Show Cause Notice (SCN) must clearly spell out ingredients for Section 74

[Kamal Aggarwal]

In the matter of HCL INFOTECH LTD VERSUS COMMISSIONER, COMMERCIAL TAX AND ANOTHER - 2024 (9) TMI 1644 - ALLAHABAD HIGH COURT, the Hon’ble Allahabad High Court has firmly asserted that, prior to issuing a Show Cause Notice (‘SCN’) under Section 74 of the CGST Act, 2017 (’CGST Act’), the adjudicating authority must have prima facie satisfaction clearly spelled out in the SCN that the petitioner has availed or utilized Input Tax Credit (‘ITC’) as a result of fraud, willful misstatement, or deliberate suppression of facts intended to evade tax.

In the matter before the Honorable High Court, the petitioner, a public limited company, transferred unutilized CENVAT Credit to the GST regime in accordance with the CGST Act, 2017. Thereafter, a notice was issued by the department alleging discrepancies in ITC availed by the petitioner during the period July 2017 to March 2018. The petitioner submitted their reply, wherein it explained the difference on accounts of transitional credit and after reviewing it and verifying the documents, the proceedings initiated under Section 73 of the CGST Act, 2017 were dropped by the department

However, the department issued another SCN under Section 74 of the CGST Act, 2017 alleging that the transitional ITC availed by the petitioner is more than the closing CENVAT balance in June 2017.

The petitioner contended before the Honorable High Court that the adjudicating authority can initiate proceedings under Section 74 of the CGST Act, 2017 only if there is a prima facie belief that the petitioner has wrongfully availed or utilized ITC due to fraud, willful misstatement, or suppression of facts. It was further contended that since Section 74 of the CGST Act, 2017 allows for an extended period of limitation, the SCN must explicitly state any information or evidence supporting such a belief; otherwise, the proceedings lack jurisdiction.

The petitioner argued that since the proceedings under Section 73 of the CGST Act, 2017 concerning the question of ITC were previously dropped in their favor, they cannot be reopened under Section 74 of the CGST Act, 2017 merely by claiming that the petitioner had availed excessive ITC. The SCN thus without being jurisdiction was challenged before the Honorable High Court.

The Honorable High Court relied upon the decisions of Honorable Supreme Court in the case of RAJ BAHADUR NARAIN SINGH SUGAR MILLS LTD. VERSUS UNION OF INDIA - 1996 (7) TMI 146 - SUPREME COURT and COLLECTOR OF CENTRAL EXCISE VERSUS H.M.M. LIMITED - 1995 (1) TMI 70 - SUPREME COURT, wherein the Hon’ble Supreme Court has reaffirmed that for natural justice to be upheld, the SCN must allege any collusion, willful misstatement, or suppression of facts necessary to justify invoking the extended five-year period and that the notice must clearly state which specific acts of omission or commission warranted the extension of the limitation period; otherwise, the assessee would not have the opportunity to respond adequately.

The Hon’ble Allahabad High Court, in the present case, has affirmed the contentions of the petitioner and held that the SCN lacked any allegations of fraud, willful misstatement, or suppression of facts, rendering the proceedings under Section 74 of the CGST Act, 2017 without jurisdiction. The relevant extract of the present judgement is reproduced below:

“22. We find that proceedings initiated against the petitioner for availing or utilizing the excessive ITC have already been finalized by the Respondent No. 2 and the proceedings were dropped vide order dated 30.12.2023 therefore, the said proceedings could have been reopened under Section 74 of the CGST Act, 2017 only if the adjudicating authority was prima facie satisfied that the petitioner has availed or utilized Input Tax Credit due to any fraud or any wilful mis-statement or suppression of facts to evade tax. The field of operation of Section 73 and 74 of the CGST Act, 2017 is altogether different i.e. Section 73 operates in all other cases of wrongly availed or utilized Input Tax Credit for any reason other than fraud or wilful mis-statement or suppression of facts and Section 74 comes into play when the excessive Input Tax Credit has been availed due to some fraud or wilful mis-statement or suppression of facts. Thus it is patently manifest that for deriving the jurisdiction to initiate proceedings under Section 74 of the CGST Act, 2017, the adjudicating authority must expressly mention in the Show Cause Notice that he is prima-facie satisfied that the person has wrongly availed or utilized Input Tax Credit due to some fraud or a wilful mis-statement or suppression of facts to evade tax and that must be specifically spelled out in the Show Cause Notice. Once the aforesaid basic ingredient of the Show Cause Notice under Section 74 of the CGST Act, 2017 is missing, the proceedings becomes without jurisdiction as the adjudicating authority derives jurisdiction to proceed under Section 74 of the CGST Act, 2017 only when the basic ingredients to proceed under Section 74 are present.”

“25. We find that the impugned Show Cause Notice does not make even a whisper of the fact that petitioner has wrongly availed or utilized Input Tax Credit due to any fraud, or wilful mis-statement or suppression of facts to evade tax therefore, the proceedings initiated against the petitioner under Section 74 of the CGST Act, 2017 are without jurisdiction for the lack of basic ingredients required under the said clause.”

As concluding remarks, it is fair to state that the SCN must clearly delineate the specific grounds for invoking Section 74 of the CGST Act, 2017, as this is vital for upholding natural justice and ensuring that the assessee has a reasonable opportunity to respond. The Hon’ble Supreme Court has in the landmark case of COMMISSIONER OF C. EX., BANGALORE VERSUS BRINDAVAN BEVERAGES (P) LTD. - 2007 (6) TMI 4 - SUPREME COURT, stated that SCN is the foundation on which the department build its case. Thus, the requirement to communicate intention to invoke extended period of limitation and grounds thereof is essential not only for maintaining the integrity of the tax system but also for safeguarding the principles of natural justice.

A Master Circular No.- 1053/02/2017-CX dated 10.03.2017 has been issued on the subject of SCN, wherein it is stated that SCN is the initial step in legal proceedings. It is a mandatory document that allows the recipient to present their case before the Adjudicating Authority, in line with the principle of natural justice known as audi alteram partem, ensuring that no one is condemned without being heard. The relevant extract of the master circular is reproduced below: -

“2.1 Show-Cause notice (SCN): Show Cause Notice (SCN) is the starting point of any legal proceedings against the party. It lays down the entire framework for the proceedings that are intended to be undertaken and therefore it should be drafted with utmost care. Issuance of SCN is a statutory requirement and it is the basic document for settlement of any dispute relating to tax liability or any punitive action to be undertaken for contravention of provisions of Central Excise Act and the rules made thereunder. A SCN offers the noticee an opportunity to submit his oral or written submission before the Adjudicating Authority on the charges alleged in the SCN. The issuance of show cause notice is a mandatory requirement according to the principles of natural justice which are commonly known as audi alteram partem which means that no one should be condemned.

3.1 Limitation to demand duty: A show cause notice demanding duty not paid or short paid or erroneous refund can be issued by the Central Excise Officer normally within two year from the relevant date of non-payment or short payment of duty, whereafter the demand becomes time-barred. Where duty has not been paid or short paid by any person chargeable with the duty by reason of fraud or collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of the Central Excise Act, 1944 or of the Rules made thereunder with intent to evade payment of duty, a longer period of limitation applies and show cause notice demanding duty can be issued within five years from the relevant date.

3.2 Ingredients for extended period: Extended period can be invoked only when there are ingredients necessary to justify the demand for the extended period in a case leading to short payment or non-payment of tax. The onus of establishing that these ingredients are present in a given case is on revenue and these ingredients need to be clearly brought out in the Show Cause Notice along with evidence thereof. The active element of intent to evade duty by action or inaction needs to be present for invoking extended period.

3.3 The Apex Court's in the case of COSMIC DYE CHEMICAL VERSUS COLLECTOR OF CENTRAL EXCISE, BOMBAY - 1994 (9) TMI 86 - SUPREME COURT, has laid the law on the subject very clearly. The same is reproduced below for ease of reference.

Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word "wilful" preceding the words "mis-statement or suppression of facts" which means with intent to evade duty. The next set of words "contravention of any of the provisions of this Act or Rules" are again qualified by the immediately following words "with intent to evade payment of duty". It is, therefore, not correct to say that there can be a suppression or mis-statement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11A. Mis-statement or suppression of fact must be wilful.”

The absence of clear allegations in the SCN regarding such misconduct not only renders the notice invalid but also highlights the necessity for tax authorities to provide specific grounds for invoking extended limitation periods. Ultimately, this principle serves to protect taxpayers from arbitrary actions, upholding the accountability and fairness of the legal framework within which tax adjudication occurs.