When a Show Cause Notice (SCN) is issued under Section 74 of the Central Goods and Services Tax (CGST) Act, it indicates that the authorities believe there has been a tax shortfall due to fraud, collusion, wilful misstatement, or suppression of facts. Such notices can attract an extended period of limitation—up to five years—and impose steep penalties.
However, not every instance of non-payment or short payment of tax implies a deliberate attempt to evade liability. There are several legal grounds on which taxpayers can challenge a notice issued under Section 74 of the CGST Act. In this blog post, we will discuss four important grounds for challenging an SCN under Section 74, along with relevant judicial precedents.
Page Contents
1. Extended Period Without Proving Intention to Evade Tax
What the Law Says
Section 74 allows an extended limitation period of five years only when there is a clear presence of fraud, collusion, wilful misstatement, or suppression of facts, with an intent to evade tax. The onus lies on the department to prove the existence of these elements.
Key Judicial Decisions
- Gopal Zarda Udhyog v. Commissioner of Central Excise, 2005 (188) E.L.T. 251 (S.C.)
The Hon’ble Supreme Court held that each ground—fraud, collusion, wilful misstatement, or suppression of facts—requires a positive intention to evade tax.
It was held that mere non-payment of duty/tax is not enough to invoke the extended period. There must be a deliberate or wilful act to evade payment.
Practical Takeaway
If a taxpayer can show that the non-payment or short payment of tax was due to an inadvertent mistake, interpretational issue, or a bona fide belief rather than a deliberate attempt to evade, the extended limitation period under Section 74 may not be sustainable.
2. Absence of Pre-SCN Intimation (Form GST DRC-01A)
What the Law Says
Rule 142(1A) of the CGST Rules mandates that before issuing a notice under Section 74, the proper officer ought to issue Form GST DRC-01A to inform the taxpayer about the tax, interest, and penalty proposed. This form gives the taxpayer an opportunity to pay tax and possibly avoid the rigors of penalty and extended proceedings.
Key Judicial Decision
The Hon’ble High Court emphasized the procedural importance of issuing pre-SCN intimation in Form GST DRC-01A. Non-issuance of this form was held to be a significant procedural lapse.
Practical Takeaway
If you receive an SCN under Section 74 but did not receive Form GST DRC-01A prior to the notice, you can challenge the notice on grounds of procedural non-compliance.
3. Bunching of Multiple Periods in a Single Notice
What the Law Says
GST laws require year-wise or period-wise determination of liability. When authorities club multiple assessment periods together in a single SCN, they risk overshooting the limitation period if any particular period falls outside the permissible time limit.
Key Judicial Decision
The Madras High Court struck down the practice of “bunching” multiple years in a single SCN under Section 73 (similar principles apply to Section 74) when it caused some of those periods to exceed the statutory limitation. Separate adjudications were deemed necessary for each assessment year.
Practical Takeaway
If your SCN under Section 74 clubs multiple years/periods together, resulting in time-barred demands for certain periods, you can challenge the validity of such “bunching.”
4. Issue Involves Mixed Questions of Law and Fact (No Wilful Evasion)
What the Law Says
Sometimes, the dispute may hinge on interpretational ambiguities or classification issues—i.e., “mixed questions of law and fact.” In such scenarios, it may not necessarily amount to a wilful act or intent to evade.
Key Judicial Decisions
- J.S. Pigments Pvt. Ltd. v. Commissioner of CGST and Central Tax, Howrah, (2022) 381 E.L.T. 45 (Cal.)
- D.C.L. Polyester Ltd. v. Collector of Central Excise and Customs, Nagpur, (2005) 181 E.L.T. 190 (S.C.)
Both decisions reiterate that genuine interpretational errors or bona fide differences of opinion on taxability do not automatically translate into wilful evasion.
Authorities must prove the taxpayer’s deliberate intent to evade.
Practical Takeaway
If the crux of your dispute is a mixed question of law and fact—e.g., classification differences, rate disputes, or interpretational ambiguities—rather than a clear subterfuge, you can rely on these precedents to argue that the extended period and penal provisions should not apply.
Conclusion
Challenging a notice under Section 74 of the CGST Act requires a clear understanding of both procedural and substantive grounds. Key points to remember include:
1. Extended Period Requires Intent: Mere short payment is not enough—there must be proof of wilful intention to evade.
2. Procedural Safeguards: The absence of Form GST DRC-01A and procedural lapses in issuing the SCN can be vital grounds for challenge.
3. No Bunching: Each assessment period should be separately adjudicated to avoid time-barred demands.
4. Interpretational vs. Intentional: Where the issue is a mixed question of law and fact, it typically does not attract the stringent provisions of Section 74 unless deliberate evasion is proven.
By carefully examining the notice and citing relevant judicial decisions, taxpayers can mount a robust defense. However, each case is unique; seeking expert legal or tax advisory is essential to navigate the complexities of GST litigation effectively.