Conversion of Section 73 notice to Section 74 demand order is invalid under Section 75(2).

By | July 24, 2026
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Conversion of Section 73 notice to Section 74 demand order is invalid under Section 75(2).

Conversion of Section 73 notice to Section 74 demand order is invalid under Section 75(2).

Issue

Whether an assessment order passed under Section 74 and the rejection of a Section 128A application are sustainable when the Show Cause Notice was issued under Section 73 without alleging fraud, wilful misstatement, or suppression.

Facts

  • SCN Issued Under Section 73: The Revenue issued a Show Cause Notice identifying three defects, primarily seeking the reversal of excess Input Tax Credit (ITC) due to a mismatch between GSTR-3B and GSTR-2A.

  • No Allegation of Fraud: The SCN did not contain any allegations of fraud, wilful misstatement, or suppression of facts with an intent to evade tax.

  • Discrepancy in Orders: The summary order bore a caption under Section 73, but the detailed assessment order invoked Section 74, confirming the demand for failure to substantiate the ITC claim.

  • Absence of Section 74 Ingredients: The core ingredients required to trigger Section 74 were absent from both the SCN and the case record.

  • Rejection Under Section 128A: The taxpayer’s subsequent application seeking benefit under Section 128A was rejected, leading to the challenge.

Decision

  • Mandate of Section 75(2): Under Section 75(2), since the essential elements of Section 74 were missing, the proceedings ought to have been initiated and concluded strictly under Section 73.

  • Orders Quashed: The assessment order passed under Section 74 and the order rejecting the application under Section 128A were set aside.

  • Remand: The matter was remanded for re-adjudication in accordance with the provisions of Section 73 [Para 6].

Key Takeaways

  • No Unilateral Escalation: Adjudicating authorities cannot convert a non-fraud SCN issued under Section 73 into a final demand order under Section 74 without explicitly alleging and establishing fraud or wilful misstatement.

  • Boundaries set by SCN: The nature of the SCN governs the scope and section under which the final order can be passed; authorities cannot travel beyond the grounds stated in the notice.

  • Protection of Section 128A Eligibility: Arbitrarily invoking Section 74 deprives taxpayers of statutory waiver schemes like Section 128A, making such procedural deviations legally unsustainable.

HIGH COURT OF MADRAS
WFB Baird and Company India (P.) Ltd.
v.
State Tax Officer
Senthilkumar Ramamoorthy, J.
WP Nos. 24237 & 24239 of 2026
WMP Nos. 26376 & 26378 of 2026
JULY  7, 2026
R. Anish Kumar for the Petitioner. R. Sethu Prabakaran, Government Counsel for the Respondent.
ORDER
1. Both order dated 08.12.2023 under Section 74 of applicable GST enactments and order dated 06.01.2026 rejecting the petitioner’s application under Section 128A of applicable GST enactments are challenged in these writ petitions.
2. Adverting to show cause notice dated 29.09.2023, learned counsel for the petitioner submits that said show cause notice was issued under Section 73. He also contends that the ingredients of Section 74 are not contained either expressly or in substance in said show cause notice. Turning to order dated 08.12.2023, learned counsel points out that the summary order records that it is an order under Section 73, whereas the detailed order makes a reference to Section 74 and a penalty of 100% was imposed. As a consequence, he submits that the petitioner’s application under Section 128A was rejected.
3. In response, Mr.R.Sethu Prabakaran, learned Government Counsel submits that an application under Section 128A is not maintainable in relation to an order issued under Section 74.
4. On perusal of the show cause notice dated 29.09.2023, it is evident that said show cause notice was issued under Section 73. The show cause notice deals with three defects. Out of said three defects, defect No. 3 was dropped in entirety and defect No.2 was confirmed with regard to a small demand. The confirmed tax proposal relates largely to defect No.1. In the show cause notice, the tax payer was called upon to show cause as to why the excess ITC should not be reversed. Said show cause notice records the ITC claimed under GSTR 3B by comparing the same with available ITC as per GSTR 2A. Beyond such comparison, there is nothing in the show cause notice that indicates that it appears that there was fraud or a wilful misstatement or even suppression of facts with an intent to evade tax.
5. The summary order is superscribed “order under Section 73”. The detailed order refers to the tax payer’s response to defect No.1. Thereafter, the order records that the burden of proof to establish a claim for ITC lies on the tax payer and that the tax proposal is being confirmed in view of the failure of the taxable person to prove the ITC claim. The ingredients of Section 74 are neither expressly nor impliedly contained in the said order.
6. Therefore, in terms of subsection (2) of Section 75 of applicable GST enactments, I conclude that the proceedings should appropriately have been initiated and concluded under Section 73 and not under Section 74. Consequently, the impugned assessment order is set aside and the matter is remanded for issuance of a fresh order under Section 73 of applicable GST enactments. As a corollary, the order rejecting the application under Section 128A is also set aside. Pursuant to the issuance of a fresh order under Section 73, it will be open to the petitioner to lodge a fresh application under Section 128A within the time limit prescribed in that regard.
7. These writ petitions are disposed of on these terms. Consequently, connected miscellaneous petitions are closed. No costs.