The Gujarat High Court has quashed a show cause notice issued under Section 74 of the Central Goods and Services Tax Act, 2017 against a Section 12AA-registered entity engaged in treating and disposing of industrial effluent, holding that its environmental preservation services were exempt from GST under Notification No. 12/2017-Central Tax (Rate).
The Division Bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati observed that an earlier judgment of the High Court had conclusively recognised the petitioner’s activities as charitable activities involving the preservation of the environment. The GST authorities could not disregard that binding determination while seeking to tax the same activities.
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The bench further held that the ingredients required for invoking Section 74—fraud, wilful misstatement or suppression of facts with an intention to evade tax—were absent. It accordingly set aside the show cause notice dated September 5, 2023.
The petitioner/assessee had obtained registration under Section 12AA of the Income Tax Act, 1961 with effect from December 21, 2005. It had also been registered under Section 25 of the Companies Act, 1956, applicable to not-for-profit companies.
A dispute had earlier arisen over whether the company’s activities qualified as charitable purposes under Section 2(15) of the Income Tax Act. The Commissioner of Income Tax (Appeals) ruled in the company’s favour, and the Income Tax Appellate Tribunal subsequently rejected the Revenue’s appeals.
The matter then reached the Gujarat High Court through Tax Appeal No. 627 of 2015 and connected cases. In its judgment dated July 29, 2019, the High Court held that the entity was engaged in charitable activities by preserving the environment through pollution-control treatment and the disposal of liquid and solid industrial waste.
The civil appeal filed by the Income Tax Department against that judgment was disposed of by the Supreme Court on January 30, 2025, on account of the low tax effect.
Following the introduction of GST on July 1, 2017, the petitioners treated their services as exempt under Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017.
Entry No. 1 of the notification prescribes a nil rate of GST for services supplied by an entity registered under Section 12AA of the Income Tax Act by way of charitable activities. The definition of “charitable activities” under the notification expressly includes activities relating to the preservation of the environment, including watersheds, forests and wildlife.
Since the petitioner was claiming an exemption, it was not eligible to claim input tax credit. According to the petitioners, this resulted in financial losses. The entity subsequently obtained GST registration and began paying output tax from May 13, 2022 so that it could avail input tax credit.
The High Court clarified that the petitioner’s subsequent decision to stop claiming the exemption did not establish that the exemption had been wrongly claimed during the preceding period.
A search was conducted at the petitioner’s premises on November 23, 2022. The GST authorities alleged that tax had erroneously not been paid for the period from July 1, 2017 to May 12, 2022.
On June 21, 2023, the department issued an intimation in Form GST DRC-01A proposing the recovery of tax, interest and penalty. The petitioners filed their objections on June 27, 2023 and relied upon the Gujarat High Court’s 2019 judgment recognising their activities as charitable environmental-preservation activities.
Despite the objections, the department issued a show cause-cum-demand notice on September 5, 2023 under Section 74 of the GST Acts. The notice alleged that the petitioner’s activities constituted taxable sewage and waste collection, treatment, disposal and environmental protection services falling under Service Accounting Code 9994.
The department alleged misdeclaration and wilful suppression of facts with an intention to evade GST. It also referred to offences under Section 132(1)(e) and Section 132(1)(i) of the CGST Act.
The petitioners, contended that the show cause notice ignored the binding judgment of the Gujarat High Court dated July 29, 2019.
It was argued that the earlier judgment had categorically held that pollution-control treatment and disposal of liquid and solid industrial waste amounted to preservation of the environment. The petitioner was also registered under Section 12AA of the Income Tax Act.
Therefore, its services were covered by Entry No. 1 read with clause 2(r)(iv) of Notification No. 12/2017, attracting a nil rate of GST.
The petitioners further contended that there was no fraud, deliberate misstatement or suppression of facts. Their claim was based on a bona fide interpretation of the exemption notification and the earlier judgment of the High Court.
It was also argued that the second petitioner had only rendered honorary services to the not-for-profit company. Consequently, the proposed personal penalty against him was without jurisdiction.
Senior Standing Counsel Hetvi H. Sancheti, appearing for the Revenue, argued that the 2019 High Court judgment concerned the Income Tax Act and could not automatically govern the exemption available under GST.
The department relied upon Notification No. 11/2017-Central Tax (Rate), under which sewage and waste collection, treatment, disposal and other environmental protection services falling under Heading 9994 attracted CGST at 9%.
It contended that commercial, fee-based effluent-treatment services supplied to industrial units in Naroda GIDC could not be regarded as charitable activities merely because the supplier was registered under Section 12AA.
The Revenue also alleged that the petitioner had not filed GST returns for nearly five years despite being registered with effect from July 1, 2017. It claimed that the petitioner cancelled its registration on its own and continued to supply services valued at approximately ₹79.53 crore without paying GST.
According to the department, the taxpayer was required to disclose its tax liability, and its failure to do so justified proceedings under Section 74.
The High Court examined its 2019 decision alongside Notification No. 12/2017 and found that the petitioner satisfied the requirements of the exemption.
The earlier judgment had held, after a detailed examination of the petitioner’s activities, that treating trade effluent and liquid or solid waste generated by polluting industries protects and preserves the environment.
The Court noted that the petitioner was registered under Section 12AA and its activities had already been judicially recognised as charitable activities involving environmental preservation.
Reading that determination with Entry No. 1 and clause 2(r)(iv) of Notification No. 12/2017, the Bench held that the applicable GST rate was nil.
The GST regime itself referred to entities registered under Section 12AA of the Income Tax Act while granting the exemption. The authorities could not, therefore, ignore the earlier judgment rendered specifically in relation to the petitioner’s activities.
The department relied on Entry No. 32 of Notification No. 11/2017, which prescribed CGST at 9% for sewage and waste collection, treatment and disposal and other environmental protection services under Heading 9994.
Rejecting that contention, the High Court observed that Notification No. 12/2017, issued on the same date but subsequent in sequence, specifically covered Section 12AA-registered entities undertaking charitable activities.
The Court held that the taxable classification under Notification No. 11/2017 would apply to private entities providing the services described under Chapter 99. It could not be imposed on the petitioner, which fulfilled the specific requirements of the charitable-services exemption under Notification No. 12/2017.
The Court separately examined whether Section 74 could have been invoked against the petitioners.
Section 74 applies where tax has not been paid or has been short-paid because of fraud, wilful misstatement or suppression of facts with an intention to evade tax.
Relying on the Supreme Court’s decision in Uniworth Textiles Limited v. Commissioner of Central Excise, Raipur, the High Court observed that suppression must be deliberate and directed towards evading tax. Mere failure to make a declaration does not, by itself, amount to wilful suppression.
A positive act by the taxpayer withholding material information with the object of evading tax is necessary. An omission to do something that a person might have done cannot automatically be treated as suppression, particularly when the relevant facts are known to both sides.
In the present case, the Court found no fraudulent intention, deliberate misstatement or suppression of material facts. The petitioner’s position was supported by its Section 12AA registration, the language of the exemption notification and the earlier High Court judgment.
The Bench also rejected the suggestion that the petitioner’s decision to start paying GST from May 13, 2022 established that tax was payable during the earlier period.
The petitioner had stopped claiming the exemption because the consequent denial of input tax credit was causing losses. It opted to pay output tax so that it could claim input tax credit.
According to the Court, such a commercial decision could not be construed as evidence that the petitioner had wilfully avoided GST earlier. Nor could it retrospectively deprive the petitioner of an exemption otherwise available under Notification No. 12/2017.
The Gujarat High Court held that the show cause notice had been issued in disregard of its earlier judgment, which had conclusively settled the character of the petitioner’s activities.
Since the petitioner was registered under Section 12AA and was engaged in charitable activities involving environmental preservation, its services were covered by the nil-rate exemption under Notification No. 12/2017.
Finding no basis for allegations of fraud, wilful misstatement or suppression of facts, the Court quashed and set aside the Section 74 show cause notice dated September 5, 2023.
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