Introduction: Encountering audit objections demanding penalties can be challenging for taxpayers. This article delves into scenarios where penalties are proposed despite no fraud or suppression of facts. By exploring relevant sections and court rulings, we shed light on the implications for taxpayers facing such demands.
Let’s take a hypothetical situation normally occurring during the course of audit- One of the audit objections pointed out is a simple case of wrong/ excess availment of ITC for the period, say- 2017-18. The said observation is accepted by the TP. But when the official communication is received from the Audit Officer demanding the wrong/ excess availment of ITC, the officer, in addition to demanding the said ITC and interest payable thereon, also points out the provision of Section 74(5) of the GST Act and suggests the TP, to pay penalty @15% in terms of the said provision along with payment of the said ITC amount + Interest, in order to get the benefit of waiver of SCN and thereby concluding the proceedings in the said matter.
It’s clear that in simple cases of wrong/ excess availment of ITC due to clerical mistake or oversight, normally, demand notice cannot be issued in the said matter under the provision of Section 74 as the same has not been availed by reasons of fraud or any wilful mis-statement or suppression of facts, one of which is a pre-requisite for issuance of SCN under the provision of Section 74(1). In other words, SCN, if at all, is to be issued in the said case, has to be in terms of Section 73(1) of the GST Act, which cannot be issued, being beyond the normal limitation period, if it is pertaining to the period of 2017-18 and 2018-19 [The time limit for issuance of SCN in terms of Section 73(1) for the period of 2017-18 and 2018-19 is 30.9.2023 and 31.1.2024 (extended date in view of notification no. 56/2023 dt. 28.12.2023) respectively].
In terms of Section 73(5) of the GST Act, the TP can avail the benefit of waiver of issuance of SCN, if he pays the tax demanded along with interest and informs the Audit officer in writing of such payment. In other words, no penalty is payable in such cases, if the TP pays the tax amount along with interest payable thereon. However, invariably, as already pointed out, the Audit officer, most of the time, in such cases, will point out the provision of Section 74(5) instead of Section 73(5) in order to suggest to the TP that he can get the benefit of waiver of SCN in the matter only if he pays the tax demanded along with interest and Penalty @15%. The Audit Officer, in most of the cases, also issues SCN under the provision of Section 74(1) proposing imposition of penalty, even in those cases where the TP pays the tax demanded along with interest before issuance of SCN.
TP’s can relate to many such audit observations being raised against them, wherein the tax default pointed out is not due to reasons of fraud or any wilful mis-statement or suppression of facts, but invariably departmental officers in order to recover penalty in such cases, despite the TP having paid the differential tax demanded along with interest, issues SCN in terms of Section 74(1), most of the time. This is the general practice being followed by Audit officers, particularly for tax involved for the period beyond the normal limitation period, wherein only the provision of Section 73 can be invoked.
In a similar case before the Telangana High Court [Petition filed by M/s. Rays Power Infra P Ltd.- WP NO. 298 OF 2024- ORDER DT.28.2.2024], during the course of Audit,
i) Audit findings was pointed out to the TP on 14.10.21. The findings related to –
a) Irregularly availed ITC on ineligible supplies;
b) Irregularly availed ITC on common input services used for providing taxable as well as exempted supplies; and
c) Demand for interest payable, in terms of Section 50 of the GST Act.
ii) The period involved was from July 2017 to March 2019.
iii) The entire tax involved was immediately paid along with interest.
iv) Demand was made on 28.10.21.
v) FAR issued on 10.11.21. In the FAR, the auditors have accepted the payment made by the petitioner.
vi) Despite the entire payment being made, department issued SCN dated 20.4.22 under Section 74(1) of CGST Act.
vii) Reply dated 4.9.23 filed highlighting the fact of payment of the entire tax amount along with interest and thereby requesting for dropping of the proceedings initiated vide the said SCN.
viii) Order passed confirming the demand and imposition of penalty under the provision of Section 74, which led to the filing of the subject WP.
During the course of deliberation on the matter, the Hon’ble HC made the following observations-
“ Admittedly in the instant case, the show cause notice was issued on 20.04.2022, however, during the course of the audit itself certain discrepancies were pointed out by the audit team. Even much before of the final audit report being published, the petitioner is said to have paid the entire tax liability along with the updated interest on 28.10.2022. In the said circumstances, we are of the considered opinion that the case of the petitioner is one which that would fall strictly under Sub-Sections (5) and (6) of Section 73 where it has been emphatically laid down by the law makers that any person chargeable with tax, if he pays the amount of tax along with the interest payable there on, proper officer upon receipt of such information shall not initiate any further proceedings under Sub-Section (1) and all the proceedings shall have to deemed to be concluded.”
“this Court is of the firm view that Section 74 would get attracted only in the event of their being strong materials available on record to show that the petitioner had played fraud or there was any misstatement made by him and there being any suppression of fact.”
“ We are also of the considered opinion that applicability of Section 74 would come into play only if the conditions stipulated in Section 73 has not been met with by the taxpayer i.e. to say in the event if the conditions stipulated in Sub-Section (5) of Section 73 is not honored by the taxpayer in spite of the tax liability being brought to his knowledge. Then in the said circumstances, Section 74 would automatically attract..”
“The attempt of the learned Senior Standing Counsel trying to bring the conduct of the petitioner within the purview of fraud, misstatement and suppression of fact would not be sustainable and the said contention stands negated by the Bench simply for the reason that Sub-Section (1) of Section 73 permits a taxpayer to even clear wrongly availed I.T.C. and also wrongly utilized I.T.C. and it is this what is alleged against the petitioner of having wrongfully and irregularly availed I.T.C.”
“In view of the same, we are of the considered opinion that the action on the part of the respondents in initiating the show cause proceedings under Section 74 and passing of the impugned order dated 15.11.2023 both would be in excess of their jurisdiction and the same therefore deserves to be and are accordingly set-aside / quashed.”
The above quoted HC observations, particularly para nos. 3 and 4, appears to be on a wrong footing. The said paras imply that unless there is a clear-cut case of suppression/ fraud etc., in cases of wrongly availed ITC, in case the same is pointed out to the TP but the said ITC amount is not squared off by the TP along with interest in terms of Section 73(5), then in the said circumstances, Section 74 would automatically get attracted.
From a perusal of the provisions of Section 73 and 74 of the CGST Act, it’s clear that the only factor that decides the invocation of the provision of Section 73 or 74 of the Act is determined by the fact as to whether the wrongly availed ITC/ short paid tax/ non-payment of tax is due to reasons of fraud or any wilful mis-statement or suppression of facts. If it has occurred due to the said reasons then Section 74 can be invoked or else if it is due to other reasons, then, only the provision of Section 73 becomes applicable.
Now, in the discussed HC case, let’s assume that the petitioner, even after being brought to his knowledge, the tax liability in the form of the wrongly availed ITC, does not pay the ITC amount along with interest. In other words, he has not honoured the provision of Section 73(5). Does that imply that the provision of Section 74 would automatically get attracted, in such case?.
The answer to the above is a simple NO. Once a notice is issued to the TP, in terms of Section 73(5) demanding tax and interest and if he honours the provision of Section 73(5) ie. he pays the tax demanded along with interest and informs the proper officer in writing, then in terms of Section 73(6) he can get the benefit of waiver of issuance of SCN in the matter. If he does not honour the provision of Section 73(5) ie. he does not pay the tax demanded along with interest, then the department has the only option of issuing SCN in terms of Section 73(1), as also prescribed vide sub-section (7) to Section 73 and the maximum penalty that can be demanded on the TP is 10% of the tax amount of ten thousand rupees, whichever is higher.
The provisions of Section 74 are more or less parallel to the provisions of Section 73 with some changes related to the penalty factor. In terms of the parallel provision of Section 74(5), if the TP pays the amount of tax + Interest and 15% penalty and informs the proper officer in writing, then in terms of Section 74(6), the TP can get the benefit of waiver of SCN. In a case before the Hon’ble Allahabad HC, [YASH BUILDING MATERIALS-WP NO. 1435 OF 2022-ORDER DT. 31.1.24], a notice was issued to the petitioner, under the provision of Section 74(5) demanding tax with interest and penalty. In the said case, without issuing SCN, demand order was issued to the petitioner. It was rightly observed by the Hon’ble Court that “upon non-payment of the tax, Section 74(7) of the Act would come into play and the proper officer is required to give a notice under Section 74(1) of the Act. This procedure, that is to be followed, was not followed and no show cause notice was issued to the petitioner. From the above factual matrix, it is clear that proper show cause notice was not issued to the petitioner, and therefore, all the orders impugned herein are without any basis of law. In my opinion, the impugned orders are required to be set aside”.
Similarly, applying the ratio to the parallel provision of Section 73, it could be said that in the event that the conditions stipulated in Sub-Section (5) of Section 73 is not honored by the taxpayer in spite of the tax liability being brought to his knowledge, the next step in such case is issuance of SCN under Section 73(1), as prescribed vide sub-section (7) of Section 73. In other words, the provision of Section 74 does not get automatically attracted in case the provision of Section 73(5) is not honoured. [I have already discussed the process flow for issuance of SCN, in my earlier article on the said topic, which may be referred to, if required.]
Further, it was specifically pointed out that applicability of Section 74 would come into play only if the conditions stipulated in Section 73 has not been met with by the taxpayer. In my personal viewpoint, Section 74 is in no way dependent on the fulfilment of the conditions in Section 73. Once it is established that the short payment/ non-payment/ wrong availment of ITC is due to reasons other than by reason of reasons of fraud or any wilful mis-statement or suppression of facts, then, only the provision of Section 73 becomes applicable. As already pointed out, the provision of Section 74 will not come into play even if the TP fails to pay the differential tax amount + Interest, on being brought to its notice. The only option is to issue SCN in terms of Section 73(1) and proceed further in terms of the provisions of Section 73.
SUMMARISATION –
Coming back to the scenario wherein Audit officer points out a simple case of excess/ wrong availment of ITC/ short payment/ non-payment of tax which has occurred due to clerical mistake or oversight and is not due to reasons of fraud or any wilful mis-statement or suppression of facts and further, let’s say the period involved is 2017-18 and 2018-19, it may be noted that in such cases and for the said period involved, SCN cannot be issued in terms of Section 73 as it beyond the time limit prescribed thereunder for issuance of SCN under the said provision. The same is equally applicable to demand raised as an outcome of other proceedings like scrutiny of returns and assessment.
SUGGESTION – The TP, may, in such cases, if he prefers to, pay the tax involved along with interest. However, if the department insists on payment of Penalty, the response should be a BIG NO
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