The Supreme Court has set aside a Goods and Services Tax (GST) show cause notice issued for the 2018-19 assessment year, holding that a department cannot invoke the extended limitation period under Section 74 of the Central Goods and Services Tax Act, 2017 merely by mechanically using expressions such as “fraud” or “concealment of facts.” 

The bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that the allegations and circumstances justifying invocation of the extended limitation must emerge from the show cause notice itself.

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The case concerned a show cause notice issued in relation to the assessment year 2018-19. The central question before the Supreme Court was whether the notice could be treated as one validly issued under Section 74 of the CGST Act read with the Madhya Pradesh GST Act, despite the expiry of the limitation period applicable to proceedings under Section 73.

Section 73 deals with determination of tax that has not been paid, has been short-paid, or where input tax credit has been wrongly availed or utilised for reasons other than fraud, wilful misstatement or suppression of facts. Section 74, on the other hand, deals with situations involving fraud, wilful misstatement or suppression of facts and consequently provides for an extended period of limitation.

The assessee argued before the Supreme Court that a notice seeking to invoke Section 74 must itself contain specific allegations demonstrating fraud, wilful misstatement or suppression of facts. According to the appellant, merely referring to these expressions without explaining the factual basis for such allegations could not legally transform an otherwise time-barred proceeding under Section 73 into a proceeding under Section 74.

One of the significant aspects of the judgment was the Court’s refusal to rely upon the State’s counter-affidavit to supply allegations that were absent from the original show cause notice.

The State had sought to rely upon its counter-affidavit, contending that allegations of fraud and suppression had been elaborated there and that these allegations justified the proceedings under Section 74 rather than Section 73.

The Supreme Court rejected this approach. It reiterated the established principle that when an authority issues a notice or order, the requirements necessary to establish its validity must be contained in the notice or order itself. Deficiencies in the original notice cannot subsequently be cured by introducing additional factual allegations through a counter-affidavit filed before the Court.

The ruling therefore reinforces an important procedural safeguard in tax adjudication: the taxpayer must be able to understand from the show cause notice itself the precise statutory basis and factual allegations on which the department proposes to proceed.

The Supreme Court undertook a detailed examination of the limitation provisions applicable to the 2018-19 assessment year.

Under Section 73, the relevant proceedings are subject to a statutory limitation period. The Court noted that annual returns for financial year 2018-19 were initially required to be filed by December 31, 2019. However, extensions granted through successive notifications ultimately moved the due date for filing the annual return to December 31, 2020. Consequently, the ordinary limitation period for issuance of a Section 73 notice would have expired on December 31, 2023.

The COVID-19 pandemic subsequently affected limitation periods across various proceedings. The Supreme Court, in its suo motu proceedings concerning extension of limitation, excluded the period from March 15, 2020 to February 28, 2022 while computing limitation.

For the 2018-19 proceedings, the Court calculated the relevant excluded period as one year and two months. After giving effect to that exclusion, the extended limitation period for the Section 73 proceedings came to an end on February 28, 2025.

The impugned show cause notice, however, was issued only on June 13, 2025.

The Supreme Court therefore held that the notice was clearly beyond the limitation period prescribed under Section 73. This made the question of whether Section 74 could legitimately be invoked crucial to the outcome of the case.

The proceedings had their origins in an investigation concerning the assessee’s business for the years 2017-18 to 2020-21.

According to the material placed before the Court, summons were issued in March 2022. The State contended that the assessee had sought time but did not produce the documents required by the assessing officer. An inspection was subsequently conducted at the assessee’s premises, and statements were recorded from the accountant, authorised signatory and director.

The State also alleged that despite several hearings scheduled between September 1, 2022 and February 7, 2025, the assessee failed to appear on 20 occasions. A draft notice-cum-investigation report was prepared on March 3, 2025, followed by an intimation under Section 142(1A) on April 29, 2025.

The assessee raised preliminary objections on May 14, 2025, including an objection that the draft notice had not been served. The draft notice was subsequently served on May 27, 2025, after which an additional response was submitted. The final show cause notice under Section 74 was thereafter issued on June 13, 2025.

The Supreme Court found a fundamental defect in the Section 74 notice.

On examining the notice, the Court found that apart from a general or “bland” reference to fraud or concealment of facts, there was no explanation of how fraud had been inferred or how concealment of facts had allegedly been detected.

The Court also took note of the wording used in the notice, observing that the use of the word “or” suggested that even the assessing officer was not clearly identifying whether the proceedings were based on fraud or concealment of facts.

According to the Supreme Court, what is required for invoking the extended limitation period is not merely the reproduction of statutory language. The notice must contain the allegations and circumstances that lead to an inference of fraud, wilful misstatement or suppression of facts.

The Court specifically emphasised that there must be material in the notice explaining the basis on which the assessing authority concluded that one of these circumstances existed. A mechanical invocation of the expressions “fraud, wilful misstatement or suppression of facts” cannot by itself justify resort to the extended limitation period under Section 74.

The Supreme Court concluded that there was no justification for sustaining the impugned show cause notice.

It accordingly set aside both the Madhya Pradesh High Court’s order and the show cause notice issued by the State authorities. The State was specifically directed not to take any further proceedings pursuant to the challenged notice.

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