CGST Act Section 74 Applicable for Willful Suppression of Sales to Evade Tax

Ayyappan Pillai Vs State Tax Officer (Kerala High Court)

In Ayyappan Pillai Vs State Tax Officer, the Kerala High Court examined the petitioner’s challenge against the invocation of Section 74 of the CGST/SGST Act. The petitioner was served with a show cause notice for alleged suppression of sales, resulting in tax evasion. The petitioner contested the use of Section 74, claiming the suppression was not willful, and that the notice was factually incorrect. However, the Court found that there were sufficient grounds to invoke Section 74, as discrepancies in stock and unaccounted sales pointed to potential tax evasion. Additionally, the Court dismissed the petitioner’s rectification request under Section 161, as he failed to provide necessary evidence. The Court rejected the petition, noting that disputed facts should be adjudicated by the relevant statutory authorities. Nonetheless, the period during which the petitioner sought rectification was excluded for calculating the limitation period for filing an appeal.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

The petitioner is a registered person under the CGST / SGST Acts. The petitioner was served with Ext.P3 show cause notice under Section 74 of the CGST Act calling upon the petitioner to show cause as to why certain proposals should not be finalized against the petitioner. The petitioner submitted Ext.P4 reply. After considering the reply submitted by the petitioner and after affording to the petitioner an opportunity of being heard, Ext.P5 order was issued by the 2nd respondent confirming the proposals in the show cause notice and finalizing a demand against the petitioner. The petitioner filed Ext.P6 application for rectification under Section 161 of the CGST Act, which was considered and rejected by Ext.Pio order. The petitioner is thus before this Court challenging Exts.P5 and Pio orders on various grounds.

2. The learned counsel appearing for the petitioner would vehemently submit that the principal ground of challenge is that there was no just cause or reason to invoke the provisions of Section 74 of the CGST / SGST Acts in the case of the petitioner. It is submitted that the wordings of Section 74 will suggest that it is not every suppression or misstatement that should lead to 2024:KER:72634 proceedings under Section 74 and unless such suppression or misstatement was willful and with the intention of evading tax, a proceeding under Section 74 cannot be justified in law. It is submitted that a reading of the show cause notice will show that one of the reasons mentioned for invoking Section 74 is that the petitioner is not a registered person. It is submitted that this is a factually incorrect statement. It is submitted that the reasoning in the show cause notice for invoking Section 74 of the CGST / SGST Acts in the case of the petitioner is obviously a cut copy paste from some other notice issued under Section 74 and has no relationship with the facts of the case in so far as it pertains to the petitioner. It is pointed out with reference to Ext.P5 order that there has been a complete misunderstanding of the factual situation and without actually verifying the stock and considering the explanations of the petitioner, a huge demand has been made on the petitioner. It is submitted that though the petitioner submitted an application for rectification to correct the obvious mistakes in Ext.P5 order, the rectification application was also mechanically rejected by Ext.Pio order. It is submitted that in such circumstances, Exts.P5 and Pio orders are liable to be set aside and the matter is liable to be remanded to the files of the 2^nd respondent for fresh adjudication, 2024:KER:72634 in accordance with the law. It is submitted that the proceedings are also liable to be quashed on the ground that there was no reason to invoke Section 74 of the CGST / SGST Acts.

3. The learned Government Pleader appearing for the respondents would vehemently oppose the grant of any relief to the petitioner. It is pointed out from the show cause notice as also from Ext.P5 order that there are sufficient justifications for invoking Section 74 of the CGST/ SGST Acts in the facts of the present case. Pertinently it is pointed out that certain documents which were stated to be ‘estimates’ were recovered which would show that the sales or part of it was not being accurately recorded by the petitioner leading to loss of revenue. It is submitted that there were discrepancies in the stock which would also show that there was unaccounted sales by the petitioner. It is submitted that the contention of the learned counsel for the petitioner that the invocation of Section 74 was on the basis that the petitioner is not a registered person is not correct as the 1st paragraph of the show cause notice itself refers to the petitioner as a registered person. It is submitted that the use of the word ‘registered’ in paragraph 46 of the show cause notice refers only to the failure to register the actual sales and suppression and not to the fact that the petitioner is an unregistered person. It is submitted that the petitioner did not even raised any objection before the officer that the provisions of Section 74 were wrongly invoked in the facts and circumstances of this case. It is submitted that even while considering the application for rectification, the Officer had asked for certain details and as can be seen from Ext.Pio, the petitioner failed to produce materials to justify any of the contentions taken by him leading to rejection of the application for rectification.

4. Having heard the learned counsel for the petitioner and the learned Government Pleader, I am of the view that the petitioner has not made out any case for grant of the relief sought for in the writ petition. A perusal of the show cause notice would indicate that there are several instances of suppression which have been pointed out in the show cause notice as a justification for invoking Section 74 of the CGST / SGST Acts. While the petitioner may have raised several contentions to show that the allegations are not correct to reach a conclusion the adjudication of disputed questions of fact will be necessary. It is for the petitioner to get his claim adjudicated by the statutory authorities under the CGST / SGST Acts. The procedure under Article 226 of the Constitution of India cannot be invoked to determine disputed questions of fact especially on account of the procedure adopted in this Court in respect of writ petitions under Article 226 of the Constitution of India. The petitioner has no case that the alternate remedy available to the petitioner is not effective including for adjudicating the question as to whether there was just cause or reason for invoking the extended period of limitation (under Section 74) in the facts and circumstances of this case. The learned Government Pleader is also right in contending that the Officer did not invoke the extended period of limitation on the ground that the petitioner was an unregistered person but on the ground of suppression of sales willfully for the purpose of evasion of tax. The wordings of Section 74 clearly indicates that in such circumstances, the provisions of Section 74 could be invoked. A reading of the Ext.Pio order indicates that though not within the scope of rectification, the Officer had called for further details from the petitioner and the petitioner failed to produce any further details for the purpose of considering the contentions taken in the application for rectification. For all these reasons, the writ petition fails and will stand dismissed.

However, considering the fact that Ext.P5 order was issued on 10.12.2023 and the petitioner had filed Ext.P6 application for rectification on 22.01.2024 and the fact that the rectification application was rejected only on 08.05.2024 and this writ petition was filed in the month of August 2024, I am of the view that the period from the date of filing of the rectification application till today can be excluded for the purpose of determining any period of limitation within which the petitioner had to file an appeal against Ext.P5 order. It is also clarified that no observation in this judgment will preclude the petitioner on raising a contention before the Appellate Authority that there was no just cause or reason for invoking the provisions of Section 74 of the CGST / SGST Acts.

The writ petition is ordered accordingly.