The Allahabad High Court has set aside a fresh show cause notice issued under Section 74 of the UPGST Act, 2017 holding that the adjudicating authority’s observations reflected prejudice against the taxpayer.
The bench of Justice Saumitra Dayal Singh and Justice Arun Kumar clarified that the department is not barred from initiating fresh Section 74 proceedings, provided the statutory jurisdictional ingredients—fraud, wilful misstatement or suppression of facts with intent to evade tax—actually exist.
The dispute arose from a show cause notice dated July 22, 2026, issued to the company under Section 74 of the UPGST Act for FY 2017-18. The taxpayer challenged the notice principally on the ground that it had been issued beyond the applicable limitation period.
Buy Now: 130 GST Judgments – E-Magazine July 2026
According to the petitioner, the limitation for issuance of the notice had expired on August 5, 2024, and there was no statutory provision permitting the Revenue to issue a fresh notice thereafter. The taxpayer also relied upon an earlier Allahabad High Court order dated September 27, 2024, in its own case, contending that the earlier judgment did not authorise issuance of the impugned notice in the manner adopted by the department.
The petitioner raised additional objections, including that the High Court’s earlier order had recorded findings favourable to it and that the Revenue had initially initiated proceedings under Section 73 for the same tax period, which were subsequently dropped.
The taxpayer also specifically challenged certain observations in the new notice, arguing that they demonstrated a prejudicial approach on the part of the adjudicating authority.
The Court noted that the Revenue had first issued a Section 73(1) notice dated September 30, 2023 concerning FY 2017-18. The notice raised several issues relating to the taxpayer’s input tax credit and other GST compliances.
Among the allegations were that ITC claimed on imports had not been substantiated with relevant documents such as bills of entry, ITC availed through TRAN-1 had not been adequately substantiated, zero-rated supplies were allegedly not supported by LUT-related documentation, and there were unreconciled ITC figures in GSTR-9C.
The notice also questioned reversal of ITC under Rules 42 and 43 in relation to exempt, nil-rated and non-GST outward supplies.
The department’s proposed computation in that notice, as reproduced in the judgment, culminated in a grand total of ₹5,76,12,310.20, comprising tax, interest and penalty. The notice was subsequently dropped on December 30, 2023.
After dropping the Section 73 proceedings, the Revenue issued another notice dated August 3, 2024, this time under Section 74 of the Act on substantially the same issues.
The petitioner/assessee challenged that notice before the High Court in an earlier writ petition. The taxpayer had specifically argued that proceedings under Section 74 could not be revived after the earlier Section 73 proceedings had been dropped.
The High Court, in its earlier judgment, examined the distinction between Sections 73 and 74 of the GST law.
The Court observed that Section 73 applies to cases involving wrongful availment or utilisation of ITC for reasons other than fraud, wilful misstatement or suppression of facts, whereas Section 74 applies where the wrongful availment or utilisation is attributable to fraud, wilful misstatement or suppression of facts.
Importantly, the earlier judgment held that a Section 74 notice must specifically disclose that the authority was prima facie satisfied that the wrongful availment or utilisation of ITC was occasioned by fraud, wilful misstatement or suppression of facts to evade tax.
Since the August 3, 2024 notice did not contain such an allegation, the High Court had quashed it. However, it expressly left it open to the Revenue to initiate fresh Section 74 proceedings, subject to the existence of the basic ingredients relating to fraud, wilful misstatement or suppression of facts.
The High Court rejected the taxpayer’s contention that the earlier judgment completely extinguished the Revenue’s jurisdiction.
The Court noted that the earlier order had attained finality and had not been challenged before the Supreme Court. More importantly, the earlier judgment had specifically permitted the adjudicating authority to initiate fresh proceedings under Section 74, provided that the jurisdictional ingredients existed.
The Court therefore held that the taxpayer could not subsequently contend that the Revenue had been denied another opportunity to issue a Section 74 notice.
A significant aspect of the ruling concerns limitation under Section 75(3) of the GST Act.
The provision states that where an order is required to be issued pursuant to a direction of an Appellate Authority, Appellate Tribunal or Court, such order is to be issued within two years from the date of communication of that direction.
The High Court acknowledged that, ordinarily, Section 75(3) contemplates a situation where an adjudication order has already been passed and is subsequently set aside by an appellate authority, tribunal or court.
However, the Court held that the provision could not be read in isolation in the present case because the earlier writ judgment had positively permitted the Revenue to initiate fresh Section 74 proceedings.
Accordingly, even though the earlier proceeding had not culminated in a final adjudication order and only the show cause notice had been quashed, the specific direction issued by the High Court meant that the Revenue retained a period of two years from communication of the September 27, 2024 order to give effect to that direction.
The Court rejected a literal interpretation that would completely eliminate the limitation period merely because the earlier court order had set aside a show cause notice rather than a final adjudication order.
Such an interpretation, the Court said, would defeat the purpose of the earlier judicial direction and would contradict an order that had already attained finality.
Although the High Court rejected the taxpayer’s broad limitation objection, it nevertheless found a fundamental problem with the impugned notice.
The notice contained observations accusing the taxpayer of “Misleading the Court” and referring to an alleged wilful misstatement in connection with the earlier proceedings.
The High Court found these observations to be clearly out of place. The Revenue’s Standing Counsel also fairly conceded that the observations contained in paragraph 3(ग) of the notice were not appropriate.
The Bench went further and held that the language of the notice indicated an element of prejudice on the part of the adjudicating authority.
The Court was particularly concerned that the prejudice appeared to stem from the fact that the taxpayer had previously approached the High Court and had obtained relief.
The Court held that, solely because of the element of prejudice, the impugned notice could not be sustained.
It accordingly set aside the July 22, 2026 notice and remitted the matter for issuance of a fresh Section 74 notice, if the requisite jurisdictional facts exist.
Thus, the ruling does not amount to a final finding that the underlying ITC-related issues raised by the Revenue were legally untenable. Instead, the Court drew a distinction between the Revenue’s power to initiate a valid Section 74 proceeding and the requirement that such proceeding be conducted by an authority approaching the matter fairly and without prejudice.
The High Court directed the Additional Commissioner (Grade 1), State Tax, Gautam Budh Nagar, to assign the matter to an officer other than the officer who issued the impugned notice.
The new officer has been directed to consider the case neutrally and independently, without being influenced by the observations contained in the present judgment.
The Court permitted the fresh notice, if necessary, to be issued within two weeks.
Once a fresh notice is issued, the assessee has been granted four weeks to submit its written reply.
The Court also protected the taxpayer’s right to access documents relevant to the proceedings.
If any relied-upon documents (RUDs) or non-relied-upon documents are required, the taxpayer may make an appropriate request along with its reply.
The adjudicating authority has been directed to supply documents available with it within the following two weeks. If any document is refused, the authority must pass and communicate an appropriate reasoned order explaining the refusal.
Thereafter, the authority must fix a hearing date with at least 15 days’ advance notice and pass a reasoned and speaking order.
Recognising that the limitation period was approaching its end, the High Court directed that the proceedings be concluded as expeditiously as possible, without permitting unnecessary or prolonged adjournments.
The Court fixed December 31, 2026 as the outer date for conclusion of the proceedings.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
