Section 74 Proceedings Quashed: Specific Allegation of Fraud in SCN is Mandatory

Section 74 Proceedings Quashed: Specific Allegation of Fraud in SCN is Mandatory

Issue

Whether the extended period of limitation under Section 74 of the CGST Act can be validly invoked when the Show Cause Notice (SCN) fails to explicitly charge the assessee with fraud, willful misstatement, or suppression of facts with the intent to evade tax, and instead uses language indicating a pre-determined liability.

Facts

• The Notices: The Commercial Tax Officer issued Show Cause Notices (SCNs) to the petitioner, Neeyamo Enterprise Solutions (P.) Ltd.

• The Charge: The notices proposed demands under Section 74 of the CGST Act, which allows for a longer limitation period (5 years) but requires the presence of fraud or intent to evade.

• Defects in SCN:

  • The SCNs did not contain any clear allegation of fraud, willful misstatement, or suppression of facts.

  • They did not present specific evidence or material to support such serious charges.

  • The text of the notices used definitive terms like “determination,” suggesting that the liability had already been decided before the reply was even considered.

• Assessee’s Default: The petitioner did not file a reply to these notices. Consequently, the officer passed orders confirming the demand under Section 74.

Decision

• The Madras High Court ruled in favour of the assessee and quashed the SCNs and the consequential orders.

• Sine Qua Non: The Court held that the existence of fraud, willful misstatement, or suppression with intent to evade tax is a sine qua non (absolute necessity) for invoking Section 74. These conditions are mandatory jurisdictional facts, not optional descriptions.

• Foundational Defect: Since the SCNs failed to level these specific charges or provide supporting material, the foundation for invoking the extended limitation period was missing.

• Pre-Determined Mind: The use of the word “determination” in the SCN revealed a mindset of pre-decided liability, violating the principles of natural justice which require a notice to be neutral and open to explanation.

• Non-Response Irrelevant: The Court clarified that a taxpayer’s failure to reply does not empower the officer to invoke Section 74 automatically. The statutory conditions for fraud must exist independently of the taxpayer’s participation.

• Liberty Granted: While quashing the Section 74 proceedings, the Court gave the authorities liberty to re-initiate proceedings under Section 73 (normal limitation period), if the law permits.

Key Takeaways

• Specific Charge is Vital: Tax authorities cannot use Section 74 as a “catch-all” provision to bypass limitation periods. The SCN must explicitly state what fraud was committed and how.

• Drafting of SCN: An SCN must effectively be a “Show Cause” notice, not a “Final Order.” Language that suggests the demand is already confirmed (like “determined”) renders the notice void for bias.

• Section 73 vs. Section 74: If the department fails to prove the “intent to evade,” the proceedings must fall back to Section 73. This significantly reduces the penalty (from 100% to 10%) and shortens the limitation period (from 5 years to 3 years).

• Silence $\neq$ Guilt: A taxpayer’s silence (non-reply) cannot cure a defective notice that lacks the jurisdictional ingredients of fraud.