Allahabad High Court quashes Section 74
CGST notice for lack of fraud allegations, leaving room for fresh proceedings
with proper jurisdiction.
By Yogesh Verma (CS/ LLB) / 2 min. read / GST Case Law
Case Analysis: HCL
Infotech Ltd vs. Commissioner, Commercial Tax and Another
Case Title: HCL Infotech Ltd vs. Commissioner, Commercial Tax and
Another
Case No.: Writ Tax No. 1396 of 2024
Date of Order: 27th September 2024
Court: High Court of Judicature at
Allahabad, Court No. 40
Judges: Hon'ble Shekhar B. Saraf, J. and
Hon'ble Manjive Shukla, J.
Neutral Citation No.: 2024:AHC:158274-DB
Background and Facts
of the Case:
HCL Infotech Ltd, a public limited
company, was involved in the business of providing IT services. Prior to the
implementation of the Goods and Services Tax (GST), the company had availed of
CENVAT credit for taxes paid under the erstwhile tax regime, including Service
Tax and various forms of cess (Education Cess, Secondary & Higher Education
Cess, and Krishi Kalyan Cess). With the advent of GST on 1st July 2017,
businesses were allowed to transition unutilized credits from the old regime
into the GST framework by filing Form GST TRAN-1. In this case, HCL Infotech transferred
unutilized credit worth ₹5,47,57,755.
According to the company's records, this amount was the
closing balance of CENVAT credit under the previous regime, which they carried
forward to the new GST regime. Of this total amount, ₹3,28,25,979 was utilized
by the petitioner across various states (Gujarat, Himachal Pradesh, Karnataka,
and Rajasthan) under the same Permanent Account Number (PAN), leaving a balance
of ₹2,19,31,776 for the company in Uttar Pradesh.
In March 2018, the petitioner reversed ₹25,31,801 pertaining
to carried-forward credit that included various cess amounts. The issue
arose
when the tax department scrutinized the petitioner's claim of Input Tax Credit
(ITC) for the period of July 2017 to March 2018. The department issued a notice
to the petitioner under Section 61 of the Uttar Pradesh Goods and Services Tax
(UPGST) Act in April 2023, highlighting alleged discrepancies in the
petitioner's tax filings for the relevant period.
The petitioner responded in July 2023, asserting that the
ITC claim was lawful, except for the ₹25,31,801 already reversed voluntarily.
Despite the petitioner's explanations, the department initiated proceedings
under Section 73 of the Central Goods and Services Tax (CGST) Act, accusing the
company of having availed excess ITC. A Show Cause Notice was issued on 30th
September 2023, demanding ₹5,76,12,310 along with applicable interest and
penalties.
The petitioner submitted a detailed response in November
2023, reiterating that the ITC claim was in accordance with Sections 140(1) and
140(9) of the CGST Act. Additionally, they emphasized that the cess portion had
already been reversed, and the remaining credit was legitimately claimed. After
reviewing the submissions and documents, the Deputy Commissioner of State Tax,
Sector-2 NOIDA, Uttar Pradesh, concluded the proceedings under Section 73 and
issued an order on 30th December 2023, dropping all charges against the
petitioner.
However, in a surprising turn of events, a new Show Cause
Notice was issued to the petitioner under Section 74 of the CGST Act on 3rd
August 2024. This notice alleged that the CENVAT credit closing balance as of
June 2017 was ₹4,16,00,772, but the petitioner had claimed ₹5,47,57,755 as ITC.
Consequently, the authorities argued that the petitioner had availed excess ITC
amounting to ₹1,31,56,983. Section 74 deals specifically with cases of tax
evasion due to fraud, willful misrepresentation, or suppression of facts, as
opposed to Section 73, which covers incorrect ITC claims for reasons other than
fraud.
Submissions by the
Petitioner:
HCL Infotech Ltd, represented by their counsel, Atul Gupta,
vehemently challenged the new Show Cause Notice issued under Section 74 of the
CGST Act. Their primary argument revolved around the jurisdiction and validity
of the notice itself. The petitioner contended that since the earlier
proceedings under Section 73 had already been concluded in their favor, the
authorities could not reopen the case under Section 74 unless there was prima
facie evidence of fraud, willful misstatement, or suppression of facts, which
were not present in this case.
1.
Jurisdictional
Challenge:
The petitioner’s primary submission was that the fresh Show Cause Notice under
Section 74 was without jurisdiction. The petitioner argued that both Sections
73 and 74 of the CGST Act operate in different factual circumstances. Section
73 applies when there is no allegation of fraud or willful misrepresentation,
while Section 74 is invoked in cases where fraud or deliberate misstatement is
suspected. Since the department had already investigated the petitioner’s ITC
claims under Section 73 and had dropped the case, they could not subsequently
initiate proceedings under Section 74 for the same set of facts. The issuance
of a second Show Cause Notice on the same grounds, but under a different
provision, was a clear abuse of process.
2.
Lack of
Allegations of Fraud:
The petitioner further argued that the new Show Cause Notice did not contain
any specific allegations of fraud, willful misrepresentation, or suppression of
facts. In order to invoke Section 74, the notice must clearly state that the
petitioner had availed ITC by committing fraud or misstatement. Without such an
allegation, the notice lacked the basic ingredients required to proceed under
Section 74. The petitioner relied on Supreme Court judgments, including Union
of India vs. Hindalco Industries (2003) and CCE vs. H.M.M. Limited
(1995), which emphasize that a Show Cause Notice must contain clear allegations
of fraud or misstatement to invoke extended jurisdiction under tax laws. The
petitioner contended that the department’s failure to specify such allegations
rendered the notice without jurisdiction.
3.
Supreme
Court Precedents:
The petitioner cited several rulings from the Supreme Court to bolster their
argument:
o Union of India vs. Hindalco Industries (2003): The court ruled that a Show Cause Notice must
clearly allege fraud or misstatement if the authorities intend to invoke
extended powers. In the absence of such an allegation, the notice is without
jurisdiction.
o CCE vs. H.M.M. Limited
(1995): The court held that for the department to invoke the extended period of
limitation, the notice must specifically state that fraud or willful
misstatement was involved. Mere discrepancies or errors are not sufficient
grounds for invoking extended powers under tax laws.
o Raj Bahadur Narain Singh Sugar Mills Ltd. vs. Union of India (1996): This ruling reinforced the principle that tax
authorities must clearly state the basis for invoking extended powers under tax
laws, failing which the notice is invalid.
4.
Estoppel
from Reopening the Case:
The petitioner argued that the department was barred from reopening the case
under Section 74 due to the principle of estoppel. Since the earlier proceedings
under Section 73 had been concluded, with the authorities finding no
discrepancies and dropping the case, they could not now allege fraud or
misstatement based on the same set of facts. The petitioner contended that the
department’s actions were an attempt to re-litigate an issue that had already
been settled, and such a reopening of the case was not permissible under the
law.
Submissions by the
Respondent:
The respondents, represented by the Standing Counsel,
defended their actions and argued that the fresh Show Cause Notice under
Section 74 was valid and issued in accordance with the law. The department made
the following arguments:
1.
Allegation
of Suppression of Facts:
The respondents contended that although the proceedings under Section 73 had been
concluded, the department had subsequently discovered evidence that suggested
the petitioner had suppressed material facts regarding their ITC claims. The
respondents argued that this suppression of facts justified the initiation of
fresh proceedings under Section 74, which specifically deals with cases of
fraud, willful misrepresentation, and suppression of facts.
2.
Justification
for Section 74 Proceedings:
The respondents asserted that Section 74 provided for an extended period of
limitation and harsher penalties compared to Section 73 because it dealt with
cases of tax evasion due to fraudulent behavior. The department believed that
the petitioner had availed ITC in excess of their actual CENVAT closing balance
and had failed to disclose this excess claim. The department’s view was that
this amounted to suppression of facts, justifying the invocation of Section 74.
The respondents argued that the writ petition was premature, as the case was
still at the Show Cause Notice stage. They suggested that the petitioner should
raise their objections before the adjudicating authority instead of challenging
the notice directly in the High Court.
3.
Authority
to Reopen the Case:
The respondents also contended that the CGST Act provided the authorities with
the power to reopen cases if new evidence came to light that indicated
fraudulent activity. They argued that the fresh Show Cause Notice was based on
new evidence and that the department was within its rights to initiate
proceedings under Section 74, even after the earlier proceedings under Section
73 had been concluded.
Findings and Judgment
of the Court:
The court carefully considered the submissions of both
parties and analyzed the provisions of the CGST Act, particularly Sections 73
and 74. The key findings and reasoning of the court are summarized below:
1.
Distinction
Between Sections 73 and 74:
The court began by distinguishing between Sections 73 and 74 of the CGST Act.
Section 73 deals with cases where the wrong availment of Input Tax Credit (ITC)
or non-payment of tax happens for reasons other than fraud or willful
misrepresentation. On the other hand, Section 74 specifically addresses
situations where ITC is wrongly availed or tax is not paid due to fraudulent
activity, misrepresentation, or suppression of facts.
The court emphasized that the two
sections serve different purposes and apply under different factual
circumstances. Section 73 is intended for cases where an error occurred without
any fraudulent intent, while Section 74 is invoked when there is prima facie
evidence of fraudulent conduct or intent to evade tax.
2.
Lack of
Prima Facie Allegations of Fraud in the Show Cause Notice:
After reviewing the Show Cause Notice issued on 3rd August 2024 under Section
74, the court found that the notice did not contain any specific allegations of
fraud, willful misstatement, or suppression of facts by the petitioner. The
court noted that for a Show Cause Notice under Section 74 to be valid, it must
include clear allegations indicating that the petitioner had availed excess ITC
with fraudulent intent or by deliberately suppressing information.
In this case, the court observed
that the department had merely stated that the petitioner had availed excess
ITC, but there were no allegations of fraud or misstatement. The court pointed
out that the absence of such allegations deprived the department of the
necessary jurisdiction to proceed under Section 74.
3.
Finality
of Proceedings under Section 73:
The court also highlighted that the earlier proceedings under Section 73 had been
concluded in favor of the petitioner. The Deputy Commissioner of State Tax had
reviewed the petitioner’s submissions and verified the documents before
dropping the case in December 2023. The court held that once proceedings under
Section 73 are concluded, the department cannot reopen the same issue under
Section 74 unless there is prima facie evidence of fraud or deliberate
suppression of facts.
The court emphasized that the
principle of finality applies to tax proceedings, and the authorities cannot arbitrarily
reopen a settled issue unless there are new facts or evidence that justify such
action. Since the department did not present any new evidence or allegations of
fraud, the court found that the reopening of the case under Section 74 was
unjustified.
4.
Jurisdictional
Issue and Validity of the Show Cause Notice:
The court concluded that the Show Cause Notice issued under Section 74 was
without jurisdiction due to the lack of essential allegations of fraud or
willful misrepresentation. The court reiterated that for the department to
derive jurisdiction under Section 74, the notice must specifically allege that
the petitioner wrongly availed ITC due to fraudulent conduct or deliberate
suppression of facts. In the absence of such allegations, the notice could not
be sustained.
5.
Supreme
Court Precedents:
The court referred to various Supreme Court judgments cited by the petitioner,
including Union of India vs. Hindalco Industries (2003), Raj Bahadur
Narain Singh Sugar Mills Ltd. vs. Union of India (1996), and CCE vs.
H.M.M. Limited (1995). These rulings established that a Show Cause Notice
must contain clear allegations of fraud or misrepresentation if the department
intends to invoke extended powers or periods of limitation. In the absence of
such allegations, the notice is considered invalid.
The court noted that in this case,
the department had failed to comply with these principles, as the Show Cause
Notice did not include any allegations that would justify the invocation of
Section 74.
6.
Writ
Petition Validity and Prematurity Argument:
The court also addressed the respondent's argument that the writ petition was
premature since the case was still at the Show Cause Notice stage. The
respondents had argued that the petitioner should first contest the notice before
the adjudicating authority rather than filing a writ petition in the High
Court.
However, the court rejected this
argument, stating that it is a settled principle of law that a writ petition is
maintainable when a Show Cause Notice is issued without jurisdiction. The court
held that since the notice lacked the necessary jurisdictional basis, the
petitioner was entitled to challenge it directly through a writ petition under
Article 226 of the Constitution of India. The court emphasized that when the authorities
act beyond their jurisdiction, the affected party has the right to seek relief
from the High Court.
7.
Opportunity
for Fresh Proceedings:
While quashing the Show Cause Notice, the court did leave the door open for the
department to issue a fresh Show Cause Notice under Section 74, provided they
include the necessary allegations of fraud, willful misstatement, or
suppression of facts. The court clarified that if the department has prima
facie evidence of fraudulent conduct, they are free to initiate fresh
proceedings in accordance with the law. However, any new notice must comply
with the requirements of Section 74 and include the essential ingredients
necessary to invoke that section.
Judgment:
1.
Quashing
of the Show Cause Notice:
The High Court quashed the Show Cause Notice dated 3rd August 2024, holding it
to be without jurisdiction. The court ruled that the notice lacked the
necessary allegations of fraud or willful misstatement, which are essential for
invoking Section 74 of the CGST Act. As a result, the proceedings initiated
under the notice were declared invalid.
2.
Opportunity
for Fresh Proceedings:
The court allowed the department to issue a fresh Show Cause Notice under
Section 74 if they could provide prima facie evidence of fraud, misstatement,
or suppression of facts. However, the court emphasized that any new notice must
contain clear and specific allegations to justify the invocation of Section 74.
3.
Relief for
the Petitioner:
The court’s decision provided significant relief to the petitioner, HCL
Infotech Ltd. By quashing the notice, the court protected the petitioner from
further proceedings under Section 74 based on the current notice. The decision
also set a precedent for future cases, emphasizing the importance of including
clear allegations of fraud or misstatement when invoking extended powers under
tax laws.
Conclusion: The High Court’s ruling in the case
of HCL Infotech Ltd vs. Commissioner, Commercial Tax and Another is an
important judgment that clarifies the distinction between Sections 73 and 74 of
the CGST Act. The court reiterated that tax authorities cannot arbitrarily
reopen a settled issue without presenting new evidence or allegations of fraud.
Moreover, the judgment reinforced the principle that a Show Cause Notice under
Section 74 must contain specific allegations of fraudulent conduct, willful
misstatement, or suppression of facts. In the absence of such allegations, the
notice is invalid.
The decision highlights the need for tax authorities to
exercise their powers carefully and in accordance with the law. It also
provides protection to taxpayers from being subjected to multiple proceedings
on the same issue without any new evidence or justification. The court’s ruling
serves as a reminder that tax proceedings must adhere to the principles of
natural justice and fairness, and that authorities must provide clear and
specific reasons when invoking extended powers under tax laws.
This judgment is particularly relevant for businesses that
have transitioned from the pre-GST regime to the GST regime, as it addresses
issues related to the transfer of unutilized CENVAT credit and the complexities
surrounding ITC claims under GST. The court’s decision offers guidance on how
tax authorities should approach cases of alleged excessive ITC claims and the
conditions under which they can initiate proceedings under Section 74.
Finally, the judgment underscores the importance of judicial
oversight in ensuring that tax authorities do not abuse their powers or act
beyond their jurisdiction. By quashing the Show Cause Notice in this case, the
High Court has upheld the rights of taxpayers and reinforced the principles of
fairness and transparency in tax administration.
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