Is section 74 notice, a Brahmastra, which cannot be taken back, once activated?

[Subba PV]

1. Sections 73 and 74 of the CGST Act, 2017 pertain to determination of tax. While the taxable persons may not be worried to receive the show cause notices issued under Section 73, there has been a cause for concern when Section 74 notices are received. For the sake of convenience headings of both the provisions are extracted below:-

‘Section 73 - Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful-misstatement or suppression of facts’

‘Section 74 - Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.’

2. Essential difference between the two provisions is that Section 74 allows longer or extended period of limitation and higher quantum of penalty. It has been generally felt that in most of the cases, proper officers invoke Section 74 only, irrespective of the existence of the three ingredients mentioned therein. We have seen cases, where on the very same issue, State tax officers have issued Section 73 notices and Central tax officers have issued Section 74 notices and vice versa. Even within them also, we find such variations. Keeping this issue aside, the burning question now being widely discussed is that the proper officers have been telling that, when once a show cause notice under Section 74 has been issued, it cannot be converted by them into Section 73 proceedings, in spite of strong grounds agitated by the taxable persons through letter of objections. According to them, simply, it cannot be taken back. They say that they have no such power under the GST law. Some officers have been citing section 75 (2), which reads as follows:-

“(2) Where any Appellate Authority or Appellate Tribunal or court concludes that the notice issued under sub-section (1) of Section 74 is not sustainable for the reason that the charges of fraud or any wilful-misstatement or suppression of facts to evade tax has not been established against the person to whom the notice was issued, the proper officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of Section 73”.

3. It is therefore their contention that, only when such conclusion has been made in terms of section 75 (2), then only, the proper officer acquires jurisdiction to deal with that issue and not otherwise. Let us see what Section 74 (1) says:-

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.”

4. Where it appears to the proper officer that any of the three ingredients i.e., fraud or willful misstatement or suppression of facts to evade tax is existing, then the concerned person shall be required to show cause as to why he should not pay the amount specified in the notice along with applicable interest and penalty equivalent to the tax specified in the notice. So existence of any of the three ingredients to evade tax is sine qua non for issuing notice under Section 74 (1). Thus---

a. It should appear to the proper officer that any of the three ingredients exists.

b. That they exist to evade tax

c. That the concerned person shall be required to show cause by the service of a notice.

In Rr Financial Consultants Limited vs Union of India and others (2013 (9) TMI 792 - DELHI HIGH COURT), honourable Delhi High Court observed as follows:-

“Paragraph 10.4 in the first line uses the words "it appears that" which is indicative of a prima facie opinion and not final determination.”

5. Sub-section (1) of Section 74 begins with the words ‘where it appears’. According to Dictionaries, “appears” suggests that the person has evidence to back up his opinion. It is therefore obligatory on the part of the proper officer to bring on record on how it ‘appeared’ to him i.e., to substantiate such appearance with valid evidence.

6. In this context, following guidelines of NACIN shall be interesting:-

‘14. The Show Cause Notice should, therefore, clearly bring out as to how an assessee has committed fraud or entered into collusion or made willful misstatement of facts with a view to evade payment of duty. The matter should be examined as to what facts have been suppressed especially when the officers are visiting the units, checking the records, drawing samples for export under AR-4/AR4-A/ARE-1 procedure and for other miscellaneous work. Similarly, mere mention of the word ‘suppression’ is not enough. The same has to be proved and the burden of proof is on the Department. The practice of issuing a Show Cause Notice merely on the basis of statements of concerned persons, even of confession, may not be of much help because the same may be/can be denied. There is, therefore, no alternative to good investigation and collection of evidence for charges of suppression /misstatement etc. It also needs to be established that the suppression/misstatement was done consciously so as to evade duty. The mens rea factor has to be clearly brought out on record to invoke the extended period of limitation.’

‘Show Cause Notice not to Prejudice the Issue

24. In the Show Cause Notices, it is often concluded like "from the facts and circumstances of the case, it is abundantly clear that........." In one case, the Hon'ble High Court has observed that the Show Cause Notice has left nothing for the enquiry officer to enquire into. The opportunity of hearing and explanation to the Show Cause Notice has become an idle formality and farce. The Show Cause Notice was therefore set aside. The moral of the story is that the allegations and charges have to be made in a tentative manner (e.g. it appears that ……), so as not to give an opportunity to the noticee to state that the department has already made up its mind against him.’

“The Show Cause Notice is more than a notice. It gives an opportunity to the Department of leading evidence in support of its allegations and equally it gives an opportunity to the person/firm/company charged with, to make representation and adduce evidence against the allegations or charges made out against them.

The Show Cause Notice should not be an exercise in deliberate ambiguity. It should be specific and unambiguous.

The charges should be specific. They should not be vague/or contradictory. It is absolutely essential that each specific allegation is duly and adequately supported with substantive evidence so as to impart factual and legal sustainability to the allegation. The Show Cause Notice should be brief, comprehensive and to the point. There should be no repetition of facts.”

7. In the case of Commissioner of Central Excise v Brindavan Beverages (P) Ltd 2007 (6) TMI 4 - SUPREME COURT, honourable Supreme Court observed thus---

“The show-cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague, lack details and/or unintelligible that is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice.”

8. Honourable Calcutta High Court in Charan Dass Malhotra v Assistant Collector (1967 (5) TMI 71 - CALCUTTA HIGH COURT) held that where the grounds given in the notice are vague, uncertain, unspecified or ambiguous, the notice cannot be treated as a proper notice and hence all the subsequent proceedings are vitiated for want of a proper notice.

9. Honourable Madras High Court in Madura Coats v. Collector [1976 (7) TMI 63 - MADRAS HIGH COURT] held that the Excise Department which is issuing show cause notice, should first examine the facts properly and should not behave in a parrot-like-fashion.

10. In his report, the Comptroller and Auditor General of India (https://cag.gov.in/uploads/download_audit_report/20) stated as follows:-

Report No. 1 of 2016 (Indirect Taxes – Service Tax)

21 Chapter II

‘https://cag.gov.in/uploads/download_audit_report/2016’

Report No. 1 of 2016 (Indirect Taxes – Service Tax)

21 Chapter II

Issue of Show Cause Notices and Adjudication process

2.1 Introduction : Adjudication is a quasi-judicial function of the officers of the Central Excise and Service Tax Department. Through imposition of an appropriate penalty after adjudication, it seeks to ensure that no revenue loss is caused by the contravention of applicable laws/rules/regulations etc. However, if an innocent person is punished or the punishment is more than warranted by the nature of offence, it may undermine the trust between the Government and the tax payer. If, on the other hand, a real offender escapes the punishment provided by law, it may encourage commission of offences to the detriment of both the Government and the honest taxpayers.

2.5 Issue of SCN : Section 73(l) of the Finance Act, 1994 envisages, inter alia, that where Service Tax has not been paid or short paid or erroneously refunded, SCN is to be served within eighteen months from the relevant date in normal case (within one year up to 27th May 2012) and within five years from the relevant date in case of fraud, collusion, wilful suppression of facts, etc., with the intent to evade payment of duty or to get erroneous refund.

In an era of automation, where the focus is on improving timelines, it could be seen that the time limit for issue of SCN in normal case was extended from one year to eighteen months from 28th May 2012 onwards. But still we noticed that extended period was invoked for issuing SCNs in normal cases also. The timelines prescribed in statute determine the outer limits for issuing SCN. But as could be seen from the observations discussed below, instead of finishing this task in minimum possible time, the extended period clause was invoked in certain cases in violation of the aforementioned provisions.

2.8 Conclusion

It was noticed during audit that the journey of SCN right from the first step of issue of SCN till its adjudication was fraught with delays and shortcomings. Administrative efficiency requires that the work is done in minimum possible time. The maximum time limits define the outer boundaries for completion of tasks. The time limit prescribed for issue of SCN was one year with provision to invoke extended period of five year for specific circumstances. But instead, it was seen that the extended period was used as a routine provision rather than a rare exception. Thus there is a need to reduce delays in various stages of issue and processing of SCN by systematic monitoring so that interests of both the government revenue and the assessee are protected.”

11. A Constitution Bench of the honourable Supreme Court in Khem Chand v. Union of India and others, reported in 1957 (12) TMI 24 - SUPREME COURT, in the context of service jurisprudence, held as follows-

"To summarise: the reasonable opportunity envisaged by the provision under consideration includes-

(a) An opportunity to deny his guilt and establish his innocence, which he can only do if he is told what the charges levelled against him are and the allegations on which such charges are based;"

12. In yet another case of Oryx Fisheries Private Limited vs Union of India and Ors (2010 (10) TMI 660 - SUPREME COURT), honourable Supreme Court held as follows:-

‘29. Justice is rooted in confidence and justice is the goal of a quasi-judicial proceeding also. If the functioning of a quasi- judicial authority has to inspire confidence in the minds of those subjected to its jurisdiction, such authority must act with utmost fairness. Its fairness is obviously to be manifested by the language in which charges are couched and conveyed to the person proceeded against.

31. It is of course true that the show cause notice cannot be read hyper-technically and it is well settled that it is to be read reasonably. But one thing is clear that while reading a show-cause notice the person who is subject to it must get an impression that he will get an effective opportunity to rebut the allegations contained in the show cause notice and prove his innocence. If on a reasonable reading of a show-cause notice a person of ordinary prudence gets the feeling that his reply to the show cause notice will be an empty ceremony and he will merely knock his head against the impenetrable wall of prejudged opinion, such a show cause notice does not commence a fair procedure especially when it is issued in a quasi- judicial proceeding under a statutory regulation which promises to give the person proceeded against a reasonable opportunity of defence.

32. Therefore, while issuing a show-cause notice, the authorities must take care to manifestly keep an open mind as they are to act fairly in adjudging the guilt or otherwise of the person proceeded against and specially when he has the power to take a punitive step against the person after giving him a show cause notice.

33. The principle that justice must not only be done but it must eminently appear to be done as well is equally applicable to quasi judicial proceeding if such a proceeding has to inspire confidence in the mind of those who are subject to it.”

13. In State of Madras vs S.G. Jayaraj Nadar & Sons (1971 (9) TMI 156 - SUPREME COURT), honourable Supreme Court held as follows:-

‘In the present case the High Court found that the turnovers involved in the first and the third items were not determined on the basis of any estimate of best judgment. The quantum of turnovers in respect of both these items were based on the assessee's account books. It has almost been conceded on behalf of the Revenue before us that the determination of the turnovers relating to the aforesaid two items was made from the entries in the books of account of the assessee. The true position, therefore, was that, certain items which had not been included in the turnover shown in the returns filed by the assessee were discovered from his own account books and the assessing authority included those items in his total turnover. For these reasons the High Court was justified in holding that the assessment of the first and the third items could not be regarded as based on best judgment. The penalty thus, could not be levied in respect of those two items.’

14. Some more decisions may also be usefully mentioned as follows:-

The primary purpose of the show cause notice in law is only to put the aggrieved party on notice of facts and necessary ingredients of charge so as to enable him to effectively meet it and this is one of the cardinal principles of natural justice. [P.P. Chandrasekhara Pai Vs. Collector – 1986 (8) TMI 228 - CEGAT, MADRAS].

The expression “showing cause” connotes an opportunity of leading evidence in support of one’s allegation and controverting the charge or allegations as are made against the person called upon to show cause. A mere opportunity of submitting an explanation is not enough. Showing cause inherently involves an opportunity to lead evidence in rebuttal of the material on which the proposed action is based which contemplates an opportunity of cross-examination as well [Madhumilan Syntex Vs. UOI – 1984 (11) TMI 320 - MADHYA PRADESH HIGH COURT].

Thus show cause notice is meant to give reasonable opportunity to the assessee to meet the case against him. (Kiran Spinning Mills Vs. Collector – 1988 (10) TMI 170 - CEGAT, BOMBAY

The honourable Andhra Pradesh High Court in the case of Rajasthan Tobacco Company Vs. Assistant Collector [1979 (8) TMI 78 - ANDHRA PRADESH HIGH COURT] has held that issue of show cause notice is legal proceeding. This decision makes it clear that the issue of show cause notice is not mere a formality but is an essential requirement either of the statutory provision or the principles of natural justice to which all quasi-judicial authorities are bound.

15. Honourable Allahabad High Court in M/s. Nsoft (India) Services Private Limited Vs Purvanchal Vidhyut Vitaran Nigam Limited (2022 (9) TMI 1604 - ALLAHABAD HIGH COURT) held as follows:-

“39. We are of the view that the challenge to the show cause notices in the instant petitions is premature for the reason that the mere indication of the grounds and the penalty proposed, would not give rise to a cause of action, as it is open to the petitioners to present their case and rebut the imputations, whereupon it would be incumbent upon the respondent authority to proceed with the inquiry and pass an appropriate speaking and reasoned order after giving adequate opportunity to the petitioners and ensuring due compliance of the principles of natural justice. The outcome of the inquiry which is proposed in terms of the show cause notice would only be a matter of conjecture at this stage, inasmuch as it is equally possible that after considering the response of the petitioners and holding due inquiry, the respondent authority may drop the proceeding or may reject the reasons given by the noticee.”

16. Conjoint reading of the above provisions and the case law would show that the proper officer is duty bound to bring on record the guilt of the taxable persons by establishing one of the three ingredients with valid evidence. In the absence of discharge of such proof, taxable person can object and request to drop Section 74 notice, as there would be no circumstances at all for invoking Section 74. Even in a situation, where some evidence has been brought on record, the taxable person may argue with satisfactory evidence that the official evidence doesn’t establish fraud or wilful misstatement or suppression of facts to evade tax and hence request to drop. Burden lies on the proper officer to establish wilfulness. Further it must also be established that fraud or wilful misstatement of suppression of facts must be to evade tax. Taxable person has opportunity to make representation and adduce evidence against the allegations. If the representation and the evidence are satisfactory, proper officer needs to drop the notice under Section 74, as otherwise, there would be no need to require ‘to show cause’. If a cause has been shown disproving the allegations in the notice, proper officer cannot say that, he cannot drop the proposal. Affected person has a right to know as to why, despite representation and evidence, still Section 74 proceedings are concluded. Transactions and entries from the books of account, which formed the basis for identifying the tax not paid or short paid cannot be the basis for issuing Section 74 notice as held by the honourable Supreme Court in S.G. Jayaraj Nadar and Sons (supra). Proper officer holds only a prima facie or tentative view in the show cause notice that the case falls under Section 74. On hearing the taxable person, such view can be changed on good grounds.

17. Taxable person has the opportunity to represent against (a) allegation of fraud, (b) allegation of wilful misstatement of facts, (c) allegation of wilful suppression of facts, (d) allegation of liability to pay tax, which is not paid or short paid, (e) allegation of ineligible input tax credit, (f) allegation of excess claim of ITC, (g) allegation of evasion of tax, etc. It is the duty of the proper officer to deal with each of such representations and it is mandatory for him to record reasons in respect of each of the allegations, in case the representations are not acceptable. Reasons are the bridge between the facts of the case and the conclusions arrived at. If the taxable person establishes that none of the three ingredients is present in the case as alleged, there is no alternative for the proper officer except to drop the notice issued under Section 74. It is settled law that the assessing authority must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. In our view, he cannot claim that he has no power to drop Section 74 notice.

18. A non-speaking order or a decision without reason would be devoid of accountability and transparency. It totally reduces the clarity in the order. Taxable person will not know as to why still order under Section 74 has been passed, in spite of establishing absence of any of the said three ingredients.

19. The CBIC in its Circular No. 41/15/2018-GST 13.4.2018, in connection with the inspection of goods in movement instructed as follows:-

‘2 (j) Where any objections are filed against the proposed amount of tax and penalty payable, the proper officer shall consider such objections and thereafter, pass a speaking order’.

These instructions hold good even in respect of Section 74 notices. When the taxable person opposed the proposal made under Section 74, the proper officer should consider the objections and give valid reasons in his order. If the objection to such proposal is acceptable, it is needless to state that the proceedings under Section 74 cannot be continued.

20. It shall be interesting to see the following extract from the website of Australian Taxation Office:-

‘After we make a decision

Once we have made a decision on your objection, we will send you:

• a notice of amended assessment
• a notice of decision that includes the reasons for our decision
• information on how to seek a review through a tribunal or court if you are dissatisfied with our decision
• information on how to pay any outstanding amount of tax.

If the objection is in your favour, we will implement the decision, including amending any assessment if relevant. We will pay money we owe you, including any interest you are entitled to.’

21. In Rays Power Infra Private Limited vs Superintendent of Central Tax in 2024 (3) TMI 438 - TELANGANA HIGH COURT, honourable Telangana High Court held as follows:-

‘16. As regards the contention of the learned Standing Counsel that the show cause notice in the instant case has been issued under Sub-Section (1) of Section 74 and not under Sub-Section (1) of Section 73 of the C.G.S.T Act, this Court is of the firm view that Section 74 would get attracted only in the event of their being strong materials available on record to show that the petitioner had played fraud or there was any misstatement made by him and there being any suppression of fact.’

22. In Parity Infotech Solutions Pvt Ltd vs Government of NCT of Delhi in 2023 (3) TMI 489 - DELHI HIGH COURT, honourable Delhi High Court held as follows:-

‘28. In the present case, the respondents had no material to form any opinion that the ITC had been availed wrongly on account of any fraud or any wilful-misstatement or suppression of facts to evade tax. Concededly, the respondents had no material to form any independent opinion whatsoever. It is apparent that the impugned show cause notice was issued in a mechanical manner to comply with the impugned instructions.

29. In view of the above, we have no hesitation in holding that the impugned show cause notice is not in conformity with the provisions of Section 74 of the CGST Act and is, thus, without authority of law. A show cause notice can be issued only if the conditions under Section 74 of the CGST Act are satisfied. In case relating to ITC, the show cause notice can be issued only if the proper officer believes that ITC has been “wrongly availed or utilised by reason of fraud, or any wilful misstatement or suppression of facts to evade tax”. No show cause notice can be issued without the proper officer forming at least a prima facie view that the tax has not been paid or short paid or erroneously refunded or the ITC had been wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.’

23. In Chennai Silks Vs Assistant Commissioner of State Tax (2023 (11) TMI 205 - MADRAS HIGH COURT), honourable Madras High Court held that once the assessee has filed the reply/objections to the SCN issued, the Assessing Officer is bound to pass the speaking order providing reasons for rejection of the reply/objections raised by the assessee. It would cause prejudice to the Assessee and huge loss to the revenue if cryptic orders are passed without taking into consideration the queries/contentions of the assessee.

24. In M/s. Balaji Electrical & Hardwares vs The State Tax Officer, Thirukazhukundra Assessent Cirlle (2024 (2) TMI 998 - MADRAS HIGH COURT), honourable Madras High Court held as follows:-

‘6. On examining the impugned assessment order and the show cause notice which preceded it, however, it is noticeable that the impugned order is unreasoned. It is also noticeable that the ingredients of Section 74 are not satisfied.’

25. Section 74 (9) mandates that ‘the proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order’. ‘Considering’ means ‘taking into consideration’. Cambridge Dictionary defines ‘consideration’ thus- ‘the act of thinking about something carefully’. It could be seen from this provision that only after carefully considering the representation, ‘amount of penalty’ shall be determined. It means, if there are no circumstances warranting levy of penalty equivalent to the tax demanded, then such amount of penalty cannot be determined under Section 74.

26. Section 75 (6) stipulates that ‘the proper officer, in his order, shall set out the relevant facts and the basis of his decision’. If the tax payer questions issue of notice under Section 74, proper officer is bound to set out the relevant facts, particularly relating to fraud, wilful misstatement or suppression of facts and then his decision, which should be, in accordance with the law.

27. Commencement of proceedings under Section 74 would also provide extended period of limitation to the proper officer and perhaps this is one reason for applying that section. Extended period of limitation cannot be applied in a casual manner.

28. In Kalya Constructions Pvt Ltd vs Commissioner, Central Excise (2023 (12) TMI 1211 - CESTAT NEW DELHI), honourable CESTAT, New Delhi held as follows:-

‘11. Both the SCNs further state that had the audit not conducted scrutiny of the records, the short paying the service tax would not have come to notice. It is a matter of fact that all the details were available in the records of the appellant. The appellant was required to furnish returns under section 70 with the Superintendent of Central Excise which it did. It is for the Superintendent to scrutinize the returns and ascertain if the service tax had been paid correctly or not. If the assessee either does not make the returns under section 70 or having made a return, fails to assess the tax in accordance with the provisions of Chapter or Rules made thereunder, the Superintendent of Central Excise can make the best judgment assessment under section 72. For this purpose, he may require the assessee to produce such accounts, documents or other evidence, as he may deem necessary. Such being the legal position, if some tax has escaped assessment which came to light later during audit, all it shows is that the Superintendent of Central Excise with whom the returns were filed had either not scrutinized the returns or having scrutinized then found no error in self-assessment but the audit found so much later. Had the Superintendent scrutinized the returns calling for whatever accounts or records were required, a demand could have been raised within the normal period of limitation. The fact that the alleged short payment came to light only during audit does not prove the intent to evade payment of service tax by the appellant, but it only proves that the Range Superintendent had not done his job properly. For these reasons, we find that the demand for the extended period of limitation cannot be sustained.’

29. In Pushpam Pharmaceuticals Company vs Collector of Central Excise Mumbai (1995 (3) TMI 100 - SUPREME COURT), the honourable Supreme Court examined section 11A of the Central Excise Act, 1944 which was worded similar to Section 73 of the Finance Act, 1994 and held as follows:

“4. Section 11A empowers the Department to reopen proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.”

30. When once the tax payer questions the notice issued under Section 74 through his representation, inter alia, on the point of extended period of limitation, proper officer must consider such representation carefully and decide the issue. It cannot be said that he has no power to drop Section 74 notice, when the material facts are in favour of the tax payer.

31. It is strange to see that, having issued a notice under Section 74, without establishing the existence of any of the three ingredients, the proper officer takes a stand that he has no power to drop such notice. The moot question would be, how he could get power to issue such notice, even in the absence of any of the three ingredients.

32. Proper Officer assumes in the show cause notice that the case falls under Section 74 but the taxable person places on record strong materials to establish that any of the three ingredients of that section doesn’t exist. In such situation, refusing to drop the proceedings under Section 74 would be in violation of the above decisions.

33. In Instruction No. 05/2023-GST dated 13.12.2023, CBIC has issued the following instructions, pursuant to the decision of the honourable Supreme Court in C.C.,C.E. & S.T. – Bangalore (Adjudication) vs M/s Northern Operating Systems Pvt Ltd (2022 (5) TMI 967 - SUPREME COURT).

‘3.3-From the perusal of wording of Section 74(1) of CGST Act, it is evident that Section 74(1) can be invoked only in cases where there is a fraud or wilful misstatement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful misstatement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of Section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.’

34. It can be therefore safely concluded that any show cause notice issued under Section 74 without any material evidence of fraud or wilful misstatement or suppression of fact to evade tax is no notice at all in the eyes of law and when such allegations are denied by the taxable person with evidence through a letter of objections, proper officer is obliged to drop the notice under Section 74.

35. Where the proper officer had not initiated the proceedings within the framework of Section 74, then, an order issued dropping such proceedings cannot be said to be erroneous.

36. Sub section (2) of section 75 deals with a different situation. In spite of strong evidence brought on record by the tax payer, still if the proper officer passes order mechanically under Section 74 and in case the Appellate authority or the Appellate Tribunal or Court concludes that there is no case to apply Section 74, consequential action to be taken by the proper officer for determination of the tax payable has been detailed in section 75 (2). In our view, it doesn’t mean that the proper officer has no power to drop the notice under Section 74 on the material facts and that he can always do so only when directed by the appellate forum. Such an interpretation would strike at the root of natural justice.

37. In terms of the decision in Rr Financial Consultants Limited (supra), when the proposal in the Section 74 notice is only indicative of a prima facie opinion and not a final determination, there should be no impediment in dropping such proposal, on valid material facts, by the proper officer.

38. In the case of Gayathri Cloth and General Stores, Vijayawada Vs State of Andhra Pradesh (45 APSTJ 133) the honourable Sales Tax Appellate Tribunal, Hyderabad observed as follows:-

“The attitude of the officers, who are quasi-judicial officers, should not be like ‘I do not collect material evidence but what I say is correct and whatever evidence you produce is not satisfactory and whatever you say is incorrect.’

39. It is therefore not correct to say that the proper officer has no power to drop the notice under Section 74, when it has been brought to his notice with evidence that no such notice could have been issued at all. Even if activated, it can be taken back, on valid evidence and representation.

Discussions to this article

[PAWANKUMAR SONI]

A Very detailed Article will surely help us challenge the notice u/s 74. Thank you for sharing and keep sharing

[Sadanand Bulbule]

Many a times Section 74 has become a larger than life size umbrella with thousand holes.So in every case, it may not survive the test of law. Officers need to be more diligent to invoke Section 74 to prevent short-circuit the well laid adjudication process under the Act.

[KASTURI SETHI]

Your article is voice of the  honest and sincere tax payers. I have saved your article on my desktop on my computer. Your hard work and dedication will not end in smoke. It is an eye opener. I have read one judgement wherein the Court passed strictures  against the SCN issuing authority.  for invoking Section 74 without any solid  documentary evidence. The burden of proof is cast upon the department in such SCNs.

A huge thanks for your article.

 

 

[KASTURI SETHI]

Para No.5 is worth reading :-

RAFIK ALIBHAI MAKVANA Versus STATE OF GUJARAT - 2022 (3) TMI 443 - GUJARAT HIGH COURT

 

[KASTURI SETHI]

LEKH RAJ NARINDER KUMAR Versus COMMISSIONER OF C. EX. & S.T., PANCHKULA - 2021 (6) TMI 705 - CESTAT CHANDIGARH

[KASTURI SETHI]

 XL HEALTH CORPORATION INDIA PVT. LTD. Versus UNION OF INDIA - 2018 (10) TMI 1565 - KARNATAKA HIGH COURT

 

[Sadanand Bulbule]

This article followed by supplementary judicial rulings underline that, taxpayer should not suffer from "womb to tomb" for somebody's crime. There is no excuse for crime, be it from any side.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, There is no doubt. Honest and sincere taxpayer must be rewarded as per Central Govt.'s policy. 

[Shyam Naik]

Grateful and obliged for the Article.Thank You.