ADJUDICATION UNDER GST (PART-4)

[Dr. Sanjiv Agarwal]

Adjudication in Cases of Fraud, Willful Misstatement or Suppression of Facts

Section 74 deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful misstatement or suppression of facts.

This section provides that in cases of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised, for reasons of fraud or willful misstatement or suppression of facts, the adjudication order will be issued within five years from the due date of filing of annual return for the year to which the discrepancy is noticed. Further, the show cause notice is required to be issued at least six months prior to the time limit. This clause also provides that such notice need not be issued if tax along with interest and penalty equal to fifteen percent of tax is paid before issue of such notice. This section also provides that where any person chargeable with tax pays the tax along with interest and penalty equal to twenty five percent of tax within thirty days of issue of show cause notice, all proceedings in respect of the notice shall be deemed to be concluded. This section also provides that where any person chargeable with tax pays the tax along with interest and penalty equal to fifty percent of tax within thirty day of communication of order, all proceedings in respect of the notice shall be deemed to be concluded.

Following points are important for adjudication and determination of demand under section 74 of CGST Act, 2017

1. Section 74 of CGST Act, 2017, can be invoked or applied where it appears to the Proper Officer that a situation involving payment of tax has arisen in cases of fraud, wilful misstatement or suppression of facts.
2. Section 74 of CGST Act, 2017 provides for determination of tax and its demand and recovery under certain circumstances such as:

• Tax not paid; or
• Tax short paid; or
• Tax erroneously refunded; or
• Input tax credit wrongly availed or utilised.

3. Section 73 of CGST Act, 2017, also applies for recovery of interest payable which is not paid or partly paid

or interest erroneously refunded.

4. Such non-payment or short payment etc shall be for any reason by way of fraud, misstatement or suppression of facts.

Amendments made by Finance Act, 2021

Finance Act, 2021 has amended section 74 of the CGST Act, 2017 by amending clause (ii) of explanation (i) as follows:

104. In section 74 of the Central Goods and Service Tax Act, in Explanation 1, in clause (ii), for the words and figures sections 122, 125, 129 and 130, the words and figures sections 122 and 125 shall be substituted.

The objective of this amendment is to make seizure and confiscation of goods and conveyances in transit a separate proceeding from the recovery of tax.

By virtue of the above amendment, there will be separate recovery proceedings for the following two sections:

Section 129 – Detention seizure and release of goods and conveyance in transit

Section 130 – Confiscation of goods or conveyance and levy of penalty.

Though the Finance Act, 2021 has been enacted w.e.f. 28.03.2021, the date of enforcement of aforesaid amendment has not been notified so far as on 01.12.2021.

Meaning of fraud, willful misstatement or suppression of facts

These terms are not defined in the Goods and Services Tax law and as such, general meanings of these terms as per Black’s Law Dictionary could be understood as follows:

• Fraud – A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.
• Collusion – An agreement to defraud another or to do or obtain something forbidden by law.
• Wilful mis-statement – Voluntary and intentional act of making a false or misleading assertion about something, usually with an intent to deceive.
• Suppression of fact – To put a stop to, put down, or prohibit; to prevent (something) from being seen, heard, known, or discussed.
• Intent to evade – Intent is defined as state of mind accompanying an act especially forbidden act. Tax evasion is defined as the willful attempt to defeat or circumvent the tax law in order to illegally reduce one’s tax liability. Thus, there should be a state of mind to evade.

Fraud

The term fraud has not been defined in the Act. However, fraud means deceit with an intent to obtain an unjust advantage, while suppression has been defined by way of explanation 2 to section 74 of CGST Act, 2017. Willful misstatement generally covers a case of deceit but generally with the connivance of another. The situations cited supra normally comes to light only on an inquiry. A fraud generally comes to light on its detection. Thus, this section broadly covers detection and response while no provisions are traceable to prevention mechanism.

According to definition given in Black’s Legal Dictionary, 'fraud' means a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. For the purposes of tax statutes, fraud is usually categorized as intentional act to evade payment of tax. In order to classify an act of a taxpayer as fraud, the authorities must prove that the taxpayer had the clear intention of deceiving the authorities which has resulted into the evasion of tax. The Apex Court at various occasions have held that the mens rea (guilty mind) must be proved beyond any doubt in order to classify a taxpayer as a fraud. Merely because the act was conducted due to circumstantial compulsion would not result into any fraud. However, there must be legitimate nexus between the evasion of tax and the acts of the taxpayer. For instance, merely because the taxpayer had no options to revise a CST return would not tantamount to fraud, provided the taxpayer had informed the errors/mistakes to the department. Besides, in case of genuine hardship where the taxpayers were not able to intimate the department in time, their action cannot be treated as a case of mens rea.

It may be noted that fraud has to be used diligently and the onus to prove the same lies on the authorities.

Willful misstatement

Unlike suppression, where the information is hidden, in case of misstatement, the statement of facts is falls, twisted, distorted or misleading and such act is a willful and deliberate act and not in normal course. The purpose of such mis-statement, for the purpose of section 74 of CGST Act, 2017 should be evasion of tax.

Misstatement means making a false or misleading assertion about something with the intent to deceive. It must be understood that the term fraud is different from misstatement. When we discuss about misstatement, it is a situation where the taxpayer wilfully declares the wrong facts in order to evade taxes. For instance, a claim of Input Tax Credit without having actually received the goods shall tantamount to misstatement. Similarly claiming of refund by mentioning capital goods as inputs would also fall under misstatement. But the question arises that where the information is tendered to the department and upon the assessment/scrutiny the refund of capital goods is granted, the assertion cannot be called wilful misstatement.

Willful misstatement implies that there is a statement but it does not convey the information in a true or fair manner and is likely to be misinterpreted by the person using such statement. It also does not imply that there is suppression of facts.

Suppression of facts

Explanation (ii) to section 74 of CGST Act, 2017 defines suppression to cover the following :

1. Non-declaration of facts
2. Non-declaration of information
3. Failure to furnish any information asked for

In respect of above, it is important to note that facts and information should be such which a taxable person is required to declare under the Act or rules in :

• Return
• Statement
• Report
• Document furnished

Further, for information, it is important that such information should be asked by the proper officer in writing.

Suppression implies that one of the two parties to any activity is unaware of some information or facts which have been hidden by the inter-state parties will some objective, in this case, it could be evasion of tax.

In all the above cases, the qualifying condition is that such fraud, willful misstatement or suppression of facts should be with the intention of evasion of tax.

Based on various judicial pronouncements under the central excise law and service tax law, following assertions can be made:

• When department is aware of the activities undertaken, suppression or intention to evade tax is not sustainable
• When there is a confusion or dispute about taxability in any activity which is later clarified by the authorities, intention to evade cannot be sustained.
• Any issue involving different interpretation cannot lead to willful evasion of tax.
• When department itself is not sure about classification and taxability and multiple interpretation are possible, allegation of malafide intention cannot be sustained.
• Positive suppression cannot be attributed merely because no registration was obtained.
• When financial statements are in public domain, suppression of facts cannot be alleged.

Circumstances for determination of demand under section 74(1) of CGST Act, 2017

The proper officer shall serve notice under the provisions of Section 74(1) of CGST Act, 2017,  electronically on the person chargeable with tax for any reason by way of :

• Fraud
• Willful misstatement
• Suppression of facts

when he has reason to believe that tax has not been paid or short paid or erroneously refunded or input tax credit has been wrongly availed or utilized.

To determine the demand under section 74 of CGST Act, 2017, proper officer should be of a belief or it should appear to him that:

1. Any tax has not been paid or
2. Any tax has not been short paid or
3. Any amount has been erroneously refunded or
4. Any input tax credit (ITC) has been wrongly availed or wrongly utilized for reasons as stated above. In such a situation, proper officer is required to issue or serve a notice on person chargeable with tax but has not paid or short paid tax or has been erroneously  refunded or has wrongly availed or utilized input tax credit requires him to show cause as to why he should not

1. Pay the amount so payable,
2. Pay the interest under section 50 of the CGST Act, and
3. Penalty equivalent to the tax specified in the notice

Section 74(1) provides for –

(a) Service of notice by proper officer;

(b) Notice shall be served on the person who is chargeable with tax, who has –

• Not paid or short paid the tax;
• Received the erroneous refund;
• Wrongly availed or utilized input tax credit;

(c) Such amounts as mentioned above shall be required to be determined along with the applicable interest as per Section 50 and penalty equivalent to the tax specified in the notice.

Issuance of Notice under section 74(2) of CGST Act, 2017

The notice required to be issued under sub-section (1) shall be issued by proper officer as per time limit given in sub-section (10) i.e., three months before issuance of the time limit for issuance of order.

The proper officer shall issue show cause notice at least six months prior to the time limit of five years for issuance of order i.e.

• Before completion of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilized relates to, or
• Within five years from the date of erroneous refund, as the case may be.

This can also be understood from the following table:

Situation	Time limit for issuing  Notice [Section 74(2)]	Time limit for issuing order (Sec 74(10))
Cases involving fraud, willful misstatement or suppression of facts under section 74 CGST Act, 2017.	At least 6 months prior to the time limit specified under Section 74(10) for issuance of an order.	5 years from the due date for furnishing annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or 5 years from the date of erroneous refund.

In any demand proceedings under the provisions of GST, the proper officer is required to issue a show cause notice to the taxable person against whom the allegations are made. The proper officer in the said show cause notice (SCN) set out all facts, detail of allegations made and the amount alleged to be not paid, short paid or erroneously refund and the amount recoverable.

For continuing defaults of the same nature as detailed in show cause notice in the period further to period specified in show cause notice, the proper officer instead of issuing a detailed show cause notice for further period may issue a statement containing details of tax not paid or short paid. The prerequisite to issue of such statement is that the grounds relied upon for such tax period other than those covered by show cause notice are the same as mentioned in show cause notice. These are in general practice called follow-on show cause notices.

Issue of statement under section 74(3) of CGST Act, 2017

The proper officer may serve a statement under section 74(3) along with a summary electronically containing details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized where the grounds relied upon by the proper officer for such periods are the same as are mentioned in the earlier notice issued under section 74(1). The service of such statement shall be deemed to be service of show cause notice on the person chargeable with tax.

This sub-section enables the proper officer to issue and serve a statement to the person chargeable with tax for any short payment for the period other than that covered under notice under sub-section (1).

This implies that for periods other than the period covered under notice, a statement issued under sub-section (3) will also be considered as a valid notice. Such a statement should contain the details of tax or amount sought to be demanded from the person liable to pay tax.

Statement deemed to be a notice under section 74(4) of CGST Act, 2017

A statement quantifying the demand of tax, interest and penalty as provided in sub-section (3) shall be deemed to be a notice as required to be issued under sub-section (1) provided that the grounds of issuance of such statement are the same as of the earlier notice. By virtue of sub section (4), the law provides for issuing repetitive notices and there is only a requirement of issuing a statement containing the quantification of demand for other periods. This shall be subject to the condition that the grounds relied upon in the said statement except the ground of fraud / willful statement / suppression of facts, to evade tax are same.

Voluntary payment prior to notice under section 74(5) of CGST Act, 2017

As provided in section 74(5) of the GST Act, in case the person chargeable to tax deposits the amount of tax along with interest and penalty on such tax, within 30 days of issuance of show cause notice to him and all the proceedings in respect of said tax as contained in show cause notice will be deemed to be concluded.

According to sub-section (5), the person chargeable with tax can pay the amount of tax along with interest under section 50 and penalty equivalent to 15 percent of tax, based on his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment. On receipt of such information, the proper officer shall issue an acknowledgement for accepting the payment made by the said person in Form GST DRC-04 and shall not serve any notice or statement with respect to the tax so paid.

The following conditions are relevant:

1. Such amount should be deposited on a voluntary basis
2. The amount should be deposited before service of notice under sub-section (1) or sub-section (3).
3. Amount so paid must be paid along with interest payable thereon under section 50 of CGST Act, 2017 and penalty equivalent to 15 percent of tax amount.

The basis of payment must be:

• Either on the basis of assessee’s own ascertainment of tax, or
• On the basis of tax ascertained by the proper officer.
• After depositing the tax, the same should be intimated in writing to the proper officer.

No notice to be served under section 74(6) of CGST Act, 2017

On receipt of intimation of payment by the proper officer of the payment made by the taxable person as per sub-section (5) above, it is obligatory on the proper officer not to issue and serve notice under sub-section (1) or statement under sub-section (3), as the case may be in  respect of tax paid or any penalty payable. In other words, the proper officer shall not serve any notice to the extent of such payment. In such situations, there can be no further proceedings with regard to tax and penalty so paid.

Notice to be issued for shortfall under section 74(7) of CGST Act, 2017

It has been provided in section 74(7) of the CGST Act, 2017, that in case the amount of deposit made by the taxable person under section 74(3) falls short of the amount as determined by the proper officer, he would proceed to issue the show cause notice of the amount which he considers have been short paid than the amount as determined by him as the amount of defaulted tax.

Such notice shall be issued as per sub-section (1) but the notice should only be for that portion of the shortfall which has not been deposited i.e., after considering the amount paid under sub-section (5).                              

Consequences of amount paid after Show Cause Notice under section 74(8) of CGST Act, 2017

As provided in section 74(5) of the CGST Act, 2017, in case the person chargeable to tax deposits the amount of tax along with interest and penalty equivalent to 25 percent on such tax, within 30 days of issuance of show cause notice to him, he will not be charged with any penalty and all the proceedings in respect of said tax as contained in show cause notice will be deemed to be concluded.

All proceedings in respect of the said tax shall be deemed to be concluded means any further notice even to co-noticee for penalty, late fee etc. cannot be issued.

The person chargeable with tax shall inform the proper officer of such payment and the proper officer shall issue an order concluding the proceedings in respect of the said notice. It may be noted that on such payment, all proceedings in respect of such notice except for proceedings under section 132 shall be deemed to be concluded.

Issuance of order under section 74(9) of CGST Act, 2017

This sub-section provides for determination of demand and issuance of order for determining the amount of tax, interest and penalty. However, such an order should be issued after considering the representation.

As a principle of natural justice, an opportunity of personal hearing should be provided before issuance of an order to a taxable person. However, no such opportunity needs to be provided before issuance of show cause notice.

For show cause notice issued under section 74 of the CGST Act, 2017, the proper officer can levy a penalty as provided by section 74(9) of the CGST Act, 2017.

Where the person files a reply or representation, the proper officer after considering the representation, the proper officer shall issue an order consisting of the amount of tax, interest and penalty (i.e. tax + interest + penalty). A summary of such order shall be uploaded electronically specifying therein the amount of tax, interest and penalty payable by the person chargeable with tax. Such summary of order shall be treated as a notice for recovery.

Time limit for order under section 74(10) of CGST Act, 2017

As per sub-section (3), the proper officer is required to pass an order within a period of 5 years from the:

• due date for filing of Annual return for the year to which the short payment or non-payment or input tax credit wrongly availed or utilised relates
• date of erroneous refund

The demand proceedings launched under the provisions of section 74 are required to be concluded within a period of 5 years from the due date of filing the annual return or actual date of filing the annual return of the relevant period, whichever is earlier. 

In case the proceedings were started under section 74 of the CGST Act, 2017, but no order was issued within the prescribed period of 5 years of date of filing of annual return of relevant year, the proceedings will come to an end due to reason of expiry of limitation period. Any order issued after the expiry of limitation period of 5 years will be treated as defective order and thus, ineffective.

Deemed conclusion of proceedings (under section 74(11) of CGST Act, 2017)

Sub section (11) provides for deemed conclusion of proceedings under section 74 of CGST Act, 2017, if following conditions are satisfied:

1. Order is issued and served under section 74(9) of CGST Act, 2017.
2. The person pays tax, interest under section 50 of CGST Act, 2017 and penalty equivalent to 50% of the tax within thirty days of communication of order. It may be noted that all proceedings in respect of said notice shall be deemed to be concluded except the proceedings under section 152 in relation to punishment for certain offences. Further, in cases where the proceedings are initiated and held against the main person and some other persons (co-notices) and the proceedings under section 73 and 74 of CGST Act, 2017 have been concluded, then the proceedings against all the person liable to pay tax under sections 122, 125, 129 and 130 of CGST Act, 2017 shall stand concluded.

However, Finance Act, 2021 has amended explanation 1, clause (ii) to the effect that section 129 and 130 have been omitted, so as to make seizure and confiscation of goods and conveyance in transit a separate proceeding from recovery of tax. This amendment has been notified for implementation w.e.f. 01.01.2022.

Payment of Tax, Interest & Penalty	Amount of Penalty
Before issuance of show cause notice	15% of the tax amount
Within 30 days after the issuance of SCN	25% of the tax amount
Within 30 days from the communication of order	50% of the tax amount
In any other case	100% of the amount equal to tax

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Dr. Sanjiv Agarwal

FCA, FCS