Analysing the Scope and Jurisdiction of Section 74 of the CGST Act

Under the Goods and Services Tax (GST) regime, the provisions of Sections 73 and 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) play a crucial role in determining tax liability when taxes are unpaid, underpaid, or input tax credit (ITC) is wrongly availed or utilized. The application of these sections hinges on the presence or absence of fraudulent intent, a distinction that carries significant implications for taxpayers and adjudicating authorities.

Distinction Between Sections 73 and 74

• Section 73 applies when a taxpayer’s liability arises due to reasons other than fraud, willful misstatement, or suppression of facts. It is intended to address inadvertent errors or bona fide omissions. The limitation period for initiating proceedings under this section is three years from the due date of furnishing the annual return for the relevant financial year.

• Section 74, on the other hand, is reserved for cases involving fraud, willful misstatement, or suppression of facts with intent to evade tax. The limitation period for Section 74 extends to five years, reflecting the gravity of such offenses.

Importance of Specific Allegations in Section 74 Notices

Courts have consistently emphasized the importance of specific allegations in Show Cause Notices (SCNs) issued under Section 74. The Hon’ble Allahabad High Court, in the case of HCL Infotech Ltd. v. Commissioner, Commercial Tax and Another, highlighted that the adjudicating authority must explicitly state the reasons for invoking Section 74, including the basis for allegations of fraud, wilful misstatement, or suppression of facts. Without such specific allegations, the notice may be deemed without jurisdiction.

Similarly, the Hon’ble Supreme Court in CCE v. H.M.M. Limited held that for an SCN to invoke the extended limitation period i.e., 5 years, it must explicitly allege and substantiate fraud, collusion, or wilful misstatement. Failure to do so constitutes a violation of natural justice, depriving the taxpayer of a fair opportunity to respond.

Case Study: Reissuing Notices Under Section 74

A recurring issue arises when taxpayers receive multiple notices for the same financial year, first under Section 73 and subsequently under. Section 74. For instance:

1. Scenario 1: An order is passed under Section 73 for a particular financial year, but a fresh notice is issued under Section 74 for the same period.

2. Scenario 2: A notice under Section 74 is issued for the first time, even though there is no prima facie evidence of fraud or suppression of facts.

In such cases, taxpayers must critically evaluate whether the notice complies with the procedural and substantive requirements of Section 74. Specifically, the SCN must provide:

• Evidence or reasoning to justify allegations of fraud, wilful misstatement, or suppression.

• A clear rationale for invoking the extended limitation period of five years.

If these elements are missing, the notice may be challenged as ultra vires. It is a Latin term meaning “beyond powers.” In the context of law, it refers to actions taken by an authority that exceed the powers granted to it under the law. For example, if a tax adjudicating authority issues a show-cause notice under Section 74 of the CGST Act without providing specific evidence or allegations of fraud, wilful misstatement, or suppression of facts, the notice may be considered ultra vires. This is because the authority is acting beyond its jurisdiction, violating principles of natural justice. Such actions are invalid and unenforceable under the law. and lacking jurisdiction.

Limitation Periods and Their Implications

The limitation period for initiating proceedings under Sections 73 and 74 has practical implications for both taxpayers and authorities. As of 2024:

• The limitation period under Section 73 has expired for financial years 2018–19, 2020–2021 and 2021–22.

• Proceedings under Section 74, however, may still be initiated for these years until 2025–26, provided the SCN meets the requirements.

This distinction underscores the importance of determining whether the allegations warrant invoking Section 74. Authorities cannot issue notices under Section 74 solely to take advantage of the extended limitation period.

Legal Precedents Supporting Taxpayers

Several landmark judgments bolster the rights of taxpayers facing unwarranted SCNs under Section 74:

1. HCL Infotech Ltd. v. Commissioner, Commercial Tax and Another

The Allahabad High Court reiterated that jurisdiction under Section 74 arises only when the notice clearly establishes fraud, wilful misstatement, or suppression of facts. The absence of these elements renders the notice void.

2. CCE v. H.M.M. Limited

The Supreme Court invalidated an SCN issued beyond the standard limitation period without specific allegations to justify the extended period. The ruling emphasized that procedural compliance is essential for the validity of such notices.

3. Raj Bahadur Narain Singh Sugar Mills Ltd. v. Union of India

The Supreme Court underscored that an SCN must explicitly state the grounds for invoking extended limitation, failing which it violates principles of natural justice.

Practical Steps for Taxpayers

When a taxpayer receives an SCN under Section 74, the following steps are critical:

1. Evaluate the SCN:

o Check for specific allegations of fraud, wilful misstatement, or suppression of facts.
o Ensure the notice provides evidence or reasoning to support these allegations.

2. Assess Limitation Periods:

o Confirm whether the SCN is issued within the permissible limitation period.
o Challenge the notice if it appears to misuse the extended period under Section 74.

3. Prepare a Response:

o Highlight procedural lapses, such as the absence of specific allegations or evidence.
o Refer to relevant judgments, such as HCL Infotech Ltd. and H.M.M. Limited, to substantiate your defence.

4. Seek Legal Advice:

o Engage with legal professionals to ensure a robust and comprehensive response.

Conclusion: Upholding the Rule of Law

Sections 73 and 74 of the CGST Act represent a delicate balance between addressing tax evasion and protecting taxpayer rights. While Section 74 provides authorities with the tools to address fraudulent activities, its invocation must be grounded in specific and substantiated allegations. The judiciary has consistently reinforced those procedural safeguards and natural justice are paramount in tax proceedings.

Taxpayers must remain vigilant and proactive in defending against unwarranted SCNs under Section 74. By thoroughly assessing notices and leveraging judicial precedents, taxpayers can ensure that proceedings comply with the letter and spirit of the law. At the same time, tax authorities must exercise their powers responsibly, adhering to procedural requirements and respecting the principles of fairness and transparency. Only through such balanced enforcement can the GST regime achieve its intended goals of efficiency and equity.

Author: Apoorva Lamba, 2nd Year LLB. Student of Madhav Mahavidyalaya, Jiwaji University, Gwalior

Wish to read similar articles? Click the link to read more: https://jpassociates.co.in/the-madhya-pradesh-value-added-tax-act-2002-a-recapitulation-of-important-provisions/

Link to CGST Act: https://cbic-gst.gov.in/pdf/CGST-Act-Updated-30092020.pdf