2025 (9) TMI 858 - HC - GST

Show-cause notice under s.74(1) read with s.74(10) quashed for absence of fraud, willful misstatement or suppression

Zodiac Energy Ltd. Versus Assistant Commissioner Of State Tax, Unit-5

The HC held that the respondent lacked jurisdiction under s.74(1) read with s.74(10) of the GST Act to issue the show-cause notice, there being no ... Issuance of notice invoking the provisions of Sub-section 74(10) of the GST Act for extended period of limitation for assumption of jurisdiction for issuing show cause notice as there is no fraud or any willful misstatement or suppression on part of the petitioner - HELD THAT:- Without going into the merits of the matter, only on the ground that the respondent-Authority could not have assumed the jurisdiction to issue the impugned notice under Section 74(1) read with Section 74(10) of the GST Act by considering the period of limitation as five years from the date of filing of the annual return in absence of any fraud or wilful misstatement or suppression of facts on part of the petitioner, such notice is liable to be quashed and set aside. The contention raised on behalf of the respondent that the conduct of the petitioner by not providing the details pursuant to the communication dated 19.10.2020 and approaching this Court by preferring the Special Civil Application No.6274 of 2021 and withdrawing the same on 01.02.2024 as the limitation to issue notice under Section 73 of the GST Act had expired, cannot be accepted as the impugned notice dated 05.08.2024 only refers to the intention of the petitioner to evade tax without there being any material on record to show that the petitioner has committed fraud or has made any wilfull misstatement or made any suppression of facts before the respondent-Authority. Moreover, the reliance placed on the definition of ‘Suppression’ in Explanation 2 to Section 74 of the GST Act is also not applicable in the facts of the case as the respondent has failed to point out in the impugned show-cause notice that the petitioner has failed to declare the facts or information which the petitioner is required to declare in the return, statement, report or any other document furnished under the GST Act or the Rules made thereunder or the petitioner has failed to furnish any information on being asked for in writing by the proper Officer. In absence of such facts demonstrated in the show-cause notice, the respondent-Authority could not have assumed the jurisdiction under Section 74 of the GST Act. The impugned show-cause notice dated 05.08.2024 and the consequent Order-in-Original dated 04.02.2025 are hereby quashed and set aside - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a show-cause notice issued under Section 74(1) read with Section 74(10) of the GST Act (invoking the five-year extended limitation) is sustainable where the authority has not recorded any material establishing fraud, wilful misstatement or suppression of facts by the taxable person. 2. Whether invocation of the extended period under Section 74 can be justified by alleged conduct of the taxpayer (challenge to earlier communication and subsequent withdrawal of a writ petition) absent specific factual findings of fraud, wilful misstatement or suppression as contemplated by Section 74 and its Explanation 2. 3. Whether the respondent could re-classify pre-Notification (31.12.2018) transactions by treating composite supplies as works contract to attract a higher rate (18%) when Notification No. 24/2018-Central Tax (Rate) is prospective from 01.01.2019 and the impugned notices/orders relate to periods prior to that date. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of invoking Section 74's extended limitation absent material of fraud/wilful misstatement/suppression Legal framework: Section 74 prescribes that the extended five-year limitation (Section 74(10)) applies only where it appears to the proper officer that tax has not been paid/short paid/erroneously refunded or ITC wrongly availed by reason of fraud, or any wilful misstatement or suppression of facts to evade tax; Explanation 2 defines 'suppression'. Section 73 governs non-fraud short-payment with a three-year limitation (Section 73(10)). Precedent Treatment: No binding precedent was relied upon by the parties or recorded in the judgment; the Court proceeded on statutory text and record before it. Interpretation and reasoning: The show-cause notice dated 05.08.2024, on its face, did not record any specific material establishing fraud, wilful misstatement or suppression by the petitioner. The affidavit-in-reply filed by the authority (post hoc) cannot cure the absence of such material in the notice itself. Mere allegations of suspicious conduct or inferences drawn from commercial data and pricing differentials, without concrete factual findings articulated in the notice, do not satisfy the statutory threshold for invoking Section 74's extended limitation. Ratio vs. Obiter: Ratio - The extended limitation under Section 74 cannot be invoked unless the show-cause notice reflects material demonstrating fraud, wilful misstatement or suppression as defined under the Act; absence of such material renders invocation of Section 74 unsustainable. Obiter - Observations on the insufficiency of averments that merely infer intention from procedural conduct (challenge and withdrawal of writ) are supportive but not necessary to the central ratio. Conclusions: The Court held that the impugned show-cause notice fails to demonstrate fraud, wilful misstatement or suppression on its face and therefore the authority could not validly assume jurisdiction under Section 74(1) read with Section 74(10). The notice is liable to be quashed on that ground alone. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Sufficiency of alleged taxpayer conduct (challenge and withdrawal of writ; non-production of documents) to sustain Section 74 invocation Legal framework: Explanation 2 to Section 74 treats 'suppression' as non-declaration in returns/statements/documents or failure to furnish information when asked in writing by the proper officer; statutory scheme requires a showing that the evasion is by reason of fraud, wilful misstatement or suppression. Precedent Treatment: No precedent applied; issue decided on statutory interpretation and record. Interpretation and reasoning: The authority's contention that the taxpayer's filing of a writ petition (challenging a prior communication) and subsequent withdrawal evidenced an intent to evade tax or to prevent investigation is an inference unsupported by direct factual material in the show-cause notice. The definition of 'suppression' requires failure to declare facts in returns/statements or failure to furnish information when asked in writing; the impugned notice did not set out specific instances showing such statutory non-declaration or failure. Procedural acts (litigation conduct) alone do not automatically equate to statutory suppression or fraud. Further, post-hoc assertions in affidavit do not substitute for the requirement that the notice itself supply sufficient grounds for invoking Section 74. Ratio vs. Obiter: Ratio - Procedural conduct like instituting and withdrawing litigation, or perceived non-cooperation, cannot by themselves justify invoking the extended limitation under Section 74 unless the notice itself identifies material facts amounting to fraud, wilful misstatement or suppression as defined. Obiter - The Court's view that administrative difficulty or suspicion does not replace statutory requirements is supplementary. Conclusions: The Court rejected the authority's reliance on the taxpayer's litigation conduct and alleged non-production of documents as constituting suppression or fraud for the purposes of Section 74. The authority failed to identify statutory suppression or fraud in the notice; invocation of the extended period was therefore unjustified. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Temporal application of Notification and classification of supplies prior to 01.01.2019 Legal framework: Notification No. 24/2018-Central Tax (Rate) (dated 31.12.2018) and its Explanation to Entry No.234 altered valuation/deemed value for supplies w.e.f. 01.01.2019; classification of composite supplies and application of Section 2(90) (composite supply) and Section 2(119) (works contract) are relevant to tax-rate determination. Precedent Treatment: No authority cited; Court examined the statutory effect of a notification prospectively applicable from 01.01.2019. Interpretation and reasoning: It was not in dispute that the Notification was issued on 31.12.2018 and is effective from 01.01.2019. The Court observed that to rope in transactions entered into prior to 01.01.2019 by treating them as subject to the Notification's deemed value mechanism (70/30 split) would be untenable. Therefore, reclassification of pre-Notification transactions as works contract to attract 18% on that basis raised serious temporal and legal issues. Although the Court did not decide merits of classification beyond this temporal observation, the absence of fraud/wilful misstatement or suppression precluded the authority from resorting to Section 74 to retrospectively apply the Notification. Ratio vs. Obiter: Ratio - The authority cannot lawfully invoke Section 74 to apply Notification No. 24/2018 prospectively to transactions antecedent to its effective date in the absence of the specific statutory predicate (fraud/wilful misstatement/suppression). Obiter - The Court did not finally determine the correct classification of the transactions on merits; it refrained from adjudicating the substantive tax-rate dispute. Conclusions: The attempt to treat pre-01.01.2019 supplies as falling within the Notification's scheme (and thereby as works contract at 18%) could not be sustained through invocation of Section 74 where statutory conditions for extended limitation were not met. The Court declined to adjudicate the substantive classification issue and quashed the proceedings for lack of jurisdiction under Section 74. DISPOSITION (LEGAL CONCLUSION) The Court quashed and set aside the impugned show-cause notice issued under Section 74(1) read with Section 74(10) and the consequent Order-in-Original, holding that the authority had no jurisdiction to invoke the five-year extended limitation in the absence of material in the notice demonstrating fraud, wilful misstatement or suppression as required by Section 74 and Explanation 2; the authority's post-hoc averments and reliance on taxpayer's litigation conduct did not cure this defect.