been alleged and therefore the notice is bad - HELD THAT - A bare perusal of the language indicated therein clearly reflects that a reference to notice issued under Section 73 has been made and that the explanation filed could not be verified and therefore further explanation was expected. The very fact that the respondents have sought further explanation and not a word has been indicated that the petitioner inter alia has committed fraud has given wilful misstatement or has suppressed material facts which are the ingredients based on which provisions of Section 74 of the Act can be invoked necessarily shows lack of requisite ingredients in the notice. In view of the fact situation the jurisdictional aspect for invoking provisions of Section 74 of the Act insofar as the present notice is convened being not present the same cannot be sustained. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the notice issued under Section 74 of the Goods and Services Tax Act, 2017 (the Act) was valid and sustainable in law, given the absence of specific allegations or ingredients required under Section 74.
• Whether the issuance of a Section 74 notice following an earlier proceeding under Section 73 was justified, especially when the earlier notice was responded to and the order under Section 73 indicated the need for further inquiry.
• Whether the substance of the notice under Section 74 could be upheld despite the absence of explicit language indicating fraud, wilful misstatement, or suppression of facts, which are essential for invoking Section 74.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of the Section 74 Notice in Absence of Required Ingredients

Relevant Legal Framework and Precedents: Section 74 of the GST Act empowers authorities to issue notices for recovery of tax where there is reason to believe that any person has committed fraud, wilful misstatement, or suppression of facts. The provision is stringent and requires specific ingredients to be present and alleged in the notice. The Court relied on precedents including Ajnara Realtech Limited vs. State of Uttar Pradesh and HCL Infotech Ltd. vs. Commissioner, Commercial Tax, which emphasize that a Section 74 notice must clearly allege the essential ingredients of fraud or suppression.

Court's Interpretation and Reasoning: The Court examined the language of the impugned notice and found that it merely referred to discrepancies in explanations and documents submitted during the Section 73 proceedings and departmental audit. The notice sought further explanation but did not allege any fraud, wilful misstatement, or suppression of facts explicitly or implicitly. The Court held that the absence of such allegations meant the notice lacked jurisdiction under Section 74.

Key Evidence and Findings: The notice itself was scrutinized, revealing that it primarily pointed to differences in figures submitted at different stages and requested additional clarifications. The notice did not assert that the petitioner had engaged in fraudulent conduct or wilful misstatements, which are prerequisites for invoking Section 74.

Application of Law to Facts: Given that Section 74 requires the presence of fraud or suppression, and the notice failed to allege these, the Court found that the statutory threshold for issuing a Section 74 notice was not met. The mere fact of discrepancies or unverified explanations does not suffice to invoke Section 74.

Treatment of Competing Arguments: The respondents contended that the material on record indicated suppression and that the substance of the notice should be examined rather than its form. The Court rejected this argument, emphasizing that the statutory language and ingredients must be clearly reflected in the notice for it to be valid. The Court underscored that the absence of explicit allegations cannot be cured by reading into the notice any implied fraud or suppression.

Conclusions: The Court concluded that the Section 74 notice was without jurisdiction and liable to be quashed and set aside.

Justification for Issuing Section 74 Notice Following Section 73 Proceedings

Relevant Legal Framework and Precedents: Section 73 deals with recovery of tax where there has been non-payment or short payment due to reasons other than fraud or suppression, while Section 74 is reserved for cases involving fraud or wilful misstatement. The law requires that before invoking Section 74, there must be material indicating such culpable conduct.

Court's Interpretation and Reasoning: The Court noted that the earlier Section 73 notice was responded to by the petitioner with explanations and documents. The order passed under Section 73 acknowledged discrepancies between documents produced during audit and proceedings but did not find or allege fraud or suppression. It only indicated the need for a detailed inquiry, which led to the issuance of the Section 74 notice.

Key Evidence and Findings: The Section 74 notice itself referenced the earlier Section 73 proceedings and stated that explanations were not verified but did not elevate this to an allegation of fraud or suppression.

Application of Law to Facts: The Court held that a mere difference or discrepancy in figures or documents does not automatically justify invoking the more stringent provisions of Section 74. The absence of specific allegations or findings of fraud or suppression in the Section 73 order meant that the jurisdictional requirement for Section 74 was not fulfilled.

Treatment of Competing Arguments: The respondents argued that the discrepancies and failure to verify explanations justified the Section 74 notice. The Court distinguished between a need for further inquiry and the existence of fraud or suppression, holding that the former does not justify the latter's invocation.

Conclusions: The Court found that the issuance of the Section 74 notice following the Section 73 proceedings was unjustified in the absence of requisite material indicating fraud or suppression.

Examination of the Substance of the Notice Versus its Language

Relevant Legal Framework and Precedents: Legal principles require that statutory notices must comply with the language and requirements of the enabling statute. While substance over form is a guiding principle, it cannot override explicit statutory requirements, especially in penal or quasi-penal provisions.

Court's Interpretation and Reasoning: The Court acknowledged the submission that the substance of the notice should be considered even if the exact language of Section 74 ingredients is not used. However, it held that the notice must at least allege the essential elements of fraud, wilful misstatement, or suppression. The impugned notice did not meet this standard.

Key Evidence and Findings: The notice's language was examined in detail, revealing that it only sought further explanation and did not allege any culpable conduct.

Application of Law to Facts: The Court applied the principle that procedural safeguards and statutory requirements cannot be bypassed by reading into the notice unexpressed allegations. The absence of explicit allegations meant the notice failed to meet the statutory mandate.

Treatment of Competing Arguments: The Court rejected the argument that the notice's substance sufficed, reaffirming the necessity of clear allegations in the notice.

Conclusions: The Court concluded that the notice was defective for failure to allege the ingredients of Section 74 and thus invalid.

3. SIGNIFICANT HOLDINGS

The Court held:

"A bare perusal of the language indicated therein clearly reflects that a reference to notice issued under Section 73 has been made and that the explanation filed, could not be verified and, therefore, further explanation was expected. The very fact that the respondents have sought further explanation and not a word has been indicated that the petitioner, inter alia has committed fraud, has given wilful misstatement or has suppressed material facts, which are the ingredients based on which provisions of Section 74 of the Act can be invoked necessarily shows lack of requisite ingredients in the notice."

Core principles established include:

• A Section 74 notice under the GST Act must explicitly allege the ingredients of fraud, wilful misstatement, or suppression of facts to be valid and maintain jurisdiction.
• Mere discrepancies or inability to verify explanations do not suffice to invoke Section 74; such matters may be pursued under Section 73 unless material indicating fraud or suppression emerges.
• The substance of a notice cannot override the statutory requirement that the notice must contain specific allegations as mandated by the enabling provision.

Final determinations on each issue were:

• The Section 74 notice issued was without jurisdiction and liable to be quashed and set aside.
• The issuance of the Section 74 notice following the Section 73 proceedings was unjustified in absence of requisite material indicating fraud or suppression.
• The petition challenging the Section 74 notice was allowed, and the notice was quashed, with liberty to the respondents to initiate fresh proceedings in accordance with law.