SCN u/s 74 for penalty only..whether valid?

[SUSHIL BANSAL]

Dear friends,

I am giving text of one SHOW CAUSE NOTICE. At the top of this no section etc mentioned.

2. It appears that the taxable person has passed on GST credit amounting to Rs. 900000 as the taxable person has only issued GST invoices and passed on ITC to the recipients without actual supply of the underlying goods in contravention of section 7 of the CGST Act 2017,& hence liable to be penalized under section 122(1)(ii).

3. Further, the taxable person appears to have short paid tax amounting to Rs. 1,50,000/- as E-way bills were generated for invoices as detailed , these invoices were not declared as the outward supply in GSTR 1 returns, nor the tax was deposited in the returns of GSTR 3B against such supplies in contravention of section 7, section 9(1), section 37 of the CGST Act 2017. The tax amounting to Rs. 1,50,000- appears to be recoverable under section 74,Int u/s 50,penalty u/s 122(1)(i)

4. In the view of the above, it is clear that the taxpayer has willfully suppressed the facts with intend to claim refund of fraudulent ITC so obtained. Therefore, provisions of section 74 are invokable in this case.

I need your advice on following:

1.at point No 4 the SCN is talking about invoking of 74, whether this is with regard to both the point i.e. 2nd & 3^rd.If yes, then whether the SCN u/s 74 can be issued for recovery of penalty only as in point No.2^nd it is asking for penalty u/s 122(1)(ii) only.

2. Further in point No.3^rd it is stated that we have “short paid tax” whereas in point No. 4 is is stated that “the taxpayer has willfuly suppressed the facts with intend to claim refund of fraudulent ITC so obtained.” In my view both are contradictory.

Plz guide

[Amit Agrawal]

Kcto Circular No. 171/03/2022-GST dated 06.07.2022.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[SUSHIL BANSAL]

Thanks Amit Sir for your quick & expert reply.As per the circular the dept should not have issued SCN u/s 74 but u/s 122 only , but as per the text of the SCN it seems that the SCN u/s 74 has been issued for penalty u/s 122(1)(i). (I understand that point No. 4 of the SCN is in regard to both the point No.1 & 2). In such a situation dept will impose penalty u/s 74. We have deposited concessional penalty u/s 74(8) within 30 days of SCN & if we do not want to go in appeal then our benefit of concessional penalty will be correct na.

[Amit Agrawal]

There are multiple facets of legal issue involved here. And evolvement of jurisprudence in GST law/s is at nascent stage.

All this is further complicated by the way the subject SCN is drafted, giving both parties to dispute to make contrary arguments to deny / allow benefits of reduced penalty u/s 74.

I think that subject allegations in "Para 2 of your query" does not fit into situations where action that can be taken u/s 74. Hence, I would not like to put my entire defence by presuming the availability of reduced penalty u/s 74 in given fact & circumstances. Such presumption is risky, in my view,

Accordingly, I would like to defend the case on merits. And as a last ground of defence, considering the fact that you have already made payment of reduced penalty u/s 74(8) (as per you last post) & as an alternate plea without prejudice to main defences, I would argue for reduced penalty u/s 74(8) & treating the proceedings as closed.

Considering multiple facets to be considered, one needs to be extremely careful while drafting reply to such SCN.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Sh.Sushil Bansal Ji,

(i) In this case, you should not restrict yourself to the element of 'suppression of facts' only. In this case, all other elements of mens rea with an intent to evade tax are present. These are fraud and wilful -misstatement. When such case is booked by the department statement of the accused is also recorded. This aspect is missing here.

(ii) The elements of mens rea with an intent to evade tax or wrongfully passing on ITC or availment of ITC are present in both para nos. 2 & 3 above.

(iii) SCN can be issued for imposition and recovery of penalty only. Penalty cannot be imposed upon without issue of SCN. In this situation, proposal for imposition of penalty is related to multiple offences.

(iv) The factum of "short paid tax" does not exclude the elements of mens rea.

(v) Sections 129, 130 & 132 are excluded from the expression, "all proceedings in respect of the said notice" .enumerated under Section 74 (11).

Disclaimer Certificate : These are my personal views for enlightenment purpose and not meant for court proceedings.

[Alkesh Jani]

Shri

Please mention, under which Section i.e. 74 or 73 proposal for demand and recovery is made in SCN?.....it is called upon as to why..... may please be produced, so that out experts may guide you best.

Thanks

[KASTURI SETHI]

As per serial no.2 above SCN has been issued under Section 74.

[Padmanathan KV]

I am assuming "invoices as detailed" in Para 3 pertains to invoices in Para 2.

In my opinion, without any underlying supply u/s 7, recovery of any tax under section 73 or 74 becomes unconstitutional. Mere declaration of e-way bill does not automatically mean that supply has happened. Also in para 2, the Department themselves have admitted to the fact there is no actual supply.

In my opinion, the above arguments have nothing to do with whether there is mens rea or not.To invoke Sec 74, mens rea has to be coupled with short payment or non-payment of tax, wrong avilment or utilization of ITC, etc.

In this case, you can consider a stand that section 74 cannot be invoked and at maximum, a penalty under section 122(1)(ii) for Rs. 10,000 each (as there is no tax involved) should only be levied.

Also argument that para 4 is defective may not stand as it can get cured by 160(1).

AI Summary

Section 74 penalty invoked where mens rea plus short payment or wrongful ITC claimed, affecting scope of SCN and remedies. Whether invoking Section 74 in a show cause notice is appropriate where allegations include wrongful passing of input tax credit without actual supply and alleged short payment/non declaration of outward supplies; the SCN's conflation of penalty proposals and recovery under Section 74 raises issues about the statutory fit of Section 74, availability of reduced penalty mechanisms, mens rea requirements, and whether drafting defects affect entitlement to concessional treatment.