S.74 of GST Cannot Be Invoked when No Fraud Alleged: Madras HC Clarifies application of S. 74 [Read Order]

JusticeG.R. Swaminathan held that the extended limitation and penalty framework under Section 74 is applicable only when the taxpayer’s conduct meets the statutory threshold of deliberate wrongdoing.

The fact is that a surprise inspection was conducted at Neeyamo Enterprise Solutions Private Limited under Section 67 of the TNGST Act, 2017, following which the department issued show cause notices on 10 May 2024 identifying nine defects.

These notices culminated in orders dated 11 June and 18 June 2024 invoking Section 74, demanding tax, interest, and penalties. The petitioner did not file replies to the notices and approached the High Court after the orders were passed.

The Court noted that Section 73 governs cases of non-payment or short payment of tax without fraud, while Section 74 applies only when such non-payment occurs “by reason of fraud, wilful misstatement, or suppression of facts to evade tax.”

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For invoking Section 74, the show-cause notice must clearly articulate which of these elements is alleged, supported by material in the notice itself. The court said that the presence of these elements is a “jurisdictional fact”, failure of which vitiates the entire proceedings.

The Section 74 of the GST Act provides the mechanism for recovery of tax that has not been paid, short-paid, or erroneously refunded, or where input tax credit has been wrongly availed or utilized, by reason of fraud, wilful misstatement, or suppression of facts to evade tax. It empowers the Department to invoke an extended limitation period of five years (from the due date of the annual return) to issue a show cause notice, but only when such fraudulent or intentional conduct is alleged and supported by material.

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The provision also mandates that penalties equal to the tax amount may be imposed in such cases. Proceedings under Section 74 are thus conditioned on the existence of these “jurisdictional facts,” without which the extended period and the stringent consequences under the section cannot be applied.

The bench noted Supreme Court and High Court precedents including Tamil Nadu Housing Board, Raj Bahadur Narain Singh Sugar Mills, and Reliance Industries Ltd, saying that mere non-payment or short payment of tax does not constitute suppression or misstatement.

The Court also depended on a 2023 CBIC circular cautioning field officers against mechanically invoking Section 74 without evidence of fraud, noting that this circular binds departmental authorities.

The judge specifically observed that the show cause notices issued to the petitioner did not contain any allegation of fraud, wilful misstatement, or suppression of facts.

Further, the notices used the expression “determined” tax liability, which the Court found to indicate pre-determination, contrary to the statutory requirement that a notice merely “specify” the proposed tax demand.

“Section 74(1) of the Act talks about specifying the sum payable by the assessee in the show cause notice. In the case on hand, the authority has used the word “determined”. There is a ocean of difference between specifying something and determining something. The word “determined” found in the show cause notice cannot be construed as “specified”’, said the court.

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Additionally, the Court declined to follow a contrary view taken in a 2025 judgment, noting that it did not consider earlier precedents or the binding CBIC circular. The Court held that when the jurisdictional fact is absent, the matter cannot be remanded, the impugned orders must be quashed outright.

Accordingly, the Court quashed the show-cause notices and the reassessment orders issued under Section 74, holding that the provision “could not have been invoked against the petitioner.”

The Court clarified that the department is free to proceed under Section 73 if legally permissible. The writ petitions were allowed, and all connected miscellaneous petitions were closed.

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