Section 74 Order Quashed & Remanded as GSTR-1/GSTR-3B Mismatch Requires Section 73 Examination: Madras HC

Zyvana Integrated Services Pvt. Ltd. Vs Additional Commissioner of GST and Central Excise (Madras High Court)

The petitioner challenged Order-in-Original Nos. 19 to 21/2023-GST-ADC dated 31.05.2023, by which demands raised through three show cause notices were confirmed. The first show cause notice dated 30.06.2022 was issued under Section 74 for differences between Form GSTR-1 and Form GSTR-3B for March 2018 to March 2019. The second notice dated 04.08.2022 was issued under Section 73 for similar differences for April 2019 to March 2021. The third notice dated 12.12.2022 under Section 73 related to alleged wrongful availment of ineligible ITC for July 2017 to March 2018.

The writ petition challenged the impugned order insofar as it confirmed the imposition of 100% penalty under Section 74 in respect of the first show cause notice. The petitioner submitted that the order arose from the alleged failure to pay tax on outward supplies declared in GSTR-1 and the failure to file corresponding monthly returns in GSTR-3B. According to the petitioner, certain outward supplies were not reflected in GSTR-3B as several customers had not made payment against the invoices issued. The petitioner contended that all outward supplies had been correctly declared in GSTR-1 and there was no intention to evade tax.

The petitioner further submitted that the delay in filing GSTR-3B resulted from difficulties faced by the petitioner and could not amount to suppression of facts for invoking Section 74. It was also submitted that as and when payments were received from customers, the corresponding tax liability was discharged, which was acknowledged in the impugned order. The petitioner argued that once outward supplies had been disclosed in GSTR-1, failure to make a corresponding declaration in GSTR-3B did not by itself amount to suppression of facts with intent to evade tax under Section 74.

The petitioner also contended that for the succeeding period involving an identical default, the authorities had invoked Section 73. It was therefore requested that the Court exercise its discretion under Section 75(2) by treating the proceedings under Section 73 instead of Section 74. It was argued that once timely show cause notices had been issued under Section 73 for the subsequent period, invocation of Section 74 for the earlier period could not be sustained.

The respondent relied upon paragraph 26 of the impugned order, which stated that suppression included non-declaration of facts or information required to be declared under the GST law. The order recorded that tax had not been paid with intent to evade tax through suppression of facts and that penalty equal to the tax not paid would follow. It further recorded that the petitioner had collected GST along with rental amounts from clients, failed to remit the same, and failed to file GST returns on time, resulting in suppression that came to light during departmental investigation.

After considering the rival submissions, the High Court held that invocation of Section 74 could not be interfered with on the ground of procedural irregularity, as no procedural irregularities had been committed while passing the impugned order. The Court observed that the dispute related to the period from March 2018 to March 2021 and that, having correctly declared the value of outward supplies in GSTR-1, the petitioner was required to pay the corresponding tax in Form GSTR-3B within the prescribed period.

The Court, however, noted that Section 128A had been inserted by the Finance Act No. 2 of 2024, granting amnesty to registered persons against whom proceedings under Section 73 had been initiated, and that notifications had been issued to implement the scheme. The Court also noted that the amnesty was not available where proceedings had been initiated under Section 74.

Referring to the deliberations preceding the incorporation of Section 128A, the Court observed that they indicated the existence of several glitches resulting in delayed filing of returns and that amnesty had been granted in cases involving short payment of tax compared to the admitted liability declared in GSTR-1. On examining those deliberations, the Court held that the petitioner’s case could be examined under Section 73.

Accordingly, the High Court quashed the impugned order and remitted the matter to the respondent to reconsider the case afresh. The writ petition was partly allowed, the connected miscellaneous petitions were closed, and no costs were awarded.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

In this writ petition, the petitioner has challenged the Impugned Order-in-Original Nos.19 to 21/2023-GST-ADC dated 31.05.2023. By the Impugned Orders, the demands proposed in three Show Cause Notices dated 30.06.2022, 04.08.2022 and 12.12.2022 have been confirmed. Details of the demand confirmed are as under:

2. In this writ petition, the petitioner is aggrieved by the impugned order insofar as it confirms the imposition of 100% penalty under Section 74 of the respective GST enactment, in response to Show Cause Notice dated 30.06.2022, the demand proposed therein was confirmed by the Impugned Order-in-Original Nos.19 to 21/2023-GST-ADC dated 31.05.2023.

3. The Impugned Order-in-Original Nos.19 to 21/2023-GST-ADC dated 31.05.2023 have been passed on account of the alleged failure on the part of the petitioner to pay the tax output supply declared in GSTR-1 and on account of the petitioner’s failure to file the monthly returns in GSTR-3B for the above tax period. It is submitted that the petitioner did not declare a portion of the output supply in GSTR-3B, as several customers had not paid the amounts due to the petitioner on the invoices raised for the supply made by the petitioner as a supplier. It is submitted that the petitioner had adequately declared the outward supplies in GSTR-1 and that there was no intention to evade payment of tax.

4. It is submitted that the delay in filing GSTR-3B was purely on account of difficulties faced by the petitioner and such delay cannot amount to suppression of facts to invoke the jurisdiction under Section 74 for imposing a mandatory penalty.

5. Apart from this, it is submitted that as and when payments were received from customers, the petitioner discharged the corresponding tax liability, which is also not disputed.

6. In short, the learned counsel for the petitioner submits that once the tax payable towards the outward supplies were declared in GSTR-1, mere failure to make a corresponding declaration in GSTR-3B would not, by itself, amount to suppression of facts to evade tax within the meaning of Section 74 of the respective GST enactments. It is further submitted that the tax amount has already been fully paid on various dates, which has also been acknowledged in the impugned order.

7. Apart from this, the learned counsel for the petitioner further submitted that for the identical default committed by the petitioner for the succeeding period, the respondent had invoked the machinery under Section 73. Therefore, this Court may exercise its discretion under Section 75(2) by treating the proceedings under Section 73.

8. Therefore, the learned counsel for the petitioner submitted that once show cause notice has been issued in time for the succeeding period under Section 73 of the respective GST enactments, the invocation of Section 74 cannot be countenanced for the earlier period. Consequently, the proceedings under Section 79 are liable to be interfered with.

9. On the other hand, the learned Government Advocate for the respondent submits that, insofar as the imposition of penalty is concerned, paragraph 26 of the impugned order clearly justifies the same. The relevant portion of the impugned order is reproduced below:-

“ The term “ suppression” is specifically explained to mean non-declaration of facts or information which a taxable person is statutorily required to declare in the return, statement, report or any other document furnished under the Act or the rules made there under, or failure to furnish any information on being asked for, in writing, by the Proper Officer. Whenever tax is not paid or short paid or credit wrongly availed or utilized or erroneously refunded with an intent to evade tax by way of fraud, wilful misstatement, suppression of facts, the Proper Officer shall issue a notice for such amount along with interest as per Section 50 and penalty equivalent to the amount of tax specified in notice. Once it has been conclusively held that tax has not been paid with intention to evade by suppressing facts, penalty equal to tax not paid would follow as a natural corollary. The above discussions and findings prove beyond any doubt that the Taxpayer being well aware of their tax liabilities, collected rental amounts along with GST from their client but chose not to remit the same. They further did not file GST Returns in time thereby suppressing the fact of receipt of taxable income, which surfaced only owing to the investigation conducted by the department.”

10. It is therefore submitted that the order imposing the penalty under Section 74 of the respective GST enactments on the petitioner cannot be found fault with.

11. I have considered the arguments advanced by the learned counsel for the petitioner and the learned Government Advocate for the respondent.

12. The invocation of machinery under Section 74 in the given facts and circumstances of the case cannot be interfered with in this proceeding, as there are no procedural irregularities committed by the respondent while passing the Impugned Order-in-Original Nos.19 to 21/2023-GST-ADC dated 31.05.2023.

13. The dispute pertains to the period between March 2018 to March 2021. The liability to pay tax under the scheme had to be paid by the due date in the following month of supply of services or, as the case may be. Having correctly declared the value of outward supply in GSTR-1, it was incumbent upon the petitioner to have paid the tax for the corresponding month or the quarter, as the case may be, in Form GSTR-3B. Therefore,

14. However, it is noticed that Section 128A has been inserted by the Finance Act No.2 of 2024, whereby amnesty has been given to registered persons against whom the machinery under Section 73 was invoked. Notifications have also been issued to implement the scheme under Section 128A of the Act. At the same time, this amnesty scheme is not available to persons against whom the machinery under Section 74 has been invoked.

15. The deliberations that preceded the incorporation of Section 128A into the Act before the GST Council seem to indicate that there were several glitches which had resulted in the non-filing of returns on time. Furthermore, amnesty has been granted in cases involving the short payment of tax compared to the admitted tax liability in GSTR-1.

16. A perusal of the deliberations of the GST Council indicates that the case of the petitioner can be examined under the purview of Section 73 of the Act. Therefore, the impugned order is quashed, and the case is remitted back to the respondent to redo the exercise afresh.

17. Accordingly, this Writ Petition stands partly allowed. Consequently, connected miscellaneous petitions are closed. No costs.