section 73 and 74 of the CGST Act

[Gnanamuthu samidurai]

Study of section 73 and 74 of the CGST Act

1) In chapter XV of the CGST Act 2007 under the head of Demand and Recovery provision have been made for determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised which arises under two circumstances of which the

first one is for any reasons other than fraud or any wilful mis-statement or suppression of facts  to evade tax (sec.73)

and the second one is for the reasons of fraud or any willful mis-statement or suppression of facts to evade tax(sec.74)

2) Both of the above sections  are procedural in nature  since the method of issuance  and service of notice, statement  showing the details of such demand  of tax, interest and penalty  are described in sub section (1) to (11) of section 73 and 74

3) The feeder provision for detection of such demand  are

Sec. 21 (credit distributed in excess by Input Service Distributors)

Sec. 51, (Default to deduct TDS)

Sec.61(3)(Scruitiny of returns)

Sec.64(2) (Summary assessment in special cases)

Sec.65(7) (Audit by tax authorities) and

Sec.66(6)(Spl. Audit by nominating the Charted Accountants )

    As a result of investigation made with reference to the above feeder provisions, and in the following circumstances, it warrants to invoke sec.73 & 74 of the Act   

i)Tax not paid or short paid

4)The various situations and circumstances would result in tax not paid or short paid. This kind of demand would generally arises on scrutiny of returns the task of which has to be done in terms of  section 61 of the Act. During such scrutiny of returns, there may found  certain lapses on account of clerical, arithmetical errors, as remained un-matched under section 42 and 43  adopting incorrect rate of tax  or claiming of incorrect exemption, due to misclassification of goods, incorrect location of place of supply, time of supply , incorrect quantification of value of supply. For the recovery of this kind of demand, section 73 or section would come to  play

ii)Erroneously refunded

5) In chapter XI under the head of refunds, various circumstances have been described for refund of tax or interest paid .If there is  any refund claimed or issued contrary to the provisions as described under section 54, 55 and 56 of the Act. the provisions of section 73 or section 74 would come into play for the recovery of the incorrect refund so claimed or made.

iii)In put tax wrongly availed or utilised

6) In Chapter V under the head of Input tax credit, various eligibility and conditions for taking input tax credit have been described under section 16 to 19. In circumstances of violation of any conditions it would result in recovery of such wrong availment or utilisation of input tax credit, by invoking section 73 and 74 of the Act.

With this preliminary reading, let us proceed to the procedurals described under section 73 and 74 of the Act.

As already stated, this is a machinery provision for the recovery of demand for which there is time limit for issuance of notice, issuance of orders and also for quantifying the tax, interest and penalty. The rigour of section 74 is stringent than that provided under section 73 since the gravity of the violation falling under the former one  is due to fraud,wilful mis-statement or suppression of facts to evade tax.

Reasons of fraud or any willful mis-statement or suppressions of facts

When inaccuracy of accounting records occurs, there are two possible reasons for the discrepancy: error or fraud. An error is unintentional and often occurs due to computer malfunction or human error, such as carelessness or lack of knowledge. In contrast, fraud is intentionally committed in order to render some gain for the perpetrator.

With regard to the willfull mis-statement or suppressions of facts to evade tax,it  is to be stated that the words and phrases  are not new but they were already in the Central Excise provision under section 11-A(1) of the Act empowers Central Excise officers to initiate proceedings where duty has not been levied or short levied within six months from the relevant date.This period stands extended five years in terms of the proviso to the said section in cases where the duty could not be levied or was short levied or was short paid due to fraud,collusion or willfull mis-statement or suppression of facts etc., Similar dispute with reference to the above provision came up for discussion before the Hon’ble High Court of Karnataka in the case of KIRLOSKAR COMPUTER SERVICE LTD. VERSUS UNION OF INDIA [1997 (6) TMI 35 - KARNATAKA HIGH COURT] wherein it was followed  the decision of the Hon’ble  Apex court reverting the decision of the Tribunal  in the case of Cosmic dye chemicals vs.Collector of Central excise Bombay  ..In the said decision, the following passage from the said decision was given as under:

"Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as misstatement or suppression of facts are concerned, they are clearly qualified by the word "wilful" preceding the words "misstatement or suppression of facts which means with intent to evade duty. The next set of words "contravention of any of the provisions of this Act or Rules" and again qualified by the immediately following words "with intent to evade payment of duty". It is, therefore, not correct to say that there can be a suppression or misstatement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11-A. Misstatement or suppression of fact must be wilful".

In another issue, in  the decision in 2013 (2) ECS ( 88 ) (Tri - Del) in  customs excise & Service tax Appellate Tribunal, Principal Bench, New Delhi  Court No. III MAN INDUSTRIES INDIA LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, INDORE [2013 (5) TMI 677 - CESTAT NEW DELHI] In this case, it was held that “the  fact that the activity of coating was done on the bare pipes manufactured by the appellants themselves was never brought to the notice of the department. Moreover, the fact that figures of coating pipes shown in the excise records were not in respect of the bare pipes received from outside for coating was never brought to the notice of the department. This is also seen from fact of entering two separate contracts with M/s IOCL on the same date was also not brought to the notice of the department. We find that two letters of intent were issued on the same date and addressed to the same person Manish Pathak. This action shows that this was a deliberate attempt to evade duty on the coating charges.

The above said two decisions are brought in this article with a view to say that there may be many cases of this like in the past and the present  regime of taxation laws as to the issue related to fraud or any willfull mis-statement or suppression of facts to evade tax. But each case depends upon the facts and circumstances in its individual scenario. The CGST provisions no where defines the words such as “fraud”,willfull mis-statement or suppression of facts.

But according to the explanation-2 given under section 74, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, report or any other documents 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.

It would also be appropriate to have a reading over the penal provisions of the Act, wherein in certain offences are considered for penal action. Under the CGST Act,in chapter XIX under the headings “Penalty for certain offences” is dealt with u/s 122 to 127  wherein various penalty for offences have been prescribed and also “punishments for certain offences” as prescribed u/s 132 of the Act.  The offences so described consists of both minor and major, intentional or un-intentional, on any wilfulness or otherwise, deliberate or otherwise or fraudulent in nature . The  reasons for determination of tax/interest/penalty in cases related to  tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised as specified u/s 73 and 74 of the Act.  However,it is no doubt that  the gravity   depends upon facts and circumstances of each case.

As already stated, section 73 and 74 of the Act provides certain procedures described with “time limit for issuance of notice” ,”service of notice/statement”, time limit for issuance of orders, effect of the notices or orders issued etc., It  order to read the relevant procedures, they are extracted below in a tabulated form so as to catch them at a glance on issue wise and section /sub-section wise

Sec.73	Section 74
Issue of notice u/s/73(1) shall be at least **3 months prior to the time limit specified in sub.sec.10 for issuance or orders vide ( sub section (2)	Issue of notice u/s 74(1) shall be  at least **6 months prior to the time limit specified in sub.sec.10 for issuance of orders (vide sub-sec.(2)
When the service of the notice is stayed by an order of a court or Appellate Tribunal, the period of stay shall be excluded in computing the period** (vide sec.75(1)	When the service of the notice is stayed by an order of a court or Appellate Tribunal, the period of stay shall be excluded in computing the period** (vide sec.75(1)
A statement showing the details of tax not paid has also to be served(vide sub section (3)	A statement showing the details of tax not paid has also to be served(vide sub section (3)
If the grounds are the same the service of statement deemed to be service of the notice(vide sub-sec.4)	If the grounds are the same the service of statement deemed to be service of the notice(vide sub-sec.4) & sec.75(2)
There is option to pay the tax with interest before issuance of notice and to inform such payment in writing to the proper officer (vide sub-sec.5)	There is option to pay the tax with interest and also penalty equivalent to 15% of the tax on the basis of his own ascertainment or as ascertained by the proper officer.and to inform such payment to the proper officer in writing (vide sub-sec.5)
On receipt of such information, the proper officer need not serve any notice or statement (vide sub-sec.6)	On receipt of such information, the proper officer need not serve any notice or statement (vide sub-sec.6)
If the payment so made is noticed with any short fall, the proper officer may proceed to issue notice (vide sub-sec.7)	If the payment so made is noticed with any short fall, the proper officer may proceed to issue notice (vide sub-sec.7)
If it is paid with interest no penalty is payable. The notice shall deemed to be conclused (vide sub-sec.8)	If it is paid with interest and penalty equivalent to  25% of such tax within 30 days of issue of notice, all proceedings deemed to be concluded.(vide sub-sec.8)
If the notice is rebutted, the proper officer after considering the representation may determine the tax,interest and penalty equivalent to 10% of tax or 10,000/= whichever is higher(vide sub section (9)	(i)If the notice* is rebutted, the proper officer after considering the representation may determine the tax,interest and penalty (not quantified here)(vide sub section (9) (ii)penalty quantified as equivalent to 50% of such tax (vide sub sec,11) ii)If the tax,interest and penalty are paid the notice* shall be deemed to be concluded
	Where the notice issued is held to be not sustainable as ordered by the Appellate Authority or Tribunal for the reasons of not establishing fraud or willfull mis-statement  or suppression of facts, the proper officer shall determine the tax payable deeming it as if the notice were issued u/s 73(1)
Orders shall  be issued within 3 years from the due date for filing of annual return for the financial year  and within **3 years in the case of erroneous refund (vide sub sec.10)	Orders shall  be issued within 5 years from the due date for filing of annual return for the financial year  and within **5 years in the case of erroneous refund
If the order is not issued within the above time limit, it shall be deemed to be concluded (vide sec.75(10)	If the order is not issued within the above time limit, it shall be deemed to be concluded (vide sec.75(10)
When the issuance of  the order is stayed by an order of a court or Appellate Tribunal, the period of stay shall be excluded in computing the period** (vide sec.75(1)	When the service of the issuance of order  is stayed by an order of a court or Appellate Tribunal, the period of stay shall be excluded in computing the period** (vide sec.75(1)
In the case of self assessed tax  or any amount collected as tax has not been paid  within 30 days from the due date of payment of such tax, penalty u/ sub-sec.9 shall be payable ie., @10% or 10000/= whichever is higher (vide sub-sec.11)

 Note : 1 The provisions of section 73(11) of the CGST Act can be invoked only when the provisions of section 73 are invoked. 3. The provisions of section 73 of the CGST Act are generally not invoked in case of delayed filing of the return in FORM GSTR-3B because tax along with applicable interest has already been paid but after the due date for payment of such tax. It is accordingly clarified that penalty under the provisions of section 73(11) of the CGST Act is not payable in such cases. It is further clarified that since the tax has been paid late in contravention of the provisions of the CGST Act, a general penalty under section 125 of the CGST Act may be imposed after following the due process of law. vide(Circular No. 76/50/2018 dt.31-12-2018)

Note 2: For the same  reasons given in section 73 and 74, there is also penal provision under section 122(2) of the Act.  But his penal proviso has no effect because, where penalty is imposed under sec.73 or 74 of the Act, no penalty for the same act or omission shall be imposed on the same person under any other provisions of the Act vide section 75(13) and also vide section 127 of the Act.

Note: 3 The orders passed under section 73 and 74 is subjected for appeal under section 107 of the Act as inferred from section 75(3) wherein it is stipulated that where any order is required to be issued in pursuance of the direction of the Appellate Authority or Appellate Tribunal or a court, such order shall be issued within two years from the date of communication of the said direction.

Note 4: As per section 75(10) of the Act, the adjudicating proceedings shall be deemed to be concluded , if the order is not issued within three years as provided for in sub-section 73  or within 5 years as provided for in sub-section 10 of section 74 of the Act. In such circumstances, it is not known whether that deemed order if it is against the taxpayer, is appealable or not ?  Because section 107 stipulates time limit of three months from the date on which the said decision or order is communicated and there is no specific date of communication of the deemed orders.