Drop SCN proceedings under Section 74 upon consideration of Taxpayer’s representation.
The Hon’ble High Court of Andhra Pradesh, in the case of M/s. The Cotton Corporation of India vs. Assistant Commissioner (ST) (Audit) (FAC) & Ors. [W.P. No. 1463 of 2025, judgment dated 05.02.2025], has reaffirmed the settled legal position that the prescribed periods of limitation under the GST Act are mandatory. The Court categorically held that no order can be passed beyond the statutory time limits laid down under the Act. Importantly, the Hon’ble Court emphasized that the issuance of a Show Cause Notice (SCN) within the prescribed timeframe is mandatory, and any delay in this regard is not condonable. Consequently, an SCN issued beyond the limitation period stipulated under the GST law is legally untenable and without effect (otiose).
Observation on Invoking Section 74 in Absence of Mandatory Conditions.
It is pertinent to note that the time period for issuance of SCNs under Section 73 of the CGST Act, including the extended timelines provided by notification no. 09/2023-CT dated 31.03.2023 and further by Notification No. 56/2023-CT dated 28.12.2023, for the financial years 2017–18 to 2020–21, has expired as on date.
In this context, it has been generally observed that proper officers are invoking Section 74, even in cases where the essential preconditions namely fraud, wilful misstatement, or suppression of facts to evade tax, do not exist. The proceedings under Section 74 provide an extended limitation period, which may be a driving factor for its invocation. However, it is well settled that the extended period of limitation under Section 74 cannot be applied in a mechanical or casual manner. The existence of the statutory ingredients is a jurisdictional prerequisite, and in their absence, invoking Section 74 would be legally unsustainable.
Remedy available to Taxpayer against invalid SCN under Section 74.
However, a taxpayer has the right to challenge the issuance of a SCN under Section 74—where the foundational conditions such as fraud, wilful misstatement, or suppression of facts are absent—by filing a Writ Petition under Article 226 of the Constitution of India before the jurisdictional High Court. The Hon’ble High Court is empowered to examine the validity of such SCNs and may quash the proceedings if found to be without jurisdiction or in violation of statutory provisions. It must be noted that the grant of relief is subject to judicial discretion and depends on the facts and circumstances of each case.
Mandatory pre-conditions for invoking Section 74(1) of the CGST Act.
It is pertinent to note that Section 74(1) empowers the proper officer to issue a SCN in cases “where it appears” that tax has not been paid or has been short-paid due to fraud, wilful misstatement, or suppression of facts with an intent to evade tax. However, this discretion is not unfettered. It is obligatory on the part of the proper officer to place on record specific material or evidence demonstrating how the taxpayer has allegedly committed fraud, wilful misstatement, or suppression of facts.
The Hon’ble Courts, in various judicial pronouncements, have consistently held that the extended period of limitation under Section 74 cannot be invoked in the absence of clear factual findings. Mere suspicion or presumptive inferences are not sufficient to attract the rigors of Section 74. There must be specific and unequivocal allegations of fraud, wilful misstatement, or suppression of facts with an intention to evade tax. Accordingly, the provisions of Section 74(1) can be validly invoked only when the non-payment or short payment of tax is directly attributable to such qualifying misconduct on the part of the assessee.
Judicial and Departmental clarification on invocation of Section 74(1) – Requirement of strong material evidence.
The Hon’ble Telangana High Court, in the case of M/s. Rays Power Infra Private Limited vs. Superintendent of Central Tax [W.P. No. 298 of 2024, judgment dated 28.02.2024], has categorically held that “Section 74 would get attracted only in the event of there 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.” This judgment reiterates the well-settled principle that mere procedural irregularities or unintentional errors cannot justify the invocation of Section 74.
In alignment with this judicial view, the Central Board of Indirect Taxes and Customs (CBIC) has issued Instruction No. 05/2023-GST dated 13th December 2023, following the decision of the Hon’ble Supreme Court in CC, CE & ST, Bangalore (Adj.) vs. Northern Operating Systems Private Limited [Civil Appeal Nos. 2289–2293 of 2021, judgment dated 19.05.2022].
The CBIC instruction clearly discourages the mechanical or casual invocation of the extended period of limitation under Section 74(1) of the CGST Act, and directs that specific allegations and cogent evidence must be present before resorting to this provision. It has clarified in respect to mechanically invoking extended period of limitation under section 74(1) of the CGST Act as under-
3.3- From the perusal of wording of section 74(1) of CGST Act, it is evident that section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.”
Show Cause Notice not conclusive – Opportunity of Hearing and Due process must follow.
It is also pertinent to note that the Hon’ble Allahabad High Court, in the case of M/s. Nsoft (India) Services Pvt. Ltd. vs. Purvanchal Vidyut Vitaran Nigam Ltd. [Writ – C No. 18052 of 2022, judgment dated 02.09.2022, paras 38 and 39], held that the mere issuance of a SCN by the proper officer does not automatically lead to an adverse order, nor does it necessarily infringe upon the rights of the taxpayer.
The Court emphasized that the taxpayer has the right to respond and rebut the allegations made in the SCN. It is the duty of the adjudicating authority to conduct a fair inquiry and pass a speaking and reasoned order, only after granting adequate opportunity of hearing and ensuring full compliance with the principles of natural justice.
The judgment further clarified that upon consideration of the taxpayer’s response and the outcome of the inquiry, the proper officer may either drop the proceedings or proceed to reject the explanation with valid reasons. If an order prejudicial to the taxpayer is passed, a fresh cause of action would arise, entitling the taxpayer to challenge such an order before the appropriate forum.
Requirement of Reasoned and Speaking Order under GST Law.
It is important to note that Section 74(9) of the CGST Act mandates that “the proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order.” This provision underscores the obligation of the proper officer to apply their mind to the taxpayer’s submissions before arriving at any determination.
In addition, Section 75(6) further reinforces this obligation by stipulating that “the proper officer, in his order, shall set out the relevant facts and the basis of his decision.” Thus, any order passed under Section 74 must be a reasoned and speaking order, reflecting due consideration of facts, evidence, and the taxpayer’s response, thereby ensuring transparency and adherence to principles of natural justice.
Duty of Proper Officer and right of Taxpayer under Section 74 proceedings.
Thus, it is the duty of the proper officer to clearly set out each and every allegation in the Show Cause Notice and to establish, with valid evidence, the existence of at least one of the three essential ingredients fraud, wilful misstatement, or suppression of facts with intent to evade tax before invoking Section 74 of the CGST Act.
The taxpayer has the right to object to such allegations and may request the authority to drop the proceedings, if such conditions are not fulfilled. It is imperative that the taxpayer be afforded a fair opportunity to deny the charges and establish their innocence. This is in keeping with the principles of natural justice, and the adjudication process must be conducted in a transparent and unbiased manner, culminating in a reasoned and speaking order.
Obligation to pass a Reasoned Order after considering Taxpayer’s objections.
The proper officer is duty-bound to consider the objections or representations filed by the taxpayer, as required under Section 74(9) of the CGST Act. Additionally, in line with Section 75(6), the proper officer must clearly set out the relevant facts, particularly those relating to fraud, wilful misstatement, or suppression of facts, and must base the final decision strictly in accordance with the law.
This principle was affirmed by the Hon’ble Madras High Court in M/s. The Chennai Silks vs. The Assistant Commissioner [W.P. No. 29104 of 2023, dated 12.10.2023], where the Court held that “once the assessee filed reply/objections pursuant to the show cause notice, it is the bounden duty of the Assessing Officer to pass a speaking order, providing reasons for rejection of the reply/objections raised by the assessee.”
Thus, passing a reasoned and speaking order is not a mere formality, but a mandatory requirement under the GST law, ensuring that the principles of natural justice are upheld in the adjudication process.
Right of representation and Burden of Proof under Section 74.
The taxpayer has a statutory right and opportunity to make a detailed representation, submit supporting evidence, and contest the allegations of fraud, wilful misstatement, or suppression of facts with intent to evade tax, as raised in the Show Cause Notice under Section 74 of the CGST Act.
Importantly, the burden of proof lies on the proper officer to establish the element of wilfulness in the alleged default. Mere procedural lapse or inadvertent error does not justify the invocation of Section 74.
Where the taxpayer’s representation and evidence adequately rebut the allegations, and there is no cogent material on record to establish fraudulent intent, it is incumbent upon the proper officer to drop the proceedings and withdraw the SCN, thereby ensuring compliance with the principles of fairness and natural justice.
Mandatory consideration of representation and power to drop SCN under Section 74.
Section 74(9) of the CGST Act expressly mandates that the proper officer must deal with each of the representations made by the taxpayer. Where the representations are not acceptable, it is mandatory for the officer to record specific reasons in relation to each allegation. If the taxable person is able to demonstrate, through their representation, that none of the three essential ingredients fraud, wilful misstatement, or suppression of facts with intent to evade tax are present, the proper officer is legally bound to drop the proceedings initiated under Section 74. It is a settled principle of law that no authority can act in an arbitrary manner, and any action taken must be reasoned and legally sustainable.
It has been observed in practice that when taxpayers file objections particularly contesting the invocation of the extended period of limitation some proper officers erroneously take the view that they lack the authority to drop the SCN. However, it must be clearly understood that the opinion formed by the proper officer regarding fraud, wilful misstatement, or suppression of facts is only prima facie, based on preliminary material, and not a final adjudication.
Therefore, it is the duty of the proper officer to objectively examine the taxpayer’s representation, and if it is established that none of the conditions under Section 74(1) are met, the officer is fully empowered and indeed obligated to drop the SCN and terminate the proceedings, in adherence to the principles of natural justice and statutory mandate.
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