In a recent ruling, the Allahabad High Court held that a Goods and Services Tax ( GST ) Show Cause Notice must specify allegations of fraud, willful misstatement, or suppression of facts to invoke Section 74 of the Central Goods and Services Tax ( CGST ) Act. HCL Infotech Ltd. (Petitioner) had accumulated CENVAT credit under the previous Service Tax regime before the introduction of GST on July 1, 2017. The petitioner transferred its unutilized credit of Rs. 5.47 crore into the GST system by filing GST TRAN-1 as per the CGST Act. A portion of the credit was distributed to its branches in Gujarat, Himachal Pradesh, Karnataka, and Rajasthan, leaving Rs. 2.19 crore in its Uttar Pradesh registration. The petitioner reversed Rs. 25 lakh related to education cess and other smaller levies as part of compliance. In April 2023, the tax department issued a notice under Section 61 of the CGST Act, alleging discrepancies in HCL’s tax returns for FY 2017-18. The company replied, clarifying the credit issues, and the tax authorities dropped the proceedings under Section 73 of the CGST Act in December 2023. The Future of Tax and Finance: Upskill with Us Again, In August 2024, a new Show Cause Notice was issued under Section 74 of the CGST Act, alleging the petitioner had availed excessive Input Tax Credit of Rs. 1.31 crore without clear mention of fraud or misstatement. The petitioner challenged the notice before the Allahabad High Court, arguing that Section 74 should only be invoked in cases of fraud, willful misstatement, or suppression of facts. The notice issued lacked these necessary allegations, making it invalid. The petitioner’s counsel contended that Once proceedings under Section 73 were concluded in the petitioner’s favor, they could not be reopened unless fraud or similar misstatements were involved. The counsel relied on various rulings to support their arguments. On the other hand, the department’s counsel argued that Section 74 proceedings were initiated because the petitioner had availed or utilized excessive ITC by suppressing material facts. The counsel contended that the petitioner should first respond to the Show Cause Notice and raise its defenses at the appropriate stage before approaching the court. The bench comprising Justice Shekhar B. Saraf and Justice Manjive Shukla observed both sides’ arguments and emphasized that Section 73 deals with non-fraudulent errors in tax claims, while Section 74 requires fraud or willful misrepresentation. The Future of Tax and Finance: Upskill with Us The two sections have distinct applications, and reopening concluded Section 73 proceedings under Section 74 required a clear justification of fraud. The court noted that the Show Cause Notice under Section 74 did not contain the necessary allegations of fraud or misrepresentation. This made the notice prima facie without jurisdiction. Therefore, the court quashed the Show Cause Notice issued under Section 74 of the CGST Act leaving it open for the tax authorities to issue a fresh Show Cause Notice, provided it included the essential allegations regarding fraud or suppression of facts, if applicable. The writ petition was allowed.
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