SC stays Section 74 proceedings, finding SCN prima facie unclear on fraud or wilful-misstatement

SC stays Section 74 proceedings, finding SCN prima facie unclear on fraud or wilful-misstatement

Issue

Whether a Show Cause Notice (SCN) issued under Section 74 of the CGST Act can be sustained if it fails to explicitly disclose the “material particulars” and basis for alleging fraud or wilful misstatement, even if the Department claims such details exist in a separate investigation report or draft notice.

Facts

• The Demand: The petitioner (GR Infra Projects Limited) was issued a Show Cause Notice dated 13.06.2025 demanding approximately ₹1.52 Crores. The allegations primarily concerned discrepancies between GSTR-3B and E-way bills (inter-state supplies) and ineligible ITC claims for a site office.

• Petitioner’s Grievance: The petitioner argued that the SCN was vague and mechanical. It contained only figures and tables without identifying specific transactions, modus operandi, or evidence of “fraud” or “wilful misstatement” required to invoke the extended limitation period under Section 74.

• High Court’s Stance: The Madhya Pradesh High Court (in W.P. No. 40749 of 2025, decided on Oct 29, 2025) refused to quash the SCN. The High Court justified the notice by referring to a 191-page draft notice/report stemming from a prior Section 67 search/inspection, which ostensibly contained the detailed material. The HC held that once a Section 74 notice is issued, the writ court should not adjudicate on the sufficiency of fraud allegations, as these are factual determinations for the adjudicating authority.

• Supreme Court Appeal: Aggrieved by the High Court’s refusal to interfere, the petitioner approached the Supreme Court, contending that the impugned SCN itself was bereft of reasoning, depriving them of a meaningful opportunity to defend themselves.

Decision

• Prima Facie Observation: The Supreme Court observed that the Show Cause Notice appeared to be “bereft of material particulars.” It noted that the notice merely cited figures without disclosing the specific basis or “foundational averments” for alleging fraud or wilful evasion.

• Defect in Notice: The Court emphasized that for a notice under Section 74 to be valid, it must clearly disclose the material relied upon to establish the grave charges of fraud or suppression. A “meaningful opportunity to defend” is denied if the notice is vague, even if the Department possesses a detailed internal file or draft report that was not part of the SCN.

• Stay Granted: Consequently, the Supreme Court stayed further proceedings pursuant to the SCN.

• Notice Issued: The Court issued notice to the Revenue, returnable in four weeks, to explain why the SCN should not be quashed for lacking the necessary jurisdictional ingredients.

Key Takeaways

SCN Must Be Self-Contained: A Show Cause Notice under Section 74 cannot be a “fill-in-the-blanks” document. It must inherently contain the specific grounds, evidence, and “material particulars” of fraud. It cannot rely on external reports or draft notices that were not explicitly made part of the final charge to cure its vagueness.

Jurisdictional Fact: Allegations of fraud, wilful misstatement, or suppression are “jurisdictional facts” for invoking Section 74. If the SCN fails to plead these facts specifically, the assumption of jurisdiction under Section 74 is prima facie invalid.

Writ Jurisdiction: While High Courts are generally reluctant to interfere at the SCN stage, the Supreme Court’s intervention clarifies that vague notices violating natural justice (by preventing an effective reply) are a valid ground for writ remedy.