The Allahabad High Court has set aside a fresh show cause notice issued under Section 74 of the Uttar Pradesh GST Act, 2017, holding that the notice reflected an element of prejudice on the part of the adjudicating authority. 

The bench of Justice Saumitra Dayal Singh and Justice Arun Kumar clarified that the department was not barred from initiating fresh proceedings under Section 74, provided the jurisdictional conditions relating to fraud, wilful misstatement or suppression of facts existed.

The litigation arose from a series of GST proceedings concerning the same financial year. The Revenue had initially issued a notice under Section 73(1) of the UPGST Act on September 30, 2023, raising several objections concerning input tax credit, including ITC allegedly availed on imports without supporting documents, transitional ITC claimed through TRAN-1, zero-rated supplies, unreconciled ITC and reversal of ITC relating to exempt or non-GST supplies.

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The notice proposed substantial tax, interest and penalty liabilities. The demand summary in the notice placed the aggregate proposed liability at approximately ₹5.76 crore, comprising tax, interest and penalty. The notice was subsequently dropped on December 30, 2023.

The department thereafter issued another show cause notice dated August 3, 2024, this time invoking Section 74 of the Act. The taxpayer challenged that notice before the High Court.

In the earlier writ proceedings, the High Court examined whether the Section 74 notice contained the foundational allegation necessary to assume jurisdiction under that provision.

The Court noted that Section 73 deals with cases involving wrongly availed or utilised ITC for reasons other than fraud, wilful misstatement or suppression of facts, whereas Section 74 applies where the alleged wrongful availment or utilisation is attributable to fraud, wilful misstatement or suppression of facts with an intent to evade tax.

The Court held that a Section 74 notice must specifically disclose that the adjudicating authority was prima facie satisfied that the wrongful availment or utilisation of ITC resulted from fraud, wilful misstatement or suppression of facts to evade tax. Since the earlier notice did not contain such foundational allegations, it was held to be without jurisdiction.

However, while quashing the August 3, 2024 notice, the Court expressly left it open to the Revenue to initiate fresh proceedings under Section 74 by issuing a fresh notice containing the basic ingredients concerning fraud, wilful misstatement or suppression of facts, “if they so exist.”

That earlier order attained finality, with neither side shown to have challenged it before the Supreme Court.

The taxpayer subsequently challenged the July 22, 2026 notice on several grounds.

One of the principal arguments was that the statutory period for issuing the notice had expired on August 5, 2024. According to the taxpayer, there was no provision permitting the Revenue to issue a fresh Section 74 notice beyond the limitation period merely because the High Court had earlier permitted fresh proceedings.

The taxpayer also contended that the earlier High Court judgment had effectively decided certain jurisdictional issues and that the Revenue could not revive the proceedings after the earlier Section 73 notice had been dropped.

Another argument raised was that the latest notice contained language demonstrating prejudice against the taxpayer.

The department argued that the earlier High Court order had specifically granted liberty to issue a fresh Section 74 notice.

It relied upon Section 75(3) of the GST law, which provides that where an order is required to be issued pursuant to a direction of an appellate authority, appellate tribunal or court, the order may be issued within two years from the date of communication of such direction.

The Revenue argued that, consequently, the fresh proceedings could be initiated within two years from communication of the High Court’s September 27, 2024 order.

The Division Bench rejected the taxpayer’s contention that no limitation survived for fresh proceedings.

The Court observed that Section 75(3) contemplates a situation where proceedings are required to be undertaken pursuant to a direction issued by an appellate authority, tribunal or court. Ordinarily, the provision concerns situations where an adjudication order has been set aside and a fresh order has to be passed.

However, in the present case, the earlier writ Court had issued a positive direction permitting the Revenue to initiate fresh proceedings under Section 74. The Court held that this direction could not subsequently be diluted by adopting an overly literal interpretation of the word “order” in Section 75(3).

The Bench reasoned that the earlier judgment had attained finality and expressly contemplated fresh Section 74 proceedings. Therefore, the Revenue’s compliance with that direction within two years from communication of the September 27, 2024 order remained within the permissible period.

The Court specifically observed that had the earlier writ Court not granted liberty to initiate fresh proceedings, the limitation question might have been different. But once a positive direction had been issued, it had to be given effect to by the Revenue authorities.

Despite rejecting the limitation challenge, the High Court found a serious defect in the manner in which the latest show cause notice had been framed.

The notice contained remarks alleging that the taxpayer had “misled the Court” and had made a wilful misstatement in the earlier proceedings. The remarks referred to the taxpayer’s earlier approach to the High Court and the relief obtained in connection with the previous Section 73 proceedings.

The High Court found these observations to be clearly out of line and stated that they were neither required in the context of the dispute nor desirable to remain on record.

More importantly, the Bench held that the language of the notice disclosed an element of prejudice on the part of the adjudicating authority.

The Court emphasised that the prejudice was particularly problematic because it appeared to stem from the fact that the taxpayer had previously approached the High Court and obtained relief. According to the Bench, such circumstances “compound the matter further.”

The Court therefore set aside the impugned July 22, 2026 show cause notice solely because of the element of prejudice apparent from the notice.

Importantly, the Court did not terminate the Section 74 proceedings altogether. Instead, it remitted the matter for issuance of a fresh notice, provided the jurisdictional facts necessary for invoking Section 74 actually existed.

This distinction is significant. The judgment does not hold that the Revenue is permanently prohibited from proceeding under Section 74 for the relevant financial year. Rather, it requires any fresh proceedings to be initiated by an officer who approaches the matter neutrally and independently.

The Court directed the Additional Commissioner (Grade 1), State Tax, Gautam Budh Nagar, to assign the matter to an officer other than the officer who had issued the impugned notice.

The new adjudicating authority was specifically directed to apply an independent and neutral mind and not be influenced by the observations contained in the judgment.

The Court also laid down a detailed procedural timetable. If a fresh notice was considered necessary, it could be issued within two weeks. The taxpayer would then have four weeks to submit its written response.

Where relied-upon or non-relied-upon documents were required, the taxpayer could seek them along with its reply. Documents available with the adjudicating authority were to be supplied within the prescribed period, while any refusal to provide a document was required to be supported by appropriate reasons.

The Court further directed that an appropriate hearing date be fixed with at least 15 days’ advance notice and that the eventual decision be supported by a reasoned and speaking order.

Taking note of the approaching limitation period, the High Court directed that the proceedings be completed expeditiously and without allowing undue or prolonged adjournments.

The Court fixed December 31, 2026 as the outer date for conclusion of the proceedings.

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