2025 (12) TMI 1442 - HC - GST

Voluntary payment of short-paid GST and ITC claim challenge; Section 74 fraud allegation rejected, notice quashed

Section 74 of the CGST Act can be invoked only where non-payment/short payment or wrongful ITC is attributable to fraud, wilful misstatement, or ... Issuance of show cause notice u/s 74 of the GST Act, 2017 - fraud, wilful misstatement or suppression of materials facts or not. Whether the issuance of the impugned show cause notice dated 07.04.2022, have fulfilled the ingredients of Section 74 of the Act? - HELD THAT:- Section 74 would apply only in the event of payment of tax, which is not paid or short paid or erroneously refunded or ITC wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts. When such being the case, the Authorities are supposed to have traced out as to whether there is any evasion of tax in the course of payment of tax dues, the intention of fraud or provision of wilful misstatement or suppression of facts. If the aspects of fraud, misstatement or suppression of facts were not established while issuing the show cause notice, the same would be considered as issued without fulfilling the ingredients of Section 74 of the Act and such notice is liable to be set aside as the same was issued without jurisdiction. Whether there is any fraud, wilful misstatement or suppression of materials facts involved in the petitioner's case, so as to attract the provisions of Section 74 of the Act? - HELD THAT:- A perusal of Section 39 would makes it clear that an assessee can be permitted to rectify the returns in the events other than scrutiny, audit, inspection or enforcement activity by the tax authorities and avail ITC. According to the respondents, the petitioner made payment of tax dues on 21.02.2019, which is subsequent to the enforcement activity, i.e., DGGI investigation dated 21.01.2019 and thus, it would clearly attract the provisions of Section 74 of the Act and disentitle the petitioner to avail ITC. However, upon perusal of records, it is clear that the petitioner's inclination to make the payment of tax dues was communicated to the respondents as early as on 07.01.2019, which is much prior to the date of DGGI investigation. When such being the case, no criminal motive, viz., fraud, wilful misstatement or suppression of material facts, can be attributed against the petitioner, since the petitioner had voluntarily disclosed the short payment vide the aforesaid communication. No ingredients of Section 74 of the Act was satisfied while issuing the impugned show cause notice, and hence, the question of application of Section 39(9), so as to deprive the petitioner from availing ITC, would not at all arise. The said provision would attract only in the event, if the enforcement action was initiated, much prior to the intimation of the petitioner to pay the short payment of tax. As far as the contention made by the respondents on the aspect of filing reply to the show cause notice is concerned, the challenge before this Court is only with regard to the failure on the part of the respondents in fulfilling the minimum requirement of the ingredients of Section 74 of the Act. As discussed above, no criminal motive can be attributed against the petitioner. However, without considering the said aspect, and without fulfilling the ingredients of Section 74 of the Act, the respondents had blind foldedly issued the impugned show cause notice under Section 74 of the Act. The impugned SCN issued by the 1st respondent is hereby quashed - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the impugned show cause notice invoking Section 74 was without jurisdiction for failure to satisfy the statutory ingredients of 'fraud', 'wilful misstatement', or 'suppression of facts to evade tax'. (ii) Whether the Department could rely on Section 39(9) to treat the petitioner's tax payment/rectification as invalid (and thereby allege wrongful availment of ITC), when the petitioner had intimated willingness to pay the differential tax prior to the enforcement activity. (iii) Whether the High Court could entertain a writ challenge at the show cause notice stage where the challenge was confined to lack of jurisdiction due to non-fulfilment of Section 74 ingredients. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Jurisdictional validity of invoking Section 74-requirement of fraud/wilful misstatement/suppression Legal framework: The Court examined Section 74 as extracted in the judgment, and held it applies only where tax is not paid/short paid (or ITC wrongly availed/utilised) 'by reason of fraud, or any wilful misstatement or suppression of facts to evade tax'. The Court treated these elements as jurisdictional prerequisites for issuance of a notice under Section 74. Interpretation and reasoning: The Court assessed the factual record and found that the petitioner had voluntarily communicated its decision to treat the supply as 'composite supply' and to pay the differential tax with interest, and thereafter paid the entire dues with interest before the notice was issued. The Court held that, on these facts, the Department could not attribute 'bad intention' or 'criminal motive' such as fraud, wilful misstatement, or suppression of material facts. The Court characterised the short payment (if any) as arising from industry-wide confusion regarding the applicable rate and the characterisation of supply, rather than from evasion-oriented conduct. Conclusions: Since the statutory ingredients of Section 74 were not established or satisfied on the admitted record, the show cause notice under Section 74 was held to be issued without fulfilling the ingredients and therefore without jurisdiction, warranting quashing. Issue (ii): Applicability of Section 39(9) bar based on timing vis-à-vis enforcement activity Legal framework: The Court examined Section 39(9) as extracted in the judgment, noting that rectification after furnishing returns is permitted where omission/incorrect particulars are discovered 'other than as a result of scrutiny, audit, inspection or enforcement activity', subject to payment of interest. Interpretation and reasoning: The Department's case rested on the premise that payment occurred after an enforcement activity (investigation), so Section 39(9) barred rectification and thus justified action alleging wrongful ITC. The Court rejected this approach on the factual finding that the petitioner's intimation of willingness to pay (and voluntary disclosure of short payment) was made prior to the investigation date. On that basis, the Court held that the prerequisite for invoking the Section 39(9) bar-rectification being 'as a result of' enforcement action-was not met in the petitioner's case. The Court further held that, once Section 74 ingredients were not satisfied, the attempt to apply Section 39(9) to deny ITC in the manner suggested by the Department did not arise on these facts. Conclusions: The Court held Section 39(9) could not be used against the petitioner on the ground of enforcement activity because the petitioner's disclosure/intimation preceded the investigation; consequently, the Department's reliance on Section 39(9) could not sustain issuance of the Section 74 notice. Issue (iii): Maintainability of writ petition at show cause notice stage on a pure jurisdictional ground Interpretation and reasoning: The Court held that, although arguments existed on whether the underlying supply was 'composite' or 'individual', the writ challenge was confined to the legality/jurisdiction of invoking Section 74. The Court concluded that the question whether the notice satisfied the minimum jurisdictional requirements of Section 74 could be examined under Article 226 even at the show cause notice stage. The Court therefore declined to reject the petitions merely because a reply could be filed to the notice. Conclusions: The writ petitions were maintainable to test the jurisdictional validity of the notice; on merits of that jurisdictional challenge, the notice was quashed. Final determination: The impugned show cause notice was quashed for want of jurisdiction due to non-satisfaction of Section 74 ingredients; issues relating to whether the supply constituted 'composite supply' or 'individual supply' were expressly left open and not decided.