The Allahabad High Court has ruled that before initiating proceedings under Section 74 of the Goods and Services Tax (GST) Act, 2017, the adjudicating authority must record prima facie satisfaction that the assessee wrongfully availed input tax credit (ITC) due to fraud, willful misstatement, or suppression of facts. This ruling aims to prevent arbitrary or excessive initiation of Section 74 proceedings by ensuring that the authority follows a proper legal framework.
Background of the Case
The case, HCL Infotech Ltd v. Commissioner, Commercial Tax And Another, dealt with ITC that was allegedly wrongfully claimed during the transition from the Service Tax regime to the GST regime. HCL Infotech Ltd., which was registered under the erstwhile Service Tax laws in Uttar Pradesh, had availed CENVAT Credit for various input services. As of July 1, 2017, when GST came into effect, the company transferred its unutilized CENVAT Credit amounting to ₹ 5,47,57,755 into the GST regime.
The petitioner was issued a notice under Section 61 of the Uttar Pradesh Goods and Services Tax (UPGST) Act, alleging discrepancies in its return for the financial year 2017-18. After a response from the petitioner, a show cause notice under Section 73 of the Act was issued, demanding ₹ 5,76,12,310 along with interest and penalties. Upon consideration of the petitioner’s reply, proceedings were dropped.
However, a fresh show cause notice was subsequently issued under Section 74 of the Act for the same set of facts, which prompted the petitioner to challenge the notice under Article 226 of the Constitution.
Court’s Observations
The bench comprising Justice Shekhar B. Saraf and Justice Manjive Shukla emphasized the distinction between Sections 73 and 74 of the Central Goods and Services Tax (CGST) Act. Section 73 covers cases involving wrongful ITC availment for reasons other than fraud, willful misstatement, or suppression of facts. In contrast, Section 74 applies when such actions are taken with fraudulent intent or by willfully providing misleading information.
The Court ruled that after Section 73 proceedings are closed, initiating a new proceeding under Section 74 requires that the adjudicating authority explicitly record their prima facie satisfaction that the wrongful ITC claim resulted from fraud, willful misstatement, or suppression of facts. Without this satisfaction, Section 74 proceedings lack jurisdiction.
Implications of the Verdict
This verdict has significant implications for GST administration in India. By mandating that authorities record a prima facie finding of fraud or willful intent before initiating proceedings under Section 74, the Court ensures greater scrutiny over show cause notices, preventing undue harassment of taxpayers. Authorities must follow the legal framework to initiate proceedings, which can provide businesses and taxpayers with a sense of security against unwarranted tax demands.
The Court highlighted that while a writ petition under Article 226 of the Constitution is usually not permissible against a show cause notice, exceptions can be made when a notice is issued without jurisdiction—as was the case here. Therefore, this ruling not only protects taxpayers but also upholds the sanctity of the rule of law.
Takeaway for Taxpayers
This judgment underscores the need for taxpayers to ensure that they respond thoroughly to any show cause notices, and they can challenge further actions if authorities do not follow proper procedures. The Court’s decision reaffirms the principle that tax authorities must provide valid reasons, backed by prima facie satisfaction, to justify reopening or escalating proceedings.
Tax professionals should closely examine the procedural requirements in the event of similar notices under Section 74 of the GST Act, particularly in cases where earlier proceedings under Section 73 have already been concluded.
Image Idea: A legal gavel and books with a backdrop of GST-related documents, symbolizing the adjudicating authority’s role in GST disputes.