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Bharat Mint & Allied Chemicals v. State of U.P. & Another (Writ Tax No. 2527 of 2025 | Order Date: 30 May 2025 | Allahabad High Court

Notice Under Section 74 requires allegation of fraud, misstatement, suppression - Allahabad High Court Quashes Section 74 Notice for Lack of Jurisdictional Foundation

Bharat Mint & Allied Chemicals v. State of U.P. & Another (Writ Tax No. 2527 of 2025 | Order Date: 30 May 2025 | Allahabad High Court

Summary

The Allahabad High Court in a landmark ruling has quashed a notice issued under Section 74 of the CGST/SGST Act to Bharat Mint & Allied Chemicals, citing that the statutory preconditions for invoking Section 74 were absent in the notice. The court held that when a previous Section 73 proceeding accepted the taxpayer’s explanation, and no allegation of fraud, misstatement, or suppression was made, issuing a subsequent Section 74 notice on the same issues was without jurisdiction.

This judgment reinforces judicial scrutiny over arbitrary escalation from Section 73 to Section 74, and ensures that increased penal consequences under Section 74 cannot be invoked without due cause.

Background Facts

1.    The petitioner, Bharat Mint & Allied Chemicals, was initially issued a Show Cause Notice (SCN) under Section 73 of the CGST/SGST Act, citing ten issues of discrepancies and mismatches in GST returns and disclosures.

2.    The petitioner submitted a detailed reply to the Section 73 notice, and the adjudicating authority passed an order under Section 73(9) on 20 February 2025.

3.    In that order, the authority accepted the petitioner’s response on six issues, but deferred decision on issues 1, 6, 8, and 10, stating that further investigation was needed, and that a separate notice would be issued.

4.    Subsequently, the department issued a fresh notice under Section 74 of the CGST Act on 25 February 2025, pertaining to the same issues earlier left open in the Section 73 proceedings.

5.    Aggrieved, the petitioner approached the High Court, contending that the Section 74 notice was wholly without jurisdiction.

Legal Issues for Consideration

1.    Can a notice under Section 74 be issued after an order under Section 73, covering the same issues, without any allegation of:

o   Fraud;

o   Wilful misstatement; or

o   Suppression of facts?

2.    Is it legally valid to escalate a matter from Section 73 to Section 74 based on insufficiency of time or pending investigation alone?

3.    Does the Section 74 notice satisfy the jurisdictional threshold required under the Act?

Petitioner’s Submissions

  • The Section 74 notice was devoid of the foundational jurisdictional facts required under the provision.
  • There was no allegation of fraud, wilful misstatement or suppression in the notice or the preceding order under Section 73(9).
  • The language of Section 74 requires these elements to be clearly invoked for its application, failing which the notice is ultra vires and liable to be quashed.
  • The petitioner relied heavily on the decision of the same Court in M/s Vadilal Enterprises Ltd. v. State of U.P., Writ Tax No. 2486 of 2025, decided on 23 May 2025, which involved identical facts and the same adjudicating officer.

Respondents’ Submissions

  • The State’s Counsel argued that the facts underlying the discrepancies themselves indicated suppression, and hence no specific recital of Section 74 ingredients was necessary.
  • The language of the notice need not mirror the statute, as long as the intent is discernible.
  • However, the respondent did not deny that the facts of the Vadilal Enterprises case were similar to the present one.

Section 74 of the CGST Act

This section provides for demand of tax along with interest and penalty, where tax is not paid or short paid due to fraud, wilful misstatement or suppression of facts. Penalty under Section 74 is 100% of the tax amount, unlike Section 73, where penalty is limited to 10%.

The Court’s Analysis and Findings

1. Jurisdictional Preconditions Not Met

The Court noted that for Section 74 to be invoked, it is essential that:

“There must be clear allegations and basis for believing that the assessee has indulged in fraud, wilful misstatement, or suppression.”

In this case, the Section 74 notice was silent on any such allegation.

“The very fact that the respondents have sought further explanation and not a word has been indicated that the petitioner... has committed fraud, wilful misstatement or suppressed material facts... necessarily shows lack of requisite ingredients in the notice.”

2. Vadilal Enterprises Case Applied

The Court found that the facts of the present case were squarely covered by its own judgment in M/s Vadilal Enterprises Ltd., where it held:

“...while deciding the notice under Section 73, finding paucity of time, the officer left the issues undecided and issued notice under Section 74—this method is legally unsustainable.”

3. Notice Under Section 74 Set Aside

The Court held that absent jurisdictional facts, a Section 74 notice cannot be sustained, and hence must be quashed in toto.

Final Judgment

1.    Writ Petition Allowed: The High Court allowed the writ petition filed by Bharat Mint & Allied Chemicals.

2.    Notice Under Section 74 Quashed: The impugned notice dated 25 February 2025, issued under Section 74, was quashed and set aside.

3.    Fresh Proceedings Permitted: The Court clarified that the department is free to initiate fresh proceedings in accordance with law, if jurisdictional ingredients are properly established.

Conclusion:

This ruling serves as a safeguard against arbitrary tax enforcement and reaffirms the doctrine that penalty-enhancing provisions must be strictly construed. It also:

  • Discourages GST authorities from issuing Section 74 notices casually;
  • Emphasizes that failure to decide under Section 73 due to time or administrative burden is no ground to invoke Section 74;
  • Encourages taxpayers to challenge mechanically issued show cause notices.


Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.

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