The Madras High Court has held that tax authorities cannot adjudicate proceedings under Section 74 of the GST law when the original show cause notice was issued under Section 73 and does not contain allegations of fraud, wilful misstatement or suppression of facts.
The bench of Justice Senthilkumar Ramamoorthy set aside the assessment order passed under Section 74 as well as the order rejecting the taxpayer’s application for waiver of penalty under Section 128A, while directing the authorities to issue a fresh order under Section 73.
The dispute originated from a show cause notice dated September 29, 2023, which was expressly issued under Section 73 of the applicable GST enactments. The notice proposed reversal of excess Input Tax Credit (ITC), primarily based on a comparison between the ITC claimed in GSTR-3B and the ITC reflected in GSTR-2A.
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The petitioner argued that although the proceedings commenced under Section 73, the adjudicating authority ultimately passed a detailed assessment order under Section 74, imposing a penalty equivalent to 100% of the tax demand. Because the order was treated as one under Section 74, the taxpayer’s subsequent application seeking waiver of penalty under Section 128A was rejected on the ground that the benefit is unavailable for orders passed under Section 74.
The petitioner contended that the show cause notice was unequivocally issued under Section 73. Neither the notice nor its contents alleged fraud, wilful misstatement or suppression of facts with an intention to evade tax. The summary order itself described the proceedings as being under Section 73, whereas only the detailed order referred to Section 74 and imposed a 100% penalty. Since the proceedings legally belonged under Section 73, rejection of the Section 128A application was unsustainable.
The State submitted that an application under Section 128A is not maintainable where the assessment order has been passed under Section 74 of the GST enactments and therefore the rejection was justified.
After examining the show cause notice, the High Court observed that it was clearly issued under Section 73.
The Court noted that the notice merely proposed reversal of excess ITC based on a reconciliation between GSTR-3B and GSTR-2A. Importantly, it contained no allegation or even an implied assertion that the taxpayer had committed fraud, made a wilful misstatement, or suppressed material facts with the intention of evading tax.
The Court further observed that One defect mentioned in the show cause notice had been completely dropped. Another defect resulted in only a minor demand. The principal demand related to excess ITC without any allegations attracting Section 74.
The Court also found that the summary assessment order was expressly titled as an order under Section 73. Although the detailed order referred to Section 74 and observed that the taxpayer had failed to discharge the burden of proving its ITC claim, it still did not record any finding regarding fraud, wilful misstatement or suppression of facts.
Accordingly, the Court held that the essential ingredients required for invoking Section 74 were absent both in the show cause notice and in the adjudication order.
Invoking Section 75(2) of the GST enactments, the Court concluded that the proceedings ought to have been initiated and concluded under Section 73 rather than Section 74.
Since the statutory prerequisites for Section 74 were missing, the adjudicating authority lacked jurisdiction to convert the proceedings into one under the fraud provisions merely at the stage of passing the final order.
The High Court set aside the assessment order passed under Section 74; remanded the matter to the adjudicating authority for issuance of a fresh order under Section 73, set aside the order rejecting the taxpayer’s application under Section 128A and granted liberty to the petitioner to file a fresh application under Section 128A after the fresh order under Section 73 is passed, subject to the prescribed limitation period.
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