Can GST Audit Team issue SCN u/s 74 after Completing Audit u/s 65 ? Here’s what you need to know

A common question in GST law is whether a tax officer can issue a Show Cause Notice (SCN) under Section 74 after completing an audit under Section 65 of the CGST Act, 2017. The answer is yes, but only if certain legal and procedural requirements are met.

This article explains the legal framework, recent court rulings, and practical implications of this issue.

Want a deeper insight into the Income Tax Bill, 2025? CLICK HERE

Direct Answer: Yes, With Conditions

An SCN under Section 74 can be issued after an audit under Section 65, only if the audit reveals serious issues such as:

• Fraud
• Willful misstatement
• Suppression of facts

These are the mandatory grounds to trigger action under Section 74.

Importantly, the audit report does not need to mention fraud directly. It only needs to show that tax was not paid, short paid, or wrongly claimed. The fraud or suppression allegation must be clearly made and supported in the SCN itself.

Legal Framework Overview

Section 65 – Audit

• Allows the Commissioner or authorized officer to audit registered taxpayers.
• Audit must be completed within 3 months, extendable to 6 more months.
• Audit findings must be communicated to the taxpayer within 30 days.
• Under Section 65(7), if the audit reveals unpaid taxes or wrong ITC claims, the officer may proceed under Section 73 or 74.

Section 74 – Fraud-Related Recovery

• Covers tax not paid or ITC wrongly claimed due to fraud, suppression, or misstatement.
• The officer can issue an SCN demanding tax, interest, and penalty.
• Time limits: SCN must be issued within 5 years from the due date of the relevant annual return. The notice must be issued at least 6 months before the 5-year deadline.
• Penalties range from 15% to 100% depending on when the issue is settled.

Judicial Precedents

1. In M/s. ABT Limited v. The Additional Commissioner of GST & Central Excise [2024 TAXSCAN (HC) 1068]

The Madras High Court clarified:

“There is nothing in the language of Section 65 to indicate that the audit report should contain such findings. On the contrary... the proper officer may initiate action under Section 73 or 74.”

The Court ruled that:

• Audit findings of unpaid or short-paid tax are sufficient to trigger action under Section 74.
• Fraud allegations can be included later in the SCN, not necessarily in the audit report.
• The SCN in question met all legal standards, and the writ petition was dismissed.

This ruling directly supports the position that post-audit SCNs under Section 74 are valid, provided they are jurisdictionally and procedurally sound.

2. Tvl. Raja Stores v. Assistant Commissioner (ST) [Madras High Court]

• Clarified that audits cannot be done on closed businesses, but Section 74 proceedings can still continue.
• The inability to audit under Section 65 doesn’t prevent issuing an SCN under Section 74 if other legal requirements are met.

3. Rays Power Infra Pvt. Ltd. v. Superintendent of Central Tax [2024 TAXSCAN (HC) 513, Telangana High Court] Held that once tax and interest are paid after audit but before issuing SCN, proceedings under Section 74 cannot continue.

Violation of Natural Justice Invalidates Orders

Many Courts have struck down SCNs and orders under Section 74 where:

• DRC-01A notice was not issued, or the SCN was uploaded to the wrong portal.
• The taxpayer’s reply was ignored, or no personal hearing was granted.
• Orders were passed before expiry of the mandatory 30-day window under Section 74A.

Related Sections: Quick Comparison

Section	Purpose	Does it allow SCN under 73/74?	SCN Time Limit
Section 61	Scrutiny of Returns	Yes	3 to 5 years (depending on type)
Section 65	Audit by Tax Authorities	Yes	Audit must conclude; SCN timeline applies
Section 74	Fraud-related Recovery	Yes	SCN within 5 years, issued 6 months before

Key Conditions for SCN After Audit

Requirement	Condition
Nature of Violation	Must involve fraud, misstatement, or suppression
Audit Link	Should arise from findings under Section 65
Time Compliance	SCN must be within 5 years of the annual return due date
Notice Period	SCN should be issued at least 6 months before expiry of the limitation period
Due Process	Audit findings must be shared within 30 days of audit completion

Recommendations for Taxpayers and Practitioners

• For Officers: Ensure the audit report is complete and findings are communicated within 30 days. If fraud is suspected, build a strong basis for Section 74.
• For Taxpayers: Don’t assume that absence of fraud in the audit report means no Section 74 action. Focus on replying in time and ensuring due process was followed.
• For Practitioners: Verify timelines, procedural steps, and sufficiency of fraud-related allegations before responding to or challenging an SCN.

Affective Ways Of Tax Planning for HUF, Partnership Firm and Will - CLICK HERE

Conclusion

A Show Cause Notice under Section 74 can be legally issued after a Section 65 audit, as long as the conditions of fraud, suppression, or misstatement are met. The audit does not need to state these grounds—the SCN must do so clearly and with evidence. Court rulings confirm this approach, while also emphasizing that procedural compliance is just as critical. Taxpayers and authorities alike must follow the prescribed steps to ensure legal validity and fairness.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates