Section 74 GST Proceedings Valid; Assessment Remanded for Computation Errors: Madras HC

Tvl. K.Ezhil Arasan Vs Joint Commissioner (ST) Intelligence (Madras High Court)

Section 74 GST Proceedings Valid on Inspection Findings; Assessment Remanded for Computation Errors: Madras HC

The Madras High Court considered two writ petitions challenging orders dated 20.06.2024 passed under Section 74 of the GST enactments for the tax periods 2020-2021 and 2021-2022. The impugned orders were preceded by Show Cause Notices in Form GST DRC-01 dated 07.05.2024, to which the petitioner submitted manual replies dated 14.06.2024. The notices alleged discrepancies relating to GSTR-3B vs. GSTR-2A, GSTR-7 vs. GSTR-3B, and GSTR-9 vs. Form 26AS. While one defect was dropped in the final orders, tax demands under the remaining defects, along with interest and penalty, were confirmed.

The petitioner contended that proceedings under Section 74 could not be invoked without first establishing material giving rise to fraud, wilful misstatement, or suppression of facts. Relying on principles under the Tamil Nadu Value Added Tax Act, 2006 and the Income-tax Act, 1961, including the concept of “reasons to believe” under Section 148, the petitioner argued that the show cause notices did not disclose the basis for invoking the extended limitation under Section 74.

The Revenue submitted that the notices were issued pursuant to an inspection conducted on 18.07.2023, followed by an intimation in Form GST DRC-01A dated 26.04.2024, and specifically invoked Section 74. The petitioner had been called upon to explain discrepancies relating to turnover differences and had also been afforded an opportunity of personal hearing. According to the Revenue, the petitioner had failed to satisfactorily explain the differences, particularly regarding exempted supplies.

The High Court observed that the inspection had revealed short payment of tax, and the records disclosed discrepancies between the tax declared and the figures reflected in Form 26AS and GSTR-7. Referring to its common order delivered in the connected batch of cases on the larger issue concerning Section 74, the Court held that the expression “where it appears” in Section 74 entitled the authorities to invoke the machinery under that provision when inspection records revealed tax short payment. The Court also noted that the show cause notices expressly referred to Section 74 and contained allegations of “wilful suppression of facts.”

However, the Court found significant computational and factual errors in the proceedings relating to the 2020-2021 assessment. The Revenue Abstract accompanying the show cause notice had incorrectly treated the exempted turnover reported in GSTR-9 as the tax liability instead of the tax amount discussed in the notice. The impugned order also inadvertently referred to the exempted turnover for the tax period 2018-2019 while computing the tax liability for 2020-2021, resulting in an erroneous determination of tax liability.

The Court further observed that the petitioner’s replies to the show cause notices were inadequate and did not effectively answer the allegations raised. Nevertheless, considering the computational mistakes in the impugned order and the incorrect recording of exempted turnover as tax liability, the Court held that the matter required fresh adjudication.

Accordingly, the High Court remanded the cases to the respondent authority for passing fresh orders on merits after granting the petitioner an opportunity of personal hearing. The petitioner was directed to file detailed replies along with necessary supporting documents, and the respondent was directed to complete the exercise within three months from the date of receipt of the order. The writ petitions were disposed of by way of remand, with no order as to costs. Court: Madras High Court.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

These cases were heard along with a batch of 250 Writ Petitions and as one of the 53 Writ Petitions which were finally heard on the larger issue regarding the challenge to the proceedings under Section 74 of the respective GST Enactments.

2. By a Common Order today in W.P.No.2142 of 2026 [Turbo Energy Private Limited], W.P.Nos.35967, 35970, 35974 and 35976 of 2024 [Fastenex Private Limited] and W.P.Nos.14487, 14492 and 14500 of 2025 [Ispahani Estates Private Limited], a detailed order has been passed insofar as the invocation of extended period of limitation under Section 74 of the respective GST Enactments.

3. In these Writ Petitions, the Petitioner has challenged the respective Impugned Orders both dated 20.06.2024 passed for the Tax Periods 2020-2021 and 2021-2022. The respective Impugned Orders were preceded by a Show Cause Notice in Form GST DRC-01 both dated 07.05.2024 for the respective period to which the Petitioner submitted a Manual Reply dated 14.06.2024.

4. Following defects were pointed out in the aforesaid Notice issued for the respective Tax Periods, which eventually culminated in the Impugned Orders:

*Note– Though the discussion under Defect No.3 in the Notice in W.P.No.382 of 2025 records the tax liability as Rs.15,26,347/- x 2, the Revenue Abstract erroneously mentions the Tax Liability as Rs2,54,39,123/- x2 i.e., the Exempted Turnover of the tax payer reported in GSTR-9.

5. The tax liability of the Petitioner confirmed in the Revenue Abstract to the Impugned Orders dated 20.06.2024 for the Tax Periods 2020-2021 & 2021-2022, are detailed as follows:-

#Note– In both the Impugned Orders, Defect No.1 has been dropped and the rest of the Defects have been confirmed.

6. Apart from the above, penalty and interest have been imposed on the Petitioner in the respective Impugned Orders.

7. The learned counsel for the Petitioner submitted that the “reasons to believe” the existence of Fraud or Wilful-misstatement or Suppression of Facts is a must before invoking the machinery under Section 74 of the respective GST Enactments.

8. The learned counsel for the Petitioner drew attention to the parallel provisions under Section 27 of the Tamil Nadu Value Added Tax Act, 2006 and Section 147 of the Income Tax Act, 1961.

9. The learned counsel for the Petitioner also drew attention to the decision of the Hon’ble Supreme Court in GKN Driveshafts (India) Limited Income Tax Officer and others, (2003) 1 SCC 73 / [2003] 259 ITR 19 (SC). She would submit that even under the Income Tax Act, 1961 before issuing a Notice under Section 148 of the Income Tax Act, 1961, there must be a material available with the Assessing Officer to form “reasons to believe” that income has escaped assessment.

10. It is submitted that under Section 74 of the respective GST Enactments, the expression used is “where it appears”. Therefore, it is submitted that if the required material was available, it should have been communicated to the Petitioner in the Notice issued in GST DRC-01 dated 07.05.2024. It is submitted that the reason for invoking the extended period of limitation under Section 74 of the respective GST Enactments is conspicuously absent in the Notice.

11. The learned counsel for the Petitioner further drew attention to the decision of the Hon’ble Supreme Court in Kanaksingh Raisingh Rav State of Gujarat, (2003) 1 SCC 73, rendered in the context of Section 32(1) of the Indian Penal Code.

12. On the other hand, the learned Government Advocate for the Respondents submitted that the Notice in GST DRC-01 was issued by invoking the ingredients of Section 74 of the respective GST Enactments.

13. It is submitted that the Petitioner was called upon to explain the discrepancies relating to Defect No.2 regarding the difference in turnover between GSTR-9 and the Income Tax Return in Form 26AS and that a personal hearing was also fixed informing the Petitioner that the proceedings were initiated under Section 74 of the respective GST Enactments.

14. The learned Government Advocate for the Respondents further submitted that the Petitioner had not earlier explained how the difference in exempted supply arose, and therefore, these Writ Petitions are liable to be dismissed.

15. I have considered the arguments advanced by the learned counsel for the Petitioner and the learned Government Advocate for the Respondents.

16. A reading of the records reveal that the impugned proceedings are pursuant to an inspection held on 18.07.2023. During the course of an inspection, the records revealed that the Petitioner has not paid tax fully. Thus, invocation of machinery under Section 74 of the respective GST Enactments cannot be assailed.

17. The respective Notices have clearly mentioned that the Notices were issued pursuant to the Inspection held on 18.07.2023 and after communication of the Intimation in GST DRC-01A dated 26.04.2024.

18. A reading of the Reply also indicates that the Petitioner has not effectively answered to the allegations in the Show Cause Notices.

19. The reply that was filed by the Petitioner merely reads as under:-

20. Since the records before the Respondents revealed short-payments of tax as compared to the amount mentioned in Form 26AS and in GSTR-7, the Respondents are entitled to invoke the machinery under Section 74 of the respective GST Enactments as the expression used therein is “where it appears” as held in P.Nos.35967, 35970, 35974 and 35976 of 2024 etc., batch by separate order today.

21. The Show Cause Notices have clearly referred to Section 74 of the respective GST Enactments for imposing penalty. The expression “willful suppression of facts” has been used in both the Show Cause Notices in GST DRC-01 dated 07.05.2024 impugned in the respective Writ Petitions.

22. However, as noted earlier, the Revenue Abstract to Notice in GST DRC-01 for the Tax Period 2020-2021, records the tax liability under Defect No.3 as 2,53,39,123/- x 2 i.e., the exempted turnover in GSTR-9, instead of the tax liability stated in the discussion under Defect No.3 i.e., Rs.15,26,347/- x 2.

23. That apart, the Impugned Order for the Tax Period 2020-2021, inadvertently records the exempted turnover for the Tax Period 2018-2019 and arrives at the tax liability of 23,50,142/- x 2.

24. Considering the fact that the Impugned Order and the respective Show Cause Notice in P.No.382 of 2025 have inadvertently recorded the exempted turnover as the tax liability and have erroneously arrived at the total tax liability, and considering the fact that the reply filed by the Petitioner to the Show Cause Notice preceding the Impugned Order challenged in W.P.No.172 of 2025 is insufficient, I am inclined to remit the case back to the Respondent to pass a fresh order on merits.

25. Accordingly, the cases are remitted back to the Respondent to pass a fresh order on merits after affording opportunity of personal hearing to the petitioner, who shall file detailed replies and necessary documents to defend their case, within a period of 3 months from the date of issuance of a copy of this order.

26. Accordingly, the present Writ Petitions are disposed of with the above directions. No Costs. Connected Miscellaneous Petitions are closed.