Intricacies of Section 74 to initiate Proceedings Under GST Law

1. Section 74:
   • Applicability: This section is invoked when unpaid or short-paid taxes, erroneous refunds, or wrong ITC utilization occur due to fraud, wilful misstatement, or suppression of facts to evade tax.
   • Limitation Period: Proceedings must be initiated within five years from the due date of the annual return for the relevant financial year.
   • Key Points: The SCN under Section 74 must explicitly state the grounds of fraud, wilful misstatement, or suppression of facts. If these elements are missing, the SCN can be challenged as lacking jurisdiction, as emphasized by several court rulings.

Practical Implications:

• Thorough Assessment: Taxpayers should assess any notice received under Section 74 to verify if the allegations of fraud or misstatement are supported by concrete evidence. If the notice fails to meet the legal threshold, it could be challenged.
• Difference in Penalties: Proceedings under Section 74 generally result in heavier penalties, given the intentional nature of the violation. In contrast, Section 73 focuses on unintentional errors or oversights with lower penalties or no penalties if paid promptly after the notice.

Key Takeaway:

It is crucial for taxpayers to determine whether a proceeding should fall under Section 73 or Section 74, as the latter involves more severe allegations and consequences. If fraud, wilful misstatement, or suppression of facts is not evident, an SCN issued under Section 74 could be disputed on jurisdictional grounds.

The intricacies of Section 74 under the GST law (Central Goods and Services Tax Act) focus on the determination of tax not paid, short paid, erroneously refunded, or wrongful Input Tax Credit (ITC) availed or utilized due to fraud, wilful misstatement, or suppression of facts. These proceedings are more serious compared to Section 73 (which deals with non-fraudulent cases) because of the intentional element involved.

Here are the key aspects and intricacies of initiating proceedings under Section 74 of the CGST Act:

1. Applicability of Section 74

• Section 74 applies when the tax authority identifies that the taxpayer has:
  • Not paid or short-paid the required tax,
  • Wrongly availed or utilized input tax credit (ITC),
  • Received an erroneous refund,
  • Due to fraud, wilful misstatement, or suppression of facts with the intent to evade tax.
• This section covers deliberate acts aimed at avoiding tax obligations, distinguishing it from Section 73, which addresses inadvertent errors without fraudulent intent.

2. Fraud, Wilful Misstatement, and Suppression of Facts

• Fraud: Any deliberate act with the intention to deceive tax authorities for the purpose of evading taxes.
• Wilful Misstatement: Providing false information knowingly, intending to mislead the tax authorities.
• Suppression of Facts: Intentionally hiding important information that one is legally obligated to disclose to evade tax liabilities.

These are the cornerstones of proceedings under Section 74. To invoke this section, the tax authorities must provide proof of these elements.

3. Show Cause Notice (SCN)

• A Show Cause Notice (SCN) is issued to the taxpayer, explaining the reasons for the demand and alleging fraud or misstatement.
• Essential Elements of SCN:
  • It must clearly specify the grounds for invoking Section 74, which should include allegations of fraud, wilful misstatement, or suppression of facts.
  • Lack of Evidence: If the notice does not substantiate the allegations with evidence or fails to mention the required intent (fraud or suppression), the SCN can be challenged.
  • The notice should also provide the taxpayer the opportunity to respond and present a defense.

4. Time Limit for Proceedings

• Proceedings under Section 74 must be initiated within five years from the due date of filing the annual return for the financial year in which the tax was not paid or short-paid, or the ITC was wrongly availed/utilized.
• This five-year window contrasts with the three-year time limit for cases under Section 73 (non-fraudulent cases), reflecting the more serious nature of offenses covered by Section 74.

5. Consequences and Penalty Structure

• High Penalty: The taxpayer is liable to pay a penalty equivalent to 100% of the tax due in addition to the unpaid tax and interest.
• If the taxpayer voluntarily pays the tax along with interest before the issuance of the SCN, no penalty is imposed.
• If payment is made within 30 days of the SCN being issued, the penalty is reduced to 15% of the tax amount.
• If the tax is paid after the conclusion of proceedings or later, the full penalty of 100% is applicable.

This tiered penalty structure encourages early resolution and payment of the outstanding liabilities.

6. Self-Assessment and Voluntary Payment

• A taxpayer can make a self-assessment and pay the tax, along with interest, before receiving the SCN, and inform the officer in writing.
• In such cases, if the officer is satisfied with the payment, no SCN will be issued, provided there is no further liability.
• This provision allows the taxpayer to avoid penalties and prevent formal proceedings if the tax dues are acknowledged early.

7. Burden of Proof on Tax Authorities

• The tax authorities bear the burden of proving that the non-payment, short payment, or wrongful ITC was due to fraud or misstatement by the taxpayer.
• Without clear evidence of fraud or suppression of facts, the invocation of Section 74 can be challenged in court.
• Courts and tribunals have often quashed SCNs that lacked specific evidence supporting allegations of fraudulent intent.

8. Issuance of Order

• Once the SCN is issued and the taxpayer responds, the tax authorities will consider the representations and evidence submitted.
• Based on this, the proper officer will issue an order determining the tax payable, along with interest and penalties.
• This order must be issued within the five-year period prescribed for Section 74 proceedings.

9. Appeals and Dispute Resolution

• If the taxpayer disagrees with the order, they can appeal to the Appellate Authority.
• Thereafter, the taxpayer has further recourse to the GST Appellate Tribunal and other courts, depending on the specifics of the case.
• Many cases under Section 74 involve challenges related to the sufficiency of evidence for fraud or wilful suppression, and taxpayers often challenge the SCN on procedural grounds.

10. Judicial Interpretations

• Courts have emphasized that SCNs under Section 74 must be clear and precise in their allegations of fraud or wilful misstatement.
• If the SCN is vague or does not provide clear grounds for invoking Section 74, it may be set aside as lacking jurisdiction.
• Recent judgments highlight that tax authorities cannot arbitrarily issue SCNs under Section 74 without concrete evidence of fraudulent intent.

11. Difference Between Section 73 and Section 74

• Section 73 deals with recovery in cases where there is no fraud, misstatement, or suppression of facts. The time limit is three years, and penalties are lower (10% or ₹10,000, whichever is higher).
• Section 74 deals with recovery when fraud, wilful misstatement, or suppression of facts is involved. The time limit is five years, and penalties can go up to 100% of the tax amount.
• Understanding the difference is crucial because the consequences under Section 74 are far more stringent.

Proceedings under Section 74 are serious, involving allegations of fraud, intentional misstatements, or suppression of facts. Taxpayers must be aware of the higher penalties, longer limitation period, and burden of proof requirements. Proper review of SCNs for the adequacy of evidence supporting allegations of fraud is essential. Any procedural lapses or insufficient allegations in the SCN can lead to a valid challenge in the appellate process.

In essence, Section 74 acts as a deterrent for intentional tax evasion under GST, but it also requires authorities to strictly adhere to procedural and evidentiary standards.

Under GST law, Sections 73 and 74 of the CGST Act govern proceedings for unpaid or short-paid taxes, erroneous refunds, or wrongful input tax credit (ITC) utilization. Section 73 applies when the issue arises without fraud or wilful misstatement, while Section 74 is invoked in cases involving fraud, wilful misstatement, or suppression of facts. The limitation period for initiating proceedings under Section 73 is three years, whereas for Section 74, it extends to five years from the due date of furnishing the annual return for the relevant financial year. Taxpayers must be vigilant in identifying whether a notice issued under Section 74 is legitimate, specifically requiring evidence of fraud or misstatement. Several court rulings have highlighted the need for explicit allegations in the show-cause notices issued under Section 74. In cases where a notice is issued without proper evidence or reason, it may be considered as lacking jurisdiction. Taxpayers should thoroughly assess the notice to ensure the required criteria under Section 74 are met, especially concerning fraud or misstatement claims.

Under the GST Law there is only two sections 73 and 74 of the CGST Act by which proceedings may be initiated to determine the Tax if the Tax Payer has not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized. The only difference between the two sections in regard to initiating the proceedings is that the proceedings under section 73 shall be initiated for any reason other than fraud or any wilful-misstatement or suppression of facts whereas the proceedings under section 74 shall be initiated by reason of fraud or any wilful-misstatement or suppression of facts. Therefore, the proceedings under section 74 shall not be initiated if there is not the case of fraud or wilful misstatement or suppression of facts.

LIMITATION PERIOD TO PASS THE ORDER UNDER SECTION 73 & 74

for Section 73 - Three years from the due date for furnishing of annual return for the financial year

for Section 74 - Five years from the due date for furnishing of annual return for the financial year

Limitation Period has been exhausted for the financial years 2017-18, 2018-19 and 2019-20 under the section 73 but proceedings for the years 2017-18, 2018-19 and 2019-20 may yet be initiated under section 74.

This Article shall try to discuss on how the notice issued under section 74 can be checked whether it (notice) has been issued within the provisions of section 74 or not.

Some times the matter has been settled and order has been issued under section 73 for the year 2017-18 but the Tax Payer receives the notice under section 74 on the same matter again under section 74 for the year 2017-18 or the Tax Payer receives the notice under section 74 first time.

The Taxpayer should check deeply that -

• There is categorically mentioned some information or evidence in the notice in regard to make out a prima-facie belief that the assessee has wrongly availed or utilized ITC by reason of fraud, or any wilful mis-statement or suppression of facts or
• The notice has been issued on merely belief and without any reason that the assessee has wrongly availed or utilized ITC by reason of fraud, or any wilful mis-statement or suppression of facts. It may be that after reading the notice it seems that the Adjudicating Authority wants to avail the extended period of limitation by issuing the notice under section 74.

In the case of  “HCL INFOTECH LTD VERSUS COMMISSIONER, COMMERCIAL TAX AND ANOTHER” the Hon’ble Allahabad High Court observed that

“The field of operation of Section 73 and 74 of the CGST Act is altogether different i.e. Section 73 operates in all other cases of wrongly availed or utilized Input Tax Credit for any reason other than fraud or wilful mis-statement or suppression of facts and Section 74 comes into play when the excessive Input Tax Credit has been availed due to some fraud or wilful mis-statement or suppression of facts. Thus, it is patently manifest that for deriving the jurisdiction to initiate proceedings under Section 74 of the CGST Act, the adjudicating authority must expressly mention in the Show Cause Notice that he is prima-facie satisfied that the person has wrongly availed or utilized Input Tax Credit due to some fraud or a wilful mis-statement or suppression of facts to evade tax and that must be specifically spelled out in the Show Cause Notice. Once the aforesaid basic ingredient of the Show Cause Notice under Section 74 of the CGST Act is missing, the proceedings become without jurisdiction as the adjudicating authority derives jurisdiction to proceed under Section 74 of the CGST Act only when the basic ingredients to proceed under Section 74 are present.”

The Hon’ble Supreme Court in the case of Raj Bahadur Narain Singh Sugar Mills Ltd. Vs. Union of India, reported in 1996 (88) E.L.T. 24 (S.C.) has held as follows:

“9. We have set out the relevant parts of the show cause notice. It speaks of an erroneously granted rebate. There is no mention in it of any collusion, wilful mis-statement or suppression of fact by the appellants for the purposes of availing of the larger period of five years for the issuance of a notice under Rule 10. The party to whom a show cause notice under Rule 10 is issued must be made aware that the allegation against him is of collusion or wilful misstatement or suppression of fact. This is a requirement of natural justice.”

The Hon’ble Supreme Court in the case of CCE Vs. H.M.M. Limited, reported in 1995 (76) E.L.T. 497 (S.C.) has held as follows:

“2. The assessee contended before the Additional Collector of Central Excise that the show cause notice was time barred under the main part of Section 11A since it was issued after the expiry of the period of six months stipulated therein but the Additional Collector sustained the notice on the ground that it was within five years impliedly holding that the purported action was under the proviso to Section 11A of the Act. There is no dispute that the show cause notice cannot be sustained under subsection (1) of Section 11A unless the proviso is attracted. Admittedly, it is beyond the period of limitation of six months prescribed under Section 11A (1) but it is within the extended period of 5 years under the proviso to that sub-section. Now in order to attract the proviso it must be shown that the excise duty escaped payment by reason of fraud, collusion or wilful misstatement or suppression of fact or contravention of any provision of the Act or of the Rules made thereunder with intent to evade payment of duty. In that case the period of six months would stand extended to 5 years are provided by the said proviso. Therefore, in order to attract the proviso to Section 11A (1) it must be alleged in the show cause notice that the duty of excise had not been levied or paid by reason of fraud, collusion or wilful misstatement or suppression of fact on the part of the assessee or by reason of contravention of any of the provisions of the Act or of the Rules made thereunder with intent to evade payment of duties by such person or his agent. There is no such averment to be found in the show cause notice. There is no averment that the duty of excise had been intentionally evaded or that fraud or collusion had been noticed or that the assessee was a guilty or wilful misstatement or suppression of fact. In the absence of such averments in the show cause notice it is difficult to understand how the Revenue could sustain the notice under the proviso to Section 11A(1) of the Act. The Additional Collector while conceding that the notice had been issued after the period of six months prescribed in Section 11A(1) of the Act had proceeded to observe that there was wilful action of withholding of vital information apparently for evasion of excise duty due on this waste/by-product but counsel for the assessee contended that in the absence of any such allegation in the show cause notice the assessee was not put to notice regarding the specific allegation under the proviso to that subsection. The mere non-declaration of the waste/byproduct in their classification list cannot establish any wilful withholding of vital information for the purpose of evasion of excise duty due on the said product. There could be, counsel contended, bona fide belief on the part of the assessee that the said waste or by-product did not attract excise duty and hence it may not have been included in their classification list. But that per se cannot go to prove that there was the intention to evade payment of duty or that the assessee was guilty of fraud, collusion, misconduct or suppression to attract the proviso to Section 11A(1) of the Act. There is considerable force in this contention. If the Department proposes to invoke the proviso to Section 11A(1), the show cause notice must put the assessee to notice which of the various commissions or omissions stated in the proviso is committed to extend the period from six months to 5 years. Unless the assessee is put to notice, the assessee would have no opportunity to meet the case of the department. The de- faults enumerated in the proviso to the said sub-section are more than one and if the excise department places reliance on the proviso it must be specifically stated in the show cause notice which is the allegation against the assessee falling within the four comers of the said proviso. In the instant case that having not been specifically stated the Additional Collector was not justified in inferring (merely because the assessee had failed to make a declaration in regard to waste or by- product) an intention to evade the payment of duty. The Additional Collector did not specifically deal with this contention of the assessee but merely drew the inference that since the classification list did not make any mention in regard to this waste product it could be inferred that the assessee had apparently tried to evade the payment of excise duty.”

If the Notice issued under section 74 is in a casual manner and without giving the specific reason of fraud or any wilful-misstatement or suppression of facts then this Notice should be treated as issued without jurisdiction. But the Taxpayer knows himself better than the contents of the notice whether he has done any mischief or not.