Section 74 to 73 GST Conversion: Limitation, Penalty and Judicial Position

Summary: The article examines how a GST demand initiated under Section 74 of the CGST Act, 2017 for fraud, wilful misstatement or suppression may, where such allegations are subsequently found unproved by an Appellate Authority, Tribunal or court, be treated as a Section 73 non-fraud proceeding through Section 75(2), with the proper officer required to re-determine the liability. It analyses the procedural framework under Sections 73, 74, 75(2) and 75(3), including the independent two-year period for re-determination, the 2-year-9-month limitation filter prescribed by Circular No. 185/17/2022-GST, the proper-officer clarification under Circular No. 254/11/2025-GST, treatment of multi-year notices, and the substantial reduction in penalty following conversion. The article also discusses emerging judicial decisions on when conversion and remand are permissible and when Section 74 proceedings should instead be quashed outright, while highlighting the unresolved constitutional concern that Section 75(3) may effectively revive a demand after the ordinary Section 73 limitation has expired. It further explains the prospective Section 74A/Section 75(2A) regime from FY 2024-25, where the fraud/non-fraud distinction principally affects penalty rather than the demand track, and identifies continuing issues concerning Section 128A relief, payment-linked penalty benefits, expiry of the Section 75(3) re-determination period, and the constitutional validity of the independent limitation mechanism.

FROM FRAUD TO ORDINARY DEFAULT

SHOW CAUSE NOTICE UNDER SECTION 74 — WHEN AND HOW IT CAN BE CONVERTED INTO SECTION 73

A Concise Analysis of Sections 73, 74, 75(2) and 75(3) of the CGST Act, 2017, Circulars No. 185/17/2022-GST and No. 254/11/2025-GST, and the Emerging Judicial Position

Introduction

1.1. Proceedings under Section 74 of the CGST Act can be invoked only where short payment of tax or wrongful availment of ITC arises from fraud, wilful misstatement or suppression of facts, with intent to evade tax. Where this mens rea is alleged but not ultimately established at adjudication, before the Appellate Authority, the Tribunal, or a court — the demand does not automatically fail. Section 75(2) supplies a statutory bridge: it deems the Section 74(1) notice to be one under Section 73(1), shifting the proceeding from the fraud regime to the non-fraud regime, while Section 75(3) prescribes the time within which the re-determination must be completed. This article addresses, in turn, who may invoke the conversion and at what stage; the applicable time limit; how revised liability is computed where several financial years are bundled into one notice; and whether the mechanism survives constitutional scrutiny where it revives demands otherwise time-barred under Section 73.

Key Difference Between Sections 73 and 74

1.2. Both sections deal with the same default: tax not paid, short paid, erroneously refunded, or ITC wrongly availed. The distinction lies solely in fraudulent intent, which affects limitation and penalty. The comparison below applies up to FY 2023-24; Section 74A, applicable from FY 2024-25, is addressed separately below:

The Core Question: Can a Section 74 Notice Become a Section 73 Notice?

1.3. Yes, but only through Section 75(2), and only once a competent appellate forum — never the original adjudicating authority itself concludes that elements of fraud, suppression or wilful misrepresentation are not established. From the analysis of 75(2), it can be said that below four elements are necessary for conversion:

• An Appellate Authority, Appellate Tribunal, or court must conclude that fraud, wilful misstatement or suppression is not established (not the original adjudicating authority);
• The notice is then treated as issued under Section 73 automatically, by operation of law, without any fresh notice;
• The proper officer, not the appellate forum, must re-determine the tax payable; and
• Once triggered, all Section 73 parameters apply, including the 10% penalty cap.

1.4. Conversion is neither automatic nor discretionary. It arises only on an express finding that fraud is not established, not where the notice fails on purely procedural grounds such as improper service or denial of hearing, since the basis of unsustainability there is not the absence of fraud.

1.5. The rationale balances two objectives: protecting taxpayers from Section 74’s harsher consequences absent proven fraud, and preserving Revenue’s entitlement to recover tax genuinely due. Without Section 75(2), a failed Section 74 case would often collapse entirely even where liability subsists on an ordinary-limitation footing.

1.6. Pre-GST extended-period provisions carried no equivalent express deeming clause; courts reached similar outcomes only through interpretation and remand — as in Pushpam Pharmaceutical v. Collector of Central Excise [1995 (78) E.L.T. 401 (S.C.)], which confined suppression to deliberate withholding with intent to evade duty and remitted liability to the six months preceding the notice, and Continental Foundation Joint Venture v. CCE [2007 (216) E.L.T. 177 (S.C.)], which placed the burden of proving suppression on the Department. Section 75(2) now performs, by statute, what these decisions achieved through interpretation.

1.7. Section 75(3) requires the re-determination order to be issued within two years from communication of the appellate direction — a clock independent of, and running in addition to, the ordinary three-year limitation under Section 73(10), and measured from the date of the appellate direction, not the original SCN or order. This means a demand can be revived years after the ordinary Section 73 limitation has expired — the very feature that forms the crux of the constitutional controversy is examined below.

1.8. Two circulars fill the operational gaps. Circular No. 185/17/2022-GST confirms that this two-year re-determination window operates irrespective of Section 73(10) timelines, and introduces the 2Y9M filter: since a Section 73(1) notice must be issued at least three months before the three-year order deadline, its outer date is 2 years 9 months (2Y9M) from the GSTR-9 due date. Applying this analogy: if the original Section 74 notice issued within 2Y9M, re-determination is permitted; if issued after, the proceeding must be dropped entirely, since a Section 73 notice could never validly have been issued at that point. Where a single notice spans multiple years, each year is tested independently. To summarise, the following are the possible scenarios:

1.9. Circular No. 254/11/2025-GST confirms that the proper officer under Section 75(2) is the same adjudicating authority who issued the original Section 74 notice (not any other designated officer or Appellate Authority). GSTAT, in Sterling & Wilson v. Commissioner, Odisha (TMI 726 – GSTAT NEW DELHI dated 11/02/2026), confirmed that self-conversion by the Appellate Authority is not permissible. The correct route is remand back the matter to the original officer who is required to independently re-compute liability, subject always to the 2Y9M filter.

The Central Controversy: Reviving a Time-Barred Demand

1.10.The most litigated aspect of Section 75(2) is its interplay with ordinary Section 73 limitation: where a Section 74 proceeding was validly initiated, but fraud is later found not proved, can the Department still recover tax under Sections 75(2) and 75(3) even though the ordinary Section 73 limitation had expired long before the appellate finding?

Take FY 2018-19:

Illustrative sequence for FY 2018-19 where a Section 74 SCN had been issued, upheld at adjudication, but the fraud finding is later overturned in appeal:

*In this scenario, the Section 73 SCN deadline was 31/01/2024 and Section 73 Order deadline was 30/04/2024, both are expired by almost over 2-years. Yet, because Section 75(3) supplies its own independent two-year clock running from the date of communication of the appellate direction, the proper officer may lawfully pass a fresh order under Section 73 even though the ordinary limitation expired years earlier. This revival of a time-barred demand is precisely the feature now under constitutional challenge before the Gujarat High Court (discussed in blow).

On penalty, conversion favours the taxpayer almost entirely: the ceiling drops from 100% to 10% of tax (or Rs 10,000, whichever is higher), while the underlying demand survives, subject to the 2Y9M filter for multi-year notices. On a Rs. 1 crore demand, penalty falls from Rs. 1 crore to Rs. 10 lakh. For FY 2017-18 to FY 2019-20, it may also open the door to the Section 128A conditional waiver on the re-determined liability.

Judicial Pronouncements

1.11. The case law falls into two streams: One upholding the deeming fiction by directing fresh adjudication under Section 73 and the other declining to sustain the Section 74 proceeding altogether, without remand.

Decisions in favour of Section 75(2):

• Sterling & Wilson v. Commissioner, Odisha (TMI 726 – GSTAT NEW DELHI dated 11/02/2026): Tribunal affirmed Section 75(2)’s validity. Despite the Appellate Authority finding no fraud or suppression in a GSTR-1/3B mismatch case, it sustained the demand under Section 73 — a conversion the Tribunal upheld.
• Bhavani Tractor v. Union of India (No.- R/SPECIAL CIVIL APPLICATION NO. 13787 of 2024) (2025 (7) TMI 1702-*Gujarat HC):* The petitioner’s failure to formally offset available credit balance (later regularised via DRC-03) was held not to amount to suppression, ruling out Section 74. The Gujarat HC directed a fresh Section 73 order via Section 75(2), enabling eligibility for the Section 128A(1)(b) amnesty waiver.
• Muruganandam v. State Tax Officer (2025 (11) TMI 667 Madras HC): remitted to examine whether the proceeding should have proceeded under Section 73 via Section 75(2).

Decisions against invoking of section 75(2) thereby declining remand, closing proceedings outright:

• Manojbhai Dhirubhai Gondaliya v. Union of India [R/Special Civil Application No. 17608 of 2024 – Gujarat HC]: a direct constitutional challenge to Section 75(2) is pending before the Gujarat HC, unconditional stay has been granted.
• Safecon Lifescience v. Additional Commissioner [2026 45 Centax 232 (S.C.)]: fraud never alleged, genuine movement of goods/tax payment shown; closed outright, no remand. TaxGuru coverage.
• HCL Infotech v. Commissioner [(2024) 23 Centax 71 (All. HC)]: quashed an SCN with no factual foundation for the fraud allegation at all.

Constitutional Vulnerability

1.12. Section 75(2) itself is not the difficulty — converting a failed fraud case into an ordinary demand has pre-GST pedigree. The sharper issue is Section 75(3)’s independent two-year clock, detached from Section 73(10), which can produce different outcomes for identical taxpayers depending purely on how long their appeal took. The following open questions remain, pending Manojbhai Dhirubhai Gondaliya:

• Article 14: A provision with no fixed outer limit — one that keeps running only because litigation is ongoing — may be seen as arbitrary under Article 14.
• Article 265: Was Section 74 ever validly invoked, if fraud is never proved? Article 265 does not allow tax to be levied without proper legal authority.
• Natural justice: Does a changed statutory track after the event deny the taxpayer a fair hearing, since a fraud defence and an ordinary-demand defence call for different evidence and strategy?

The Section 74A Regime (FY 2024-25 Onwards)

1.13. Section 74A, applicable prospectively, dissolves the fraud/non-fraud bifurcation into a single provision with one limitation and one adjudicating track, so no notice-track conversion of the Section 75(2) kind is needed going forward. What it retains is a penalty differential: Section 74A(5)(ii) prescribes the higher, fraud-linked penalty, Section 74A(5)(i) the lower, non-fraud penalty. Section 75(2A), inserted by the Finance (No. 2) Act, 2024 – w.e.f. 1-11-2024, supplies the corresponding bridge: once an Appellate Authority, Tribunal or court finds fraud not established, the penalty converts from the 74A(5)(ii) rate to the 74A(5)(i) rate. The Section 75(3) clock and Circular 254’s proper-officer discipline apply equally to this penalty-only conversion.

Practical Notes for Appellate Drafting

1.14. At the appellate stage, the objective is rarely limited to disputing the underlying liability (often genuinely owed) — the key aim is to displace the fraud finding. This matters because doing so brings penalty exposure down from 100% to 10%, and may also open the door to Section 128A relief for earlier years. Grounds of appeal should argue in the alternative: first, that the notice is defective on its face with no factual foundation for fraud, inviting outright quashing without remand; and second, that even taking the Department’s allegations at their highest, the evidence does not establish intent to evade tax, inviting conversion under Section 75(2). Where remand appears likely, the appeal should specifically address the 2Y9M filter for each year involved, and, where the facts justify it, the Article 14 challenge should be raised as a reserved ground pending the outcome in Manojbhai Dhirubhai Gondaliya.

1.15. Issues That Remain Unsettled

Conclusion

1.16. The Section 74-to-73 conversion mechanism now sits on reasonably settled ground procedurally: Circular 185 fixes the 2Y9M outer limit, Circular 254 fixes the proper officer, and Section 75(2A) carries the same logic into the Section 74A regime. What remains open is whether Section 75(3)’s independent limitation clock can survive Article 14 and Article 265 scrutiny — a real challenge, but one to plead as a reserved ground, not a primary defence, pending Gondaliya. For early GST years, displacing the fraud finding and invoking Section 75(2) with Section 128A remains the single most financially significant lever in GST litigation.

1.17. The larger question which remains up for a legal debate is whether a demand notice issued originally u/s 74 within the 2Y9M period wherein the officer demanded the tax with serious allegations of fraud, later which proved to be misplaced, how can that notice be now deemed to be issued in section 73 which was never ever invoked, had it been invoked the taxpayer could have chosen to take refuge of its benevolent provisions of making the payment with much lesser interest and perhaps no or little penalty, but for the reason of allegations of fraud he chose to litigate. This issue of arbitrariness of the department in raising serious allegations being negated by section 75(2) is like a magic wand been handed over to them so that they can do what pleases them.

Author Name:

CA Jahanvi Chudasama	CA Nitesh Jain