Abstract
The advent of the Goods and Services Tax (GST) regime in India was envisioned as a mechanism for simplified, technology-driven tax administration, yet it has inadvertently birthed complex procedural challenges. One particularly vexatious trend emerging in recent practice is the jurisdictional friction between the conclusions drawn during a statutory audit under Section 65 of the CGST Act and the subsequent adjudication proceedings initiated by the jurisdictional authority. This article examines the “Audit Paradox”, a scenario where taxpayers, having fully cooperated with the audit wing and exhaustively disclosed their financial records, are later confronted with fresh Show Cause Notices (SCNs) demanding tax, interest, and penalty under Sections 73 or 74.
The core of this analysis lies in questioning the legal sanctity of re-adjudicating issues that were either settled or consciously dropped during the audit process. Specifically, it critiques the practice of the adjudicating authority invoking the extended period of limitation under Section 74, alleging suppression of facts, based solely on evidence already scrutinized and recorded by the audit team. The article argues that characterizing voluntary disclosures made during an audit as “suppression” constitutes a legal contradiction and violates the principles of natural justice and fairness. Furthermore, it explores the evolving role of the GST Appellate Tribunal (GSTAT) as the necessary institutional check against such “procedural overreach,” advocating for a jurisprudence that prioritizes finality in taxation and prevents the audit mechanism from becoming a mere precursor to endless litigation.
Introduction
The Goods and Services Tax (GST) regime in India was heralded as a paradigm shift in indirect taxation, designed to foster a non-adversarial, technology-driven compliance environment. A cornerstone of this framework was the audit mechanism under Section 65 of the CGST Act, 2017[2], intended to verify the correctness of tax declaration and ensure a level playing field. For a taxpayer, undergoing a GST audit is often an exhaustive exercise involving the submission of voluminous records, detailed reconciliations, and months of engagement with the audit wing. Naturally, the conclusion of this exercise and the submission of the final audit report instill a legitimate expectation of closure. However, a disturbing procedural trend is increasingly shattering this expectation.
Taxpayers are frequently encountering a scenario best described as the “Audit Paradox”: despite having cooperated fully with the audit team and provided all necessary justifications, they are subsequently blindsided by a Show Cause Notice (SCN) issued by the jurisdictional adjudicating authority. This post-audit litigation often does not merely limit itself to the observations recorded in the audit report; in many instances, it expands the scope of scrutiny, reviving issues that were implicitly settled or deliberately dropped by the auditors. At its core, such post-audit demands amount to a mere change of opinion by the department, an administrative practice consistently frowned upon in tax jurisprudence. More concerningly, the adjudicating authority frequently invokes the stringent provisions of Section 74 of the CGST Act, alleging fraud, suppression, or willful misstatement, based on the very set of facts that were voluntarily disclosed and examined during the audit.
This raises a fundamental question of law and equity: Can the department’s “change of opinion” or fresh interpretation of facts, post-audit, legitimately be construed as “suppression” by the taxpayer? If a fact was part of the audit record, it was patently not suppressed. This article endeavors to dissect this jurisdictional conflict between the specialized audit wing and the adjudicating authority. It critically analyzes the maintainability of such post-audit demands and argues that the Appellate Tribunal must intervene to prevent the audit process from becoming a mere precursor to endless, arbitrary litigation, thereby upholding the principles of natural justice and finality in taxation.
The Legal Landscape: Two Wings, One Department?
To understand the genesis of the post-audit conflict, it is essential to dissect the institutional architecture of the GST administration. Under the CGST Act, 2017, the functions of verification (audit) and enforcement (adjudication) are vested in two distinct, albeit related, statutory bodies. This dichotomy is intended to create a system of checks and balances, yet in practice, it often leads to a jurisdictional tug-of-war.
The Central Board of Indirect Taxes and Customs, through Circular No. 169/01/2022-GST dated 12 March 2022[3], has consciously institutionalised the separation between audit or investigation and adjudication.” “The Circular… clearly delineates the functional boundaries… adjudication of [audit] notices is not to be undertaken by the audit or investigating officers themselves.”
“Although the CGST Act does not expressly prohibit an audit officer from adjudicating, it is well settled that administrative instructions issued by the CBIC are binding on departmental officers[4].“
On one side stands the Audit Wing, operating under the mandate of Section 65. The primary objective of a GST audit is to conduct a comprehensive fact-finding exercise. Auditors are tasked with verifying the correctness of the turnover declared, the tax paid, and the Input Tax Credit (ITC) availed by the taxpayer. When the audit concludes, it culminates in the submission of an Audit Report (Form GST ADT-02)[5], along with the taxpayer’s reply. Crucially, this report contains observations and recommendations; it is not an adjudication order. It identifies potential anomalies but does not by itself demand payment or create a legal liability. The audit process is collaborative in nature, relying heavily on the voluntary submission of documents and clarifications by the taxpayer.
On the other side is the Adjudicating Authority, typically the Jurisdictional Proper Officer (such as the Superintendent or Assistant Commissioner), empowered under Sections 73 and 74. This wing is responsible for determining the ultimate tax liability. When an audit report is forwarded to this authority, they are expected to examine the observations and issue a Show Cause Notice (SCN) to the taxpayer. This is where the procedural grey area emerges.
The law mandates that the adjudicating authority must issue the SCN within the time limits specified in the proviso to Section 73 or 74[6], calculated from the date of the audit report. However, the statute is silent on the substantive relationship between the audit findings and the adjudicating authority’s discretion. The adjudicating officer is not legally bound by the conclusions of the audit team. They possess the autonomy to accept, modify, or even expand upon the audit’s observations. While this procedural independence is theoretically sound, allowing a fresh judicial mind to evaluate the facts, it practically opens the door for “double jeopardy.” The adjudicating authority can choose to disregard the nuanced understanding developed during the audit (where the taxpayer physically demonstrated their compliance) and instead adopt a strictly literal, often harsher interpretation of the law to inflate revenue demands. Consequently, the taxpayer is left navigating a bifurcated system where the left hand (Audit) may see compliance, while the right hand (Adjudication) alleges suppression.
The Conflict: “Change of Opinion” vs. “Suppression of Facts”
The most contentious aspect of post-audit adjudication is the department’s frequent reliance on the extended period of limitation under Section 74 of the CGST Act[7]. This section empowers the department to demand tax for up to five years, provided the non-payment or short payment was on account of “fraud, or any wilful-misstatement or suppression of facts.” The conflict arises when the adjudicating authority invokes this stringent provision based on facts that were fully disclosed and examined during the audit. This leads to a fundamental legal contradiction: can a taxpayer be accused of suppressing facts that they voluntarily laid bare before the audit wing?
The core argument here rests on the definition of “suppression” itself. Under the GST law, suppression entails a willful failure to declare information that a taxpayer is statutorily required to disclose[8]. During a GST audit, however, the dynamic shifts dramatically. The taxpayer is compelled to produce primary records, such as invoices, ledgers, contracts, and bank statements, to substantiate their returns. When an issue, such as the claim of Input Tax Credit (ITC) on a specific transaction or the classification of a supply as “Nil Rated,” is examined during an audit, the relevant facts are effectively placed in the “public domain” of the department. The taxpayer does not hide these details; rather, they actively demonstrate them to the auditor to seek clearance.
If an issue was thoroughly examined, and the taxpayer provided all necessary documents and explanations to the audit team, it is legally incongruous for the adjudicating authority to later claim that these facts were suppressed. The very act of producing documents before an authorized officer of the department demolishes the ingredient of “willful concealment” required to invoke Section 74. For instance, if a taxpayer explains the nature of “post-sale discounts” to the auditor and provides the underlying MOUs and credit notes, the department is already in possession of the facts. A subsequent decision by the adjudicating authority to interpret these facts differently, by holding that the discounts were actually “exempt supplies” attracting ITC reversal, does not constitute suppression; it merely constitutes a “change of opinion.”
Consequently, invoking Section 74 after the conclusion of an audit often reveals a strategic misuse of power. The audit report creates a paper trail of disclosure, making a genuine allegation of fraud nearly impossible to sustain. Yet, authorities frequently resort to Section 74 not because they have discovered new, hidden evidence of fraud, but to bypass the shorter limitation period prescribed under Section 73. When a demand under Section 73 is time-barred, converting the same set of facts into a Section 74 demand by merely labeling the disclosure as “suppression” is an abuse of process.”What cannot be done directly, cannot be done indirectly”[9]. It subverts the intent of the law, transforming a provision meant to catch tax evaders into a tool for technical revenue collection based on interpretative differences. In M/S ARMOUR SECURITY (INDIA) LTD VERSUS COMMISSIONER, CGST, DELHI EAST COMMISSIONERATE & ANR, the High Court noted that the intent of the statute is to prevent parallel proceedings relating to assessment, particularly those initiated under Sections 73 and 74.[10]
The Role of the Appellate Tribunal: Restoring Finality
In the face of this procedural disarray, the Goods and Services Tax Appellate Tribunal (GSTAT) emerges not merely as a judicial forum for dispute resolution, but as the essential guardian of procedural propriety. As the first specialized appellate authority, the Tribunal bears the heavy responsibility of ensuring that the department’s vast powers are exercised within the confines of law and fairness. To resolve the “Audit Paradox,” the Tribunal must shift its standard of review, moving beyond a mere arithmetic analysis of the tax demand to a rigorous examination of the maintainability of the Show Cause Notice itself.
The Tribunal must adopt a stance where the origin of the demand is scrutinized as closely as the amount demanded. If an appeal reveals that the facts forming the basis of a Section 74 SCN were part of the record during the audit, the Tribunal should not hesitate to declare the notice void ab initio. The adjudicating authority’s power to demand tax is not absolute; it is fettered by the condition that allegations of suppression must be genuine and substantiated. When the “suppression” is a legal fiction created to override limitation periods, despite the facts having been voluntarily disclosed to the audit team, the notice loses its jurisdictional footing. The Tribunal must establish a precedent that an audit disclosure acts as a bar to subsequent allegations of suppression, thereby enforcing the doctrine of constructive knowledge: what the audit team knew, the department as a whole knew.
Furthermore, the Tribunal must aggressively apply the principles of estoppel and fairness against the Revenue. While the doctrine of estoppel against the government is a nuanced legal terrain, the Tribunal should prevent the department from “approbating and reprobating”, accepting the audit process to gather information and then rejecting its conclusions to allege fraud. The Audit Wing and the Adjudicating Wing are not independent adversaries; they are two arms of the same state. It is a travesty of justice for the department to utilize the taxpayer’s cooperation during the audit as the very sword to strike them down later with penalties.
Finally, this is an arena crying out for measured judicial activism. The Tribunal must recognize that allowing such post-audit turns turns the audit process into a trap, discouraging voluntary compliance. When the department issues a SCN on issues that were examined and dropped during the audit, it amounts to an abuse of process. The Tribunal should not limit its relief to setting aside the demand; it should consider imposing costs on the department for harassing the taxpayer. By penalizing such arbitrary re-litigation, the Tribunal can restore the much-needed principle of finality to the GST regime, ensuring that an audit is an end to scrutiny, not merely the beginning of a new, more dangerous one.
Strategic Defenses for Practitioners (The “How-To”)
For legal practitioners navigating the turbulent waters of post-audit litigation, a robust defense requires moving beyond mere factual rebuttals and attacking the very foundation of the department’s claims. When drafting appeals before the Appellate Tribunal, practitioners should systematically deploy the following three pillars of defense to dismantle the maintainability of such Show Cause Notices.
Argument 1: Lack of Mens Rea (The Intent Defense)
The invocation of Section 74 hinges on the presence of mens rea, a guilty mind or intention to evade tax. Practitioners must argue that this element is conspicuously absent in post-audit scenarios. If the specific issue, whether it is the classification of a supply or the eligibility of Input Tax Credit, was raised, discussed, and documented during the audit proceedings, the taxpayer’s intent is transparent. By providing ledgers, contracts, and explanations to the audit team, the taxpayer demonstrated a bona fide belief in their compliance. Therefore, the department’s allegation of “suppression” collapses because the taxpayer did not hide the truth; they presented it for scrutiny. Practitioners should cite the audit replies as irrefutable evidence that there was no willful misstatement, only a difference of interpretation that the Revenue is now unfairly criminalizing.
Argument 2: Procedural Violation (The Time-Bar Defense)
A critical line of defense involves testing the limitation period under the proviso to Section 73 and 74.[11] The law mandates that the adjudicating authority must issue the Show Cause Notice within the specified period, usually three months from the date of the audit report, or within the extended period provided for in the Act. Practitioners must meticulously calculate the timeline. If the Audit Wing shared its findings or the “Draft Audit Report” on a specific date, but the adjudicating authority delayed the issuance of the SCN beyond the permissible window calculated from that date, the demand is liable to be dismissed as time-barred. The Tribunal takes a strict view of limitation laws; arguing that the department cannot sit on audit files for months and then suddenly wake up to issue a notice is often a winning strategy.
Argument 3: Principles of Natural Justice (The Abuse of Process Defense)
Finally, practitioners must appeal to the Tribunal’s sense of equity by arguing against the abuse of process. The legal system fundamentally rejects the concept of “double jeopardy”, being tried twice for the same offense. While not a criminal trial, the audit process serves as the first stage of governmental examination. If the department failed to raise an objection during the audit, despite having full access to the records, it should be estopped from doing so later. Allowing the adjudicating authority to reopen settled audit issues effectively grants the department “two bites at the cherry.” This violates the taxpayer’s legitimate expectation of closure and fairness. Practitioners should argue that treating a difference of opinion, emerging from a cooperative audit, as a case of fraud is a gross violation of natural justice and warrants strict costs against the department.
Conclusion
The stability of any taxation system relies heavily on the principle of finality. Businesses and taxpayers must be assured that diligent compliance and cooperation with the audit process do not subject them to a perpetual “Sword of Damocles.” The current practice of re-litigating settled audit issues under the garb of suppression undermines this stability, eroding trust in the GST regime and fostering an adversarial climate where transparency is penalized rather than rewarded.
To bridge this widening gap between administrative procedure and justice, a clear legislative or procedural amendment is necessary. The law should explicitly state that if an issue was raised during the course of an audit, examined by the taxpayer, and subsequently dropped by the Audit Wing, the Jurisdictional Authority is estopped from reviving it in later adjudication. Such a re-opening should only be permissible if there is tangible, new evidence that was unavailable or concealed during the audit period. Codifying this protection would ensure that the audit process retains its integrity as a tool of verification rather than a trap for entrapment.
A critical, yet often overlooked, dimension of the “Audit Paradox” is the practical impossibility of maintaining a pristine evidentiary record over extended periods. While Section 36 of the CGST Act mandatorily requires taxpayers to maintain books of accounts for 72 months (6 years), there is a vast chasm between statutory retention and practical retrieval.[12] The initiation of a GST Audit (Audit under Section 65)[13] years after the close of a financial year poses a severe administrative challenge to taxpayers and fundamentally undermines the “Best Evidence” rule. By the time a jurisdictional authority initiates an audit for, say, FY 2018-19 in the year 2024 or 2025:
In conclusion, while the state reserves the right to recover its dues, it must exercise that right with fairness and restraint. The Appellate Tribunal stands as the last bastion for protecting the taxpayer against arbitrary overreach. As the legal fraternity continues to debate these nuances, a guiding principle must emerge:
“An efficient tax system must respect the end of an Audit. The Tribunal must ensure that the Audit process is not merely a ‘reconnaissance mission’ for a future Section 74 attack.”
Author: Nakul Parashar, pursuing BBA LLB at Himachal Pradesh National Law University
[2] Id. § 65
[3] Circular No. 169/01/2022-GST (Mar. 12, 2022) (CBIC) (India)
[4] Union of India v. Crompton Greaves Ltd., (2009) 6 SCC 287 (Ind.)
[5] Central Goods and Services Tax Rules, 2017 (India) r. 101.
[6] Central Goods and Services Tax Act, 2017 (India) §§ 73, 74.
[7] Central Goods and Services Tax Act, 2017 (India) § 74.
[8] Id. Explanation 2
[9] Comm’r of C. Excise v. M/s. Gujarat Bottling Co. Ltd., (1996) 5 SCC 539, 543 (Ind.)
[10] M/s. Armour Security (India) Ltd. v. The Principal Comm’r, C. GST, Delhi East, 2024 (87) G.S.T.L. 327, 335 (Del. H.C.) (Ind.
[11] Central Goods and Services Tax Act, 2017 (India) § 73 proviso; § 74 proviso.
[12] Central Goods and Services Tax Act, 2017 (India) § 36.
[13] Id. § 65.
Link to similar articles: https://jpassociates.co.in/section-73-vs-section-74-of-cgst-act/