2026 (1) TMI 146 - HC - GST

Voluntary disclosure of GST short-payment before enforcement: s.74 fraud-based notice quashed and orders set aside for natural justice breach

Where the taxpayer had voluntarily intimated the department, prior to any enforcement action, that tax was short-paid and expressed willingness to ... Violation of principles of natural justice - rejection of appeal without proper consideration - invocation of the provisions of Section 74 of GST Act, is justified or not - HELD THAT:- In the subject supply, the tubes and flaps were kept inside the tyres and wrapped together. Thereafter, supply was effected. According to the petitioner, a mere wrapping up would not amount to natural bundling of the goods, so as to consider it as a 'composite supply'. However, to Favoid further confusion, the petitioner had treated that the supply of TTF in a carry strapping form is a 'composite supply' and offered to pay the tax at the rate of 28%. The inclination of the petitioner was communicated to the respondents vide communication dated 12.01.2019. Accordingly, the arrears of tax amount, along with interest, was remitted to the respondents during the month of May 2022 - However, the acceptance of the petitioner that the subject supply is a 'composite supply' with the intention to buy peace, will not exclude the jurisdiction of this Court to decide the issue as to whether the subject supply is 'composite supply' or 'individual supply'. Further, such a mere admission would not disentitle the petitioner to raise the said issue before the Court of law, even though the said point was not raised in the appeal. Under these circumstances, the investigation was conducted by the DGGI on 21.01.2019. On the very next day of the enquiry, i.e., 22.01.2019, the petitioner had deposited a sum of Rs.5 Crore to the respondents and intimated that the said deposit shall be utilised for further tax liability. Under these circumstances, the notice under Section 74 came to be issued on 20.04.2022 by the 3rd respondent. Upon receipt of the said notice, a reply was filed by the petitioner on 28.04.2022 and subsequently, paid the entire tax dues during the month of May 2022.However, without considering the said reply, the order in original was passed by the 4' respondent on 27.04.2023. Aggrieved over the said order, an appeal was preferred by the petitioner, however, the said appeal was also rejected by the 5th respondent vide impugned order dated 18.03.2024, and the same is under challenge before this Court. The petitioner's inclination to make the payment of tax dues was communicated to the respondents as early as on 12.01.2019, which is much prior to the date of DGGI investigation. When such being the case, as stated above, 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 to invoke the said provision against the petitioner 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 the arguments were advanced by the petitioner that the supply, of TTF in the form of carry strapping, effected by them is not a 'composite supply' but it is an 'individual supply' is concerned, since the petitioner had treated it as a 'composite supply' and paid the tax accordingly to buy the peace, vide communication dated 12.01.2019, this Court feels that it is not a fit case to decide the issue as to whether it is a 'composite supply' or 'individual supply'. As discussed above, mere payment of tax, which is applicable for 'composite supply', by the petitioner, will not disentitle the petitioner to raise the said issue separately before the Authorities concerned. In such case, the Authorities are bound to decide the matter and they cannot cite the communication dated 12.01.2025 and reject the contention by stating that in a previous occasion, the petitioner had admitted the subject supply as 'composite supply'. The entire proceedings initiated against the petitioner, viz., the impugned show cause notice dated 20.04.2022, the impugned original order dated 27.04.2023 and the impugned appeal order dated 18.03.2024, are hereby quashed - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether initiation of proceedings and issuance of notice under Section 74 of the Goods and Services Tax Act, 2017 was justified, i.e., whether the case involved tax not paid/short paid or ITC wrongly availed/utilised by reason of fraud, wilful misstatement, or suppression of facts to evade tax. (ii) Whether the bar in Section 39(9) (rectification of returns 'other than as a result of' scrutiny/audit/inspection/enforcement activity) applied so as to invalidate the taxpayer's payment/rectification and support denial of ITC, when the taxpayer had communicated its intent to pay differential tax prior to the enforcement activity but remitted the differential amount later. (iii) Whether the impugned notice and consequential orders could stand when, at the time of issuance of the notice under Section 74, the Court found there was no subsisting tax liability on the taxpayer. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Justifiability of invoking Section 74 (fraud/wilful misstatement/suppression to evade tax) Legal framework (as discussed by the Court): The Court examined Section 74 and treated it as applicable only where non-payment/short payment/erroneous refund/ITC wrongful availment or utilisation occurs by reason of fraud, wilful misstatement, or suppression of facts to evade tax. The Court held that if these ingredients are not established, a notice under Section 74 is without jurisdiction. Interpretation and reasoning: The Court found that the taxpayer had voluntarily disclosed the position and communicated, in advance, its intention to pay differential tax with interest. The Court accepted the explanation that the earlier short payment arose from industry-wide confusion regarding the applicable treatment/rate and that the taxpayer decided to pay the differential amount 'to buy peace.' On these facts, the Court held that the authorities could not attribute a 'bad intention' such as fraud, wilful misstatement, or suppression to the taxpayer. The Court further held that invocation of Section 74 could not be sustained merely because the differential amount was remitted after the enforcement agency's investigation, since the taxpayer's disclosure/intent was communicated prior to such investigation. Conclusions: The Court concluded that the essential ingredients of Section 74 were not satisfied; therefore, proceedings under Section 74 were wrongly invoked and the impugned notice and consequential orders were without jurisdiction. Issue (ii): Applicability of Section 39(9) bar and consequential denial of ITC Legal framework (as discussed by the Court): The Court examined Section 39(9) and held it permits rectification of omissions/incorrect particulars in returns only when the discovery is not the result of scrutiny, audit, inspection, or enforcement activity by tax authorities. Interpretation and reasoning: The authorities argued that because payment was actually made after the investigation, Section 39(9) barred rectification and thereby supported action under Section 74 and denial of ITC. The Court rejected this by focusing on the timing and voluntariness of disclosure: records showed the taxpayer had communicated its inclination to make payment well before the enforcement activity. The Court reasoned that in such circumstances, the taxpayer's disclosure negated any criminal motive and the Section 39(9) bar could not be used to deprive ITC on the footing that the rectification/payment was enforcement-triggered. The Court treated Section 39(9) as relevant only where enforcement action precedes the taxpayer's intimation/discovery and drives the correction. Conclusions: The Court held that Section 39(9) did not apply on the facts as found, and the premise for invalidating the payment mechanism and denying ITC on that ground could not be sustained. Issue (iii): Sustainability of Section 74 notice and orders when no tax liability existed at the time of notice Interpretation and reasoning: The Court recorded a clear finding that at the time of issuance of the notice under Section 74, there was no tax liability on the taxpayer. This was treated as reinforcing the conclusion that proceedings were wrongly initiated under Section 74. Conclusions: The Court quashed the impugned show cause notice and the consequential original and appellate orders, holding that the proceedings were initiated by wrongly invoking Section 74 and were therefore liable to be set aside.