Proceedings can’t be initiated under Section 74 when tax liability is already discharged along with interest

Held by Hon’ble High Court of Telangana

In the case of

M/s Rays Power Infra Private Limited Vs Superintendent of Central Tax (Writ Petition No. 298 of 2024)

The petitioner is engaged in the business of generation of electricity through solar plants. The GST returns filed by the petitioner for the period of July, 2017 to March, 2019 were subject to audit. The petitioner was informed about tax liability during audit proceedings on account of wrong availment of ITC and ITC availed with respect to exempted supply. Upon receipt of initial audit observation, the petitioner discharged the entire tax liability alongwith interest. The final audit report was issued much after payment of GST liability. Post audit, the respondent issued show cause notice to the petitioner under Section 74 of CGST Act and confirmed the demand through DRC-07. The petitioner contended that it falls under purview of Section 73(1) and 73(5) of CGST Act and therefore, SCN under section 74 is not sustainable. Whereas, the respondent contended that this is the case of fraud and willful misstatement.

The Hon’ble High court held that the intention of Section 73(5) of CGST Act is very clear that if the taxpayer clears all the tax liability prior to issuance of SCN then the taxpayer shall not be liable to any additional tax by way of interest or penalty. Section 73 expects the taxpayer to clear all the tax liability at the earliest to avoid any stringent coercive recovery measures including imposition of penalty. The provisions of Section 73(1) are very exhaustive and intend to cover all unpaid or wrongly availed tax benefits. Further, Section 74 would come into play only if the conditions stipulated in Section 73 are not met by the taxpayer. The element of fraud or misstatement or suppression of fact would arise only if the taxpayer fails to meet the provisions of Section 73(5).

Therefore, the impugned order is liable to be set aside.

1. Facts of the case

M/s Rays Power Infra Private Limited (“The Petitioner”) is a company engaged in the business of generation of electricity through solar plants.
The GST returns filed by the petitioner for the period of July, 2017 to March, 2019 were subject to GST Audit.
The summary of the audit findings was communicated to the petitioner on 14.10.2021 and Petitioner accepted the findings and deposited the entire amount of tax, as mentioned in audit findings, alongwith interest.
The demand was made by the audit team on 28.10.2021 and final audit report was issued on 10.11.2021, post entire payment is made by the petitioner.
Despite the entire payment being made by the petitioner, the respondent issued a show-cause notice dated 20.04.2022 under Section 74(1) of the CGST Act.
The petitioner submitted a response to such SCN highlighting the facts that the entire amount mentioned in SCN has been discharged along with interest and the entire irregularly availed ITC has already been reversed. Therefore, requested for dropping of the show-cause proceedings.
However, the concerned GST authorities passed the impugned order confirming the demand raised.
Therefore, the petitioner filed the writ petition against the impugned order issued in Form GST DRC-01.

2. Legal Extracts

Relevant legal extracts of the law is reiterated below for ready reference:

“73. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful misstatement or suppression of facts

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized for any reason, other than the reason of fraud or any wilful mis statement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

…

(5) The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1) or, as the case may be, the statement under sub-section (3), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under subsection (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded.”

3. Contention of the Petitioner

The Petitioner made following submission:

As per Section 73(5) of CGST Act, the case of petitioner falls within the purview of Section 73(5) of CGST and therefore, impugned order is liable to be set aside.
The petitioner was given the initial findings of the audit on 14.10.2021 and after scrutinizing the same, the petitioner immediately cleared the entire tax payable with respect to ITC wrongly availed by the petitioner. The petitioner paid the entire interest amount on 28.10.2021 itself.
However, in the given case, the show cause notice was issued on 20.04.2022.
Therefore, the proceedings are covered by proviso to Section 73(5) of CGST Act.
Further, the authorities have wrongly initiated proceedings under Section 74 as the petitioner falls within the purview of proviso to Section 73(1) and 73(5) of CGST Act.

4. Contention of the Respondent

The Respondent contended that:

The given case is not a simple wrongful availment of Input Tax Credit. However, the same is a deliberate, willful act with an intention of evading tax. Therefore, the case falls under purview of Section 74(1) of CGST Act.
Also, There is a misstatement made by the petitioner and it was suppressed unless noticed during course of audit.
Further, this is not the case of inadvertence or ignorance on the part of petitioner while availing wrong ITC. Infact, the ITC was availed by the petitioner on certain ineligible supplies and in respect of taxable supplies and supplies which are otherwise exempted from GST.
Therefore, provisions of Section 74(1) were invoked and the impugned proceedings had been drawn.

5. Issue under Dispute

In the given case, The issue for consideration is when the petitioner has discharged the entire tax liability alongwith interest immediately upon the finding of the audit team. Can the proceedings be subsequently initiated under Section 74 of the CGST Act?

6. Findings and discussion by Hon’ble High Court

The Hon’ble High Court made following findings and discussions:

The fact to be considered that the petitioner has wrongly availment ITC in respect of certain exempted tax. Such a fact was highlighted in the provisional audit report served upon the petitioner on 14.10.2021.
The petitioner accepted the finding and discharged the tax liability immediately alongwith interest on 28.10.2021.
The final audit report was published on 10.11.2021 highlighting that the petitioner has cleared off all the tax liability alongwith interest.
The show cause notice was issued much thereafter on 20.04.2022.
Section 73(5) of CGST Act clear indicates that the intention of the law is very clear that if the assessee clears all the tax liability along with interest at any day, prior to the issuance of show cause notice, they shall not be liable for any further additional taxes by way of penalty or interest.
Further, as per joint reading of Section 73(1) and Section 73(5) would give a clear indication that Sub-Section (5) covers even those payments which have been cleared by the taxpayers which were otherwise termed as wrongfully availed ITC.
As per Section 73 of CGST Act expects the taxpayer to clear the unpaid tax or reversal of the wrongfully availed ITC at the earliest to avoid any stringent coercive recovery measures including imposition of penalty.
Section 73(1) of CGST Act mentions the liability of a taxpayer being in respect of:
- any tax that has not been paid; or
- any tax which is short paid
- any erroneously refunded
- ITC has been wrongly availed and utilised

for any reason other than fraud or willful misstatement or suppression of facts in order to evade payment of tax.

The provisions of Section 73(1) are very exhaustive and intend to cover all unpaid or wrongly availed tax benefits.
In the given case, the petitioner paid the entire tax liability alongwith interest on 28th october, 2022, which is much before the final audit report.
Therefore, the case of the petitioner would fall strictly under Section 73(5) and 73(6) of CGST Act. As per Section 73(5) and (6) of CGST Act, if a person has paid the amount of tax along with the interest, then the proper officer shall not initiate any further proceedings under Sub-Section (1) and all the proceedings shall be deemed to be concluded.
Further, the respondent has issued the show cause notice under Section 74(1) of CGST Act and not under Section 73(1).
In this matter, Section 74 would get attracted only when there are strong materials available on record to show that the petitioner had played fraud or there was any misstatement made by him and there being any suppression of fact.
Also, Section 74 would come into play only if the conditions stipulated in Section 73 have not been met by the taxpayer.
Section 73(8) also indicates that if necessary tax, as given under sub-section (1) and (3), is paid along with interest even after issuance of show cause notice, even then the penalty cannot be levied and the notice proceedings shall be deemed to have been concluded.
The element of fraud or misstatement or suppression of fact would arise only if the taxpayer fails to meet the provisions of Section 73(5). Therefore, the view of the respondent of bringing the petitioner within the purview of fraud, misstatement and suppression of fact would not be sustainable.

7. Final Order

The Hon’ble High court has held that:

Initiation of show cause proceedings under Section 74 and passing of the impugned order are in excess of respondent’s jurisdiction and the same deserve to be and are accordingly quashed.