Remand to Reclassify Section 74 Orders as Section 73 Notices; Fresh Adjudication Ordered

Remand to Reclassify Section 74 Orders as Section 73 Notices; Fresh Adjudication Ordered

Issue

Whether adjudication orders passed under Section 74 (fraud/suppression) are sustainable when the assessee contends that the non-payment of tax was not due to fraud or willful misstatement, necessitating proceedings under Section 73 (non-fraud), and whether the matter should be remanded for re-determination under Section 75(2).

Facts

• The Action: The State Tax Officer issued notices and passed orders against the assessee, invoking Section 74 of the GST Act, alleging suppression of facts.

• Assessee’s Defense: The assessee argued that there was no element of fraud, willful misstatement, or suppression. Therefore, the extended period and higher penalty under Section 74 were inapplicable; the case should have fallen under Section 73.

• Payment Status:

  • FY 2017–18 & 2019–20: Tax dues were fully paid.

  • FY 2022–23: 50% of the tax dues were paid.

• Scope of Dispute: The assessee accepted the underlying tax liability (proven by payments) but confined the dispute solely to the invocation of Section 74 and the consequential levy of interest and penalty.

• Procedural Lapse: The Court noted that the orders were passed without an adequate response from the assessee and without properly considering whether the ingredients for Section 74 were actually met.

Decision

• The Madras High Court disposed of the writ petitions by remanding the matter to the Adjudicating Authority.

• Orders Treated as SCNs: The impugned orders were set aside and directed to be treated as fresh Show Cause Notices (SCNs).

• Section 75(2) Exercise: The Authority was directed to re-examine the matter specifically in light of Section 75(2) of the CGST Act.

  • Note: Section 75(2) mandates that if an appellate authority/court concludes that the charge of fraud/suppression (Section 74) is not established, the proper officer shall determine the tax payable as if the notice were issued under Section 73.

• Conditions:

  • The assessee must file a reply to the “deemed SCNs.”

  • The assessee must deposit the remaining balance of tax for FY 2022–23.

Key Takeaways

• • Section 75(2) is a Safety Net: This provision acts as a bridge. It allows a demand raised under the “fraud” section (74) to be sustained under the “normal” section (73) if the department fails to prove intent to evade, thereby saving the demand from being quashed entirely while reducing the penalty for the taxpayer.

• Strategic Litigation: By paying the tax and contesting only the “fraud” tag, the assessee aims to reduce the penalty from 100% (under Sec 74) to 10% or Nil (under Sec 73/Amnesty schemes).

• Access to Amnesty: Successfully converting a Section 74 demand to Section 73 is often the only way for taxpayers to access benefits under amnesty schemes (like Section 128A), which typically exclude fraud cases.

• Orders to SCNs: High Courts frequently convert final orders back into SCNs to restore the opportunity of hearing without annulling the proceedings.