The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru, has held that discrepancies detected during a routine GST audit cannot automatically attract proceedings and penalties under Section 74 of the Central Goods and Services Tax Act, 2017, in the absence of positive evidence establishing fraud, wilful misstatement or deliberate suppression of facts.

The Bench of Srikanth Venkatraman (Judicial Member) and  Sudha Koka (Technical Member) observed that Section 74 is an extraordinary provision carrying an extended limitation period and an onerous penalty. Consequently, it cannot be invoked merely because a tax discrepancy was discovered during an audit.

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“Routine audit discoveries under Section 65 do not automatically trigger extended limitation or penal provisions,” the Tribunal observed.

The dispute arose from a GST audit conducted for the period from July 2017 to March 2020. An audit memo issued on May 23, 2022, raised three issues involving a combined tax demand of ₹19,28,456.

The issues were: Excess input tax credit claimed in GSTR-3B compared with GSTR-2A, involving a proposed demand of ₹17,06,697. Ineligible input tax credit under Section 17(5), involving ₹1,19,169. Irregular transitional credit claimed through TRAN-1, involving ₹1,02,590.

Before the issuance of the show cause notice, the taxpayer deposited an agreed tax amount of ₹7,78,693 along with interest of ₹5,77,235 through Form GST DRC-03. The payments were made during June and July 2022.

Despite these payments, the department issued a show cause notice on January 25, 2023, under Section 74 of the CGST Act, proposing recovery of tax, interest and penalties.

The adjudicating authority, through an order dated June 12, 2023, confirmed the agreed tax and interest liabilities. However, it dropped the Section 74 penalty in relation to the GSTR-3B and GSTR-2A mismatch and the transitional credit issue.

The authority confirmed a Section 74 penalty only in relation to the ineligible credit claimed under Section 17(5). The taxpayer subsequently paid 50% of the reduced penalty relating to that issue, which was not contested before the GSTAT.

The Revenue challenged the dropping of penalties on the other two issues before the Joint Commissioner of Central Tax (Appeals-1), Bengaluru.

The First Appellate Authority allowed the departmental appeal on October 1, 2024, and imposed Section 74 penalties on the excess ITC and transitional credit issues. This prompted the taxpayer to approach the GSTAT under Section 112 of the CGST Act.

The Tribunal identified the principal question as whether the First Appellate Authority was justified in imposing Section 74 penalties when the discrepancies had arisen from information already available in statutory returns and departmental records.

It noted that Section 74 applies only where tax has not been paid, has been short-paid or input tax credit has been wrongly availed or utilised because of fraud, wilful misstatement or suppression of facts with an intention to evade tax.

The GSTAT found that the First Appellate Authority had proceeded on the erroneous assumption that once tax demanded through a notice issued under Section 74 was confirmed, it had no option but to impose the corresponding penalty.

Rejecting this reasoning, the Tribunal held that the adjudicating authority must independently determine whether the ingredients of fraud, wilful misstatement or suppression are actually established.

The mere issuance of a show cause notice under Section 74 does not compel the adjudicating authority to confirm a penalty where deliberate intent to evade tax is absent, the Tribunal clarified.

The GSTAT took note of the finding in the original adjudication order that all relevant records, including GSTR-3B returns, GSTR-2A statements and TRAN-1 declarations, were available on the department’s portal.

There was no allegation or evidence showing that the taxpayer had undertaken a positive act to conceal information or had intentionally made a false declaration to evade GST.

The Tribunal relied upon the Supreme Court’s decision in M/s Tata Steel Limited v. Union of India & Others, in which it was held that Section 74 cannot be invoked merely by mechanically reproducing expressions such as “suppression” or “wilful misstatement.”

According to the GSTAT, a notice under Section 74 must disclose foundational facts demonstrating the use of a conscious and deliberate device to evade tax. The proper officer must also record an independent satisfaction founded upon concrete material.

An audit observation under Section 65, by itself, does not establish suppression or fraud.

The First Appellate Authority had reasoned that the contraventions would have continued “but for the audit verification.” The GSTAT held that this reasoning misconstrued the legal meaning of suppression.

The fact that a discrepancy came to light during audit does not automatically demonstrate that the taxpayer intentionally withheld information. A finding of suppression requires evidence of a deliberate act undertaken with an intention to evade tax.

The Tribunal also referred to the Supreme Court’s ruling in Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, which held that when the relevant facts are known to both parties or are accessible from statutory records, non-disclosure cannot automatically be treated as suppression.

Accordingly, the mismatch between GSTR-3B and GSTR-2A and the transitional credit discrepancy could not, without additional evidence of fraudulent intent, support penalties under Section 74.

The GSTAT further noted that the taxpayer had voluntarily paid the entire agreed tax liability and applicable interest several months before the show cause notice was issued.

Once the allegations of fraud and suppression failed, the payments were required to be considered under Section 73(5) of the CGST Act.

Section 73(5) permits a taxpayer to discharge tax and interest before the service of a show cause notice in cases not involving fraud, wilful misstatement or suppression. Section 73(8) provides protection from penalty where the prescribed tax and interest are paid within the stipulated period.

The Tribunal also relied on the Karnataka High Court’s decision in Commissioner of Central Excise and Service Tax v. Adecco Flexion Workforce Solutions Ltd., which recognised that penal proceedings cannot be sustained when tax and interest are voluntarily paid before the issuance of a notice and deliberate evasion is not established.

It found that the First Appellate Authority had failed to consider the legal effect of the pre-notice payments.

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