Pavithram Gold & Diamonds Vs Commissioner of CGST & CE (GSTAT Thiruvananthapuram)
Summary: The Goods and Services Tax Appellate Tribunal, Thiruvananthapuram, considered an appeal filed by Pavithram Gold & Diamonds, a partnership firm dealing in gold, silver and diamonds, against the imposition of a penalty of Rs. 7,66,646 under Section 74 of the CGST Act, 2017. During an audit covering January 2019 to March 2021, the department found that the appellant had availed input tax credit without paying certain suppliers the value of supplies and applicable tax within the prescribed 180-day period. The department demanded reversal of the credit, interest under Section 50(1), and an equivalent penalty under Section 74(1). The appellant had already paid the disputed tax amount and part of the interest, leaving the validity of the penalty as the principal issue before the Tribunal.
The appellant contended that the department had not established fraud, wilful misstatement or suppression of facts with intent to evade tax. The Revenue argued that the appellant had failed to disclose and reverse the ineligible credit in its statutory returns and that such non-disclosure constituted suppression within the meaning of Explanation 2 to Section 74. The Tribunal examined the show cause notice and found that it merely alleged wilful suppression of material facts without identifying the specific facts suppressed. It also observed that the notice inconsistently referred to penalties under Sections 73 and 74 for contraventions of Section 16(2), demonstrating that the basis for invoking the more stringent provision had not been properly established.
The Tribunal held that a contravention of Section 16(2) does not automatically attract Section 74 and that discovery of an irregularity during an audit under Section 65 cannot, by itself, establish wilful suppression. It further rejected the appellate authority’s attempt to place the burden on the taxpayer to disprove wilfulness, holding that the Revenue must establish the statutory ingredients of suppression. Relying on the Supreme Court decisions in Commissioner of Central Excise v. Brindavan Beverages (P) Ltd. and G.R. Infra Projects Limited Ratlam v. State of Madhya Pradesh, the Tribunal reiterated that a show cause notice must contain specific allegations and cannot subsequently be improved through adjudication findings or appellate submissions.
Accordingly, the Tribunal allowed the appeal concerning the Section 74 penalty and set aside the appellate order to that extent, with consequential relief. However, the appellant remained liable to pay the outstanding interest. The decision distinguishes the liability to reverse input tax credit and pay interest from the separate statutory requirement to prove fraud, wilful misstatement or suppression before imposing a penalty under Section 74.
List of Cases Discussed
1. Commissioner of Central Excise Vs Brindavan Beverages (P) Ltd. & Ors. (Supreme Court); 15/06/2007; (2007) 5 SCC 388, AIR SCW 7747. Relied upon for the principle that the show cause notice forms the foundation of the department’s case and must contain specific, intelligible allegations enabling the noticee to respond.
2. M/s G.R. Infra Projects Limited Ratlam Vs State of Madhya Pradesh & Ors. (Supreme Court); 19/08/2026; 2026 (8) TMI 1497. Relied upon for the principle that deficiencies in a notice or order cannot be cured through additional allegations introduced in a counter-affidavit or subsequent proceedings.
FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER
The present appeals are directed against the Order-in-Appeal No.TVM-GST-000-APP-224-2023-JC- dated 24/8/2023 passed by the Joint Commissioner (Appeals), Central Tax, Central Excise & Customs, Kochi (Appellate Authority).
1. Brief Facts of the Case
1.1 M/s. Pavithram Gold & Diamonds (GSTIN – 32ABKFM1298H1Z5) (hereinafter referred to as the “Appellant”) is a Partnership firm engaged in the retail business/sale of articles of precious metals such as Gold, Silver and Diamonds falling under Chapter 71.
1.2 During course of scrutiny of records of the Appellant by the Audit Group of Audit Commissionerate, Kochi for the period 01/2019 to 03/2021 as per Section 65 of the CGST Act 2017, one of the observations having revenue implication was the nonpayment of value and tax of inputs/services to suppliers within the stipulated period resulting in GST short-paid to the tune of Rs.7,66,446.
1.3 A show cause notice was issued which culminated in passing of Order in Original No 04/2022-23 dated 15/2/2023 by the Superintendent of CGST Adoor Range confirming the demand of Rs 766646 towards tax under section 74(1) of the CGST Act. Interest was demanded under section 50(1) of the CGST Act and penalty of Rs 766646 was also imposed under section 74(1) of the CGST Act.
1.4 The appellant filed an appeal before the first appellate authority who vide the impugned order in appeal rejected the appeal.
1.5 Aggrieved by the OIA, the appellant has filed this appeal before the Tribunal.
2. Submission of the Appellant
Shri Mohan George, Advocate appeared for the appellant and made the following submissions:
2.1 The appellate authority and adjudicating authority have not considered the agreement between the firms owned by both husband and wife.
2.2 Section 74 (1) is not sustainable for the reason that the charges of fraud or any willful-mis statement or suppression of facts to evade tax has not been established against the person to whom the notice was issued.
2.3 The appellant had paid Rs 2,50,000 towards the interest liability vide challan no AD 320926001371H dated 7/9/26 and they may be permitted to pay the balance interest in three instalments.
2.4 The penalty imposed may be deleted.
3. Submissions of the Respondent /AR
Shri Suresh S, AR AC appeared for the Revenue and made the following submissions:
3.1 Rule 37 of the CGST Rules, 2017 as it existed during the relevant period is reproduced below:
“(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice.”
3.2 In this connection attention is invited to the Explanation 2 of Section 74 of the CGST Act, 2017 which reads as follows:
“Explanation 2.- For the purposes of this Act, the expression “suppression” shall mean non declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.”
3.3 In the instant case the appellant though under an obligation to report the input tax credit that became ineligible due to the admitted non-payment of the value of supply along with tax payable to the supplier within 180 days from the date of issue of invoice by the supplier, in the output tax liability of the respective months in the statutory returns filed by them and pay the same along with interest, has failed to report the same in the returns filed by them and pay the amount and hence the provisions of Section 74 of the CGST Act has been rightly invoked to demand the amount with equal penalty.
4. Discussions and findings
4.1. We find that paragraph 12 of the OIA clearly records that:
the Appellant has remitted the sum of Rs.7,66,446/- (CGST Rs.3,83,223/- and SGST Rs.3,83,223/-) being the tax not paid in violation of the proviso to Section 16(2)(d) of the CGST Act, 2017 vide CPIN: 23053200079502 dated 17.05.2023, …
4.2 We also find that the appellant has not contested the interest liability and has produced a challan wherein part payment of interest has been made, with a request that he may be permitted to pay the balance interest in three instalments.
5. As such the only issue which remains to be decided is whether penalty is leviable under section 74 of the CGST Act in the instant case.
5.1 On perusal of the SCN it is seen that para 4.6 of the SCN reads as follows:
………Even though the details of inward supplies and payments made were available with them, they have not self-assessed the amount of eligible ITC and have not paid the amount equivalent to the proportional credit as detailed above. Thus it appears that the tax payer has wilfully suppressed the material facts with an intention to evade payment of tax. Hence the same is liable to be recovered from them in terms of section 74(1) of the CGST Act 2017 along with interest in terms of section 50(1) of the Act. Further by their contravention of the provisions of section 16(2) of the CGST Act 2017, the tax payer has rendered himself liable for penalty under section 74 of the CGST Act, 2017.
5.2 We find that the SCN has not specified as to what are the “material facts” willfully suppressed by the appellant / tax payer. To that extent we find that the SCN is vague and lacks specificity.
5.3 Further the SCN appears to suggest that mere contravention of provisions of section 16(2) would render the tax payer liable for penalty under section 74 of the CGST Act. However, this contention in the SCN is not backed by any statutory provision and we therefore find that mere contravention of section 16(2) would not automatically attract the provisions of section 74 of the CGST Act. This is evidenced by para 3.5 of the SCN itself (in the context of a different allegation of availment of ineligible ITC on invoices on which tax not paid) which reads as follows:
Further by their act of contravention of the provisions of section 16(2) of the CGST Act, ………. the taxpayer has rendered himself liable for penalty under section 73 of the CGST Act.
5.4 We therefore find that the assertion in para 4.6 of the SCN regarding mere contravention of section 16(2) rendering the tax payer liable for penalty under section 74 of the CGST Act has been contradicted in para 3.5 of the SCN itself wherein it is stated that contravention of section 16(2) renders the tax payer for penalty under section 73 of the CGST Act .
5.5 We therefore find that at the SCN stage itself, the applicability of section 74 of the CGST Act to the present case has not been established either in fact or in law and the proceedings in respect of penalty are therefore void ab initio.
5.6 We find support for our conclusion from the decision of the Honourable Supreme Court of India in the case of Commissioner of Central Excise vs M/S Brindavan Beverages (P) Ltd. And Ors on 15 June, 2007 AIR SCW 7747, 2007 (5) SCC 388, AIR 2007 SC (SUPP) 1212, (2007) 8 SCALE 549 wherein the Court held that:
The show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague, lack details and/or unintelligible that is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice.
5.7 Applying the above principles laid down by the Supreme Court, we find that in this case the SCN is vague, lacks details and does not cite the specific statutory provisions alleged to have been contravened. We find therefore that the proceedings are vitiated by this breach of the basic principles of natural justice and is therefore not sustainable.
6. We further proceed to analyze the findings in the OIA in this regard. We extract the findings in respect of penalty in the OIA Para (14 and 15) as follows and also provide our analysis with respect to each of the findings.
a. Finding 1:
I find that the violation of statutory provision was unearthed only when the audit conducted examination of records as per Section 65 of the Act. Therefore, there is a case of willful suppression by the Appellant which cannot be overlooked as Appellant was in possession of all the details of their purchase and they had full knowledge of the transactions.
Our analysis / comments:
At the outset we find that the ground that “this was a case of violation of statutory provision which was unearthed only during audit and therefore a case of willful suppression by the Appellant” is not found in the SCN and to the extent that the order in appeal has sought to introduce these fresh grounds not found in the SCN, it is not sustainable.
Be that as it may, we also find that just because the non-payment was discovered by audit, there cannot be an automatic presumption that there has been an act of willful suppression. If one were to accept this proposition, every case of detection by audit should automatically result in a case of proceedings under section 74. Clearly this is not a legally tenable proposition. We therefore find that the detection by audit alone cannot be a reason for invocation of penalty under section 74.
b. Finding 2:
I find that there is no evidence before me that would disprove the allegation that the contravention of the provisions was willful as Appellant had availed input tax credit without making the payment of value of supply and the applicable tax to its supplier deliberately suppressing the facts in violation of the proviso to Section 16(2)(d) of the CGST Act, 2017.
Our analysis and comments
We find that the appellate authority by holding that “there is no evidence to disprove the allegation that the contravention of the law was willful” seeks to reverse the burden of proof and place it on the appellant. We find that unless there is a clear-cut statutory provision to the contrary, burden of proof is always on the revenue and cannot be shifted to the appellant and in the present case no proof has been adduced by the revenue.
c. Finding 3:
“Suppression” is specifically explained to mean: non-declaration of facts or information which a taxable person is statutorily required to declare in the return, statement, report or any other document furnished under the Act. As the necessary ingredients for resorting to Section 74 exist and there is no case made out for inadvertent bona fide mistake by the Appellant, the determination of tax has to be done under Section 74 only.
Our analysis and comments:
We find that in terms of Explanation 2 to section 74 of the CGST Act, “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.
We find that the order in appeal while making a finding of suppression, has not specified the basis for the finding in terms of the statutory definition of suppression. In our view, any finding of suppression has to specifically establish:
(i) The non-declaration of specific facts / information
(ii) What was the return / statement / report / document wherein the appellant was mandated to provide this information and the provisions of the Act / Rules thereof.
We find that the appellate order has no reference to any of the above, and therefore the finding of suppression is not established and is not legally sustainable.
7. We find that though the arguments put forth by the learned AR have considerable force, these grounds are not to be found to be part of the SCN /OIO / OIA and the revenue cannot be permitted to introduce these new arguments / contentions at the second appellate stage before the Tribunal. We find that one of the fundamental principles of jurisprudence is that any show cause notice / adjudication order has to stand on its own merit and cannot be improved upon / embellished through submissions made by the Revenue at the second appellate stage before the Tribunal. We find support for our contention in the judgement dated 19/8/26 of the honourable Supreme Court of India in the case of M/s G.R. Infra Projects Limited Ratlam Versus The State of Madhya Pradesh & Ors. 2026 (8) TMI 1497 – SC – wherein the Court held as follows:
“4. Learned Counsel appearing for the appellant submits that the SCN is beyond the time of three years provided under Section 73 for determination of tax inter alia short paid, for any reason other than fraud, willful misstatement or suppression of facts. The learned Government Advocate, however, attempts to take us through the counter affidavit in which according to him the allegations of fraud and suppression of facts have been elaborated, justifying the proceedings under Section 74 and not under Section 73.
5. We refused to look at the counter affidavit on the trite principle that when an authority has issued a notice or an order, the requirements to make the notice or order valid should be contained in such notice or order and cannot be supplanted by a counter affidavit in Court, where the notice or order is alleged to be invalid for reason to non-application of mind, the requirements having not met and so on and so forth”.
8. In view of the categorical declaration of the legal position by the Supreme Court, we find that the submissions of the AR, howsoever meritorious, cannot help the revenue when no case is made out for invocation of penalty under section 74 of the CGST Act in the Show Cause Notice.
9. In view of the above findings and also in view of the fact that the appellant has contested only the levy of penalty under section 74 of the CGST Act, the following order is passed:
a. The Appellant is liable to pay the balance interest.
b. With respect to the levy of penalty under section 74 of the CGST Act, the appeal is allowed and the order in appeal is set aside, with consequent relief.
Order pronounced in open court on 8-10-2026.
