The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has held that a taxpayer’s failure to voluntarily discharge tax liability before a departmental audit does not necessarily amount to wilful suppression warranting proceedings under Section 74 of the Central Goods and Services Tax Act, 2017.

The bench of S.G. Chattopadhyay (Judicial Member) and Malay Ghosh (Technical Member) quashed the Section 74 action against the assessee observing that the discrepancies were based on documents prepared and produced by the taxpayer itself. The department had not detected incriminating documents or reports supporting an inference of deliberate concealment.

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The bench directed fresh determination for financial years 2018–19 and 2019–20 under Section 75(2), treating the notice as one issued under Section 73(1). It separately held that the revenue was precluded from taking action for 2017–18 because it was time-barred.

The proceedings originated from an audit of the statutory records of appellant/assessee, which supplied goods described in the order as “Hardened Protein” and “Cellulosic Materials.”

A show cause notice dated December 14, 2023, invoked Section 74(1) for financial years 2017–18, 2018–19 and 2019–20.

The audit objections included short payment of tax on supplies reflected in the profit and loss account but not declared in GSTR-3B or GSTR-9, eligibility of TRAN-1 credit, non-reversal of input tax credit on discounts received from suppliers, and non-reversal of credit concerning a debit note issued to a supplier.

The order recorded combined CGST and SGST short payments of ₹15,84,092 for 2017–18, ₹2,47,874 for 2018–19 and ₹2,57,550 for 2019–20.

The adjudicating authority confirmed the demand with applicable interest and a penalty equivalent to the tax confirmed, except for the objection concerning non-reversal of GST on discounts amounting to ₹1,42,530.

The tribunal recorded that the taxpayer had paid ₹19,14,473 before issuance of the show cause notice, leaving an unpaid SGST amount of ₹32,512.

Before the first appellate authority, the taxpayer admitted the remaining SGST liability of ₹32,512 and challenged the invocation of Section 74.

It sought modification of the adjudication so that the dispute would be decided under Section 73, or a remand for redetermination under Section 75(2). The taxpayer also sought an opportunity to obtain waiver of interest and penalty under Section 128A, stating that the entire confirmed tax liability had been paid.

The first appellate authority dropped interest and penalty for 2017–18 after finding that the ingredients necessary to invoke Section 74 had not been established.

However, it upheld the Section 74 treatment for 2018–19 and 2019–20. It reasoned that the profit and loss or trading accounts for those years had not been available to the department before the audit, unlike the records uploaded for 2017–18.

The appellate authority also relied on the fact that the department had detected the discrepancies during audit and that the taxpayer had not disclosed them voluntarily.

The taxpayer explained that it had not filed GSTR-9C along with the profit and loss account for the later years because its annual aggregate turnover entitled it to an exemption under Rule 80 of the CGST Rules.

The tribunal noted that the department had not objected to this explanation in its cross-objection.

Instead, the department argued that the taxpayer had accepted the audit objections and paid the demand without defending its position. According to the department, this indicated that the taxpayer had failed to discharge its liability through GST returns despite knowing that the tax was payable.

The tribunal found that this did not justify treating the later years differently. It held that the reasoning adopted by the first appellate authority for considering 2017–18 under Section 73 applied equally to 2018–19 and 2019–20.

A central finding was that the discrepancies identified by the department arose entirely from documents prepared and produced by the taxpayer.

The tribunal found no incriminating documents or reports detected by the department from which it could infer that the taxpayer had wilfully failed to disclose the discrepancies.

The department further argued that the audit was conducted in 2023, approximately six years after GST was introduced. It maintained that the taxpayer had sufficient opportunity during that period to reassess and voluntarily discharge its liability.

Addressing this argument, the tribunal referred to the statutory and infrastructural difficulties during GST’s initial implementation, followed by the pandemic. These circumstances had resulted in extensions of time for both taxpayers and the department.

The bench consequently held that failure to discharge liability suo motu before a departmental audit did not necessarily establish wilful suppression.

It emphasised that action under Section 74 required definite evidentiary support and that such evidence should form part of the show cause notice. The tribunal referred in this context to CBIC Instruction No. 5/2023-GST.

The tribunal relied on the Supreme Court’s decision in Tata Steel Limited v. Union of India, dated August 25, 2026, as reproduced in its order.

The cited passages emphasised that the assessing officer must independently arrive at satisfaction before initiating proceedings under Section 73 or Section 74, even where the matter originates from audit objections.

For Section 74, the officer’s satisfaction must extend beyond the existence of a mismatch or short payment. The officer must be satisfied that fraud, wilful misrepresentation or suppression caused the discrepancy.

The tribunal also relied on the principle that the foundational facts supporting such an inference must be evident from the notice itself. Mechanical use of statutory expressions cannot substitute for application of mind.

Holding that the Section 74 proceedings were untenable, the tribunal quashed the action and set aside the first appellate authority’s order concerning 2018–19 and 2019–20.

It remanded the matter to the proper officer to determine the tax payable afresh under Section 75(2), deeming the notice to have been issued under Section 73(1).

The proper officer was directed to issue notice and provide the taxpayer with an adequate opportunity of hearing. The tribunal said the exercise should preferably be completed within three months from communication of its order.

For 2017–18, the tribunal expressly held that the revenue was precluded from taking action because it was time-barred.

The tribunal permitted the taxpayer to approach the concerned officer for benefits under Section 128A.

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