2025 (6) TMI 1243 - HC - GST

Issuance of SCN u/s 74 of the Goods and Services Tax Act 2017 - SCN issued without jurisdiction or not - none of the ingredients as required for issuance of notice under Section 74 of the Act are neither present nor have been alleged in the notice - HELD THAT - This Court in the case of M/s Vadilal Enterprises Ltd. 2025 (6) TMI 1149 - ALLAHABAD HIGH COURT wherein the same officer in identical circumstances had adopted the similar method i.e. while deciding the notice under Section 73 of the Act finding paucity of time left the issues undecided and issued notice under Section 74 of the Act 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. The present case is squarely covered by order in the case of M/s Vadilal Enterprises Ltd. Conclusion - The impugned notice under Section 74 is without jurisdiction and is quashed and set aside The notice issued under Section 74 of the Act is quashed and set aside - petition allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Court in this matter are:

• Whether the notice issued under Section 74 of the Goods and Services Tax Act, 2017 ("the Act") was validly issued and within jurisdiction.
• Whether the ingredients required for issuance of a notice under Section 74 of the Act, namely allegations of fraud, wilful misstatement, or suppression of facts, were present or sufficiently alleged in the impugned notice.
• Whether the procedural and substantive requirements for invoking Section 74 of the Act were complied with, especially in light of a prior notice issued under Section 73 of the Act and the petitioner's responses thereto.
• The applicability and precedential value of the Allahabad High Court's earlier decision in a similar matter involving M/s Vadilal Enterprises Ltd., where a notice under Section 74 was challenged on similar grounds.

Issue-wise Detailed Analysis

Validity and Jurisdiction of Notice under Section 74 of the GST Act

Legal Framework and Precedents: Section 74 of the GST Act empowers the tax authorities to issue a notice and initiate proceedings where there is reason to believe that a person has committed fraud, wilful misstatement, or suppression of facts to evade tax. The section is thus invoked only when such ingredients are present or can be reasonably inferred from the facts. Section 73, in contrast, deals with cases of tax demand not involving fraud or wilful misstatement.

The Court relied heavily on its prior ruling in M/s Vadilal Enterprises Ltd., where it was held that a notice under Section 74 must clearly allege or demonstrate the presence of fraud, wilful misstatement, or suppression of facts. The mere seeking of further explanation or pointing out discrepancies without such allegations is insufficient to invoke Section 74.

Court's Interpretation and Reasoning: The Court examined the impugned notice dated 25.02.2025 issued under Section 74. The notice primarily highlighted discrepancies between various tax returns (GSTR-1, GSTR-3B), e-way bills, audited balance sheets, and departmental audit reports, and sought explanations with supporting evidence. It also indicated tax demand calculations, interest, and penalty proposals based on these discrepancies.

However, the Court observed that the notice did not explicitly or implicitly allege any fraud, wilful misstatement, or suppression of material facts by the petitioner. Instead, it appeared to be a continuation or extension of the earlier proceedings under Section 73, where certain issues were left undecided due to the need for further investigation.

The Court noted the respondent's argument that the notice need not use the exact language of Section 74, and that the facts themselves could imply the required ingredients. The Court rejected this submission, emphasizing that the statutory scheme demands clear jurisdictional facts to invoke Section 74, which were absent here.

Key Evidence and Findings: The impugned notice detailed multiple discrepancies in taxable turnover, tax declared, and tax paid across different GST returns and e-way bills, with tabulated data showing significant differences. The departmental audit report also indicated a short payment of IGST requiring interest and penalty. Despite these factual discrepancies, the petitioner had submitted explanations which were not found to be conclusively false or fraudulent at this stage.

Application of Law to Facts: The Court applied the principle that Section 74 proceedings are extraordinary and require a higher threshold of proof or at least a prima facie foundation of fraud or wilful misstatement. Since the notice only sought further clarification on discrepancies and did not allege fraud or suppression, the issuance of notice under Section 74 was held to be without jurisdiction.

Treatment of Competing Arguments: The petitioner contended that the notice was invalid as it lacked the necessary allegations and jurisdictional basis under Section 74. The respondent contended that the factual discrepancies themselves sufficed to invoke Section 74, and that the notice was a continuation of the earlier Section 73 proceedings.

The Court found the petitioner's submissions persuasive and consistent with statutory interpretation and precedent. The respondent's argument was rejected as it would dilute the jurisdictional safeguards embedded in Section 74.

Conclusions: The Court concluded that the notice under Section 74 was issued without jurisdiction and was liable to be quashed and set aside. The Court further clarified that this decision does not preclude the respondent from initiating fresh proceedings in accordance with law if warranted.

Significant Holdings

The Court's crucial legal reasoning is encapsulated in the following verbatim excerpt from the precedent relied upon:

"8. 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.

9. In view of the above 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."

This principle was reaffirmed in the present case, leading to the quashing of the Section 74 notice.

The core principle established is that the issuance of a notice under Section 74 of the GST Act requires the presence or clear allegation of fraud, wilful misstatement, or suppression of material facts. Mere discrepancies or demand for further explanation do not suffice to invoke this section.

The final determination on the issue was that the impugned notice under Section 74 was without jurisdiction and was quashed and set aside, with liberty granted to the revenue authorities to initiate fresh proceedings if justified.