Revenue cannot invoke Section 74 where normal Section 73 limitation has expired

The Hon'ble Gujarat High Court in  the case of Zodiac Energy Ltd. Versus Assistant Commissioner Of State Tax, Unit-5 - 2025 (9) TMI 858 - GUJARAT HIGH COURT held that the revenue authority cannot invoke Section 74 and the extended limitation period of five years without establishing fraud, wilful misstatement, or suppression of facts, and where the normal limitation period under Section 73 has expired, proceedings under Section 74 are impermissible in the absence of such mens rea.

Facts:

Zodiac Energy Ltd. ('the Petitioner') is engaged in the business of supply and installation of Solar Power Generating Systems through composite contracts. For transactions executed in Financial Year 2017-18, the Petitioner charged GST at 5% treating the supply as composite supply under Section 8 of the GST Act.

On December 31, 2018, the Government issued Notification No. 24/2018 clarifying that such transactions would be treated as 'works contract' attracting GST at 18% on 30% of the value, as supply of service and 5% on 70% of the value as supply of goods. However, this notification was applicable prospectively from January 1, 2019.

The Revenue Authority ('the Respondent') issued a communication dated October 19, 2020, under Section 73 proposing to levy GST at 18% on the Petitioner's pre-2019 transactions. The Petitioner challenged this communication through Special Civil Application No. 6274 of 2021, which was withdrawn on February 1, 2024, as the three-year limitation period under Section 73 had expired.

Subsequently, on August 1, 2024, the Revenue issued intimation in Form DRC-01A invoking Section 74(5), followed by a show cause notice in Form DRC-01 on August 5, 2024, invoking the extended limitation period of five years under Section 74(10). The Revenue passed Order-in-Original dated February 4, 2025, in Form GST DRC-07 during the pendency of the writ petition.

The Petitioner contended that there was no fraud, wilful misstatement, or suppression justifying invocation of Section 74, as it had consistently disclosed and paid GST at 5% from day one based on its understanding of the law.

The Respondent argued that the Petitioner's conduct in filing and withdrawing the earlier petition was to evade tax, and that undervaluation of installation charges amounted to suppression under Explanation 2 to Section 74.

Issue:

Whether the revenue authority can invoke Section 74 and the extended limitation period of five years in the absence of fraud, wilful misstatement, or suppression of facts where the normal limitation period under Section 73 has already expired?

Held

The Hon'ble Gujarat High Court in Zodiac Energy Ltd. Versus Assistant Commissioner Of State Tax, Unit-5 - 2025 (9) TMI 858 - GUJARAT HIGH COURT held as under:

• Observed that, the limitation for issuance of notice under Section 73 expired on completion of three years from the date of filing the annual return for FY 2017-18, and no proceedings were initiated within this period.
• Noted that, the impugned show cause notice dated August 5, 2024, did not reflect any fraud, wilful misstatement, or suppression of facts on the part of the Petitioner, which are prerequisites for invoking Section 74.
• Held that, the Revenue Authority could not assume jurisdiction to issue notice under Section 74(1) read with Section 74(10) merely on the basis that the Petitioner challenged the initial communication and later withdrew the petition and such conduct does not constitute fraud or suppression.
• Observed that, the Revenue failed to demonstrate in the show cause notice that the Petitioner failed to declare facts or information required to be declared in returns or failed to furnish information when asked in writing, as required under Explanation 2 to Section 74 and quashed both the impugned show cause notice dated August 5, 2024, and the consequent Order-in-Original dated February 4, 2025.

Our Comments:

M/s. JIT Auto Comp, Rep. by its Managing Partner K. Velmurugan Versus Assistant Commissioner, Hosur - 2025 (7) TMI 785 - MADRAS HIGH COURT The Hon'ble Madras High Court held that proceedings under Section 74 without finding fraud or willful misstatement were unsustainable and set aside the Section 74 order and remanded for fresh adjudication under Section 73. The Court emphasized that mechanical approach without considering evidence like CA certificate violated jurisdictional requirements.

Similarly in the case of Bharat Mint & Allied Chemicals Versus State of U.P. and another - 2025 (6) TMI 1243 - ALLAHABAD HIGH COURT the Hon'ble Allahabad High Court quashed an SCN under Section 74 where the same officer had earlier processed issues under Section 73 without any allegation of fraud, suppression, or willful misstatement, holding such action was without jurisdiction

Relevant Provisions:

Section 73 of the CGST Act, 2017

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 willful-misstatement or suppression of facts:

“(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 for any reason, other than the 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 leviable under the provisions of this Act or the rules made thereunder.

(2) The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in sub-section (10) for issuance of order…”

Section 74 of the CGST Act, 2017

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 willful- misstatement or suppression of facts:

“(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.

(2) The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of order…”

 (Author can be reached at [email protected])