The Madras High Court clarified that the Section 65 of the Central Goods and Services Tax ( CGST Act ), 2017 does not require the audit report to indicate the ‘Fraud or Misstatement or Suppression of Facts’ for Demand under Section 74 under GST Act. A single bench of Justice Senthilkumar Ramamoorthy observed that “There is nothing in the language of Section 65 to indicate that the audit report should contain such findings. On the contrary, subject to the audit report disclosing the aforesaid, sub-section (7) of Section 65 prescribes that the proper officer may initiate action under Section 73 or 74.”

The petitioner, a public limited company involved in the supply and servicing of light vehicles and parts, challenged the notices dated April 17, 2024, and April 29, 2024, issued by the respondent. The company’s books of account for financial years 2017-2018 to 2020-2021 were audited, resulting in a draft audit report, a revised draft, and ultimately, an audit report in Form GST ADT-02 on September 7, 2023. Subsequently, show cause notices were issued under Section 73 and Section 74 of the CGST Act. The petitioner contended the Section 74 notice on three grounds: The audit report did not record findings of fraud, willful misstatement, or suppression of facts. Intimation in Form GST DRC-01A was not issued. The show cause notice disregarded unit-specific expenditure and was based on consolidated figures.

\The petitioner’s counsel submitted that without findings of fraud or misstatement in the audit report, the proper officer lacked jurisdiction to proceed under Section 74. Additionally, it was contended that the amendment to Rule 142(1) of the CGST Rules was prospective and not applicable to the present proceedings. The petitioner also asserted that expenditure for only the unit in question should have been considered. In response, the senior standing counsel for the respondent argued that Section 65 of the CGST Act does not require the audit report to indicate fraud for action under Section 74. The proper officer, therefore, issued the show cause notice in accordance with the law. The court noted that interference with a show cause notice is warranted only if issued without jurisdiction or if no case is made out for the threatened action. Further added that the audit report indicated unpaid or short-paid tax, satisfying statutory requirements.

The court clarified that Section 65 does not necessitate findings of fraud or misstatement in the audit report. The proper officer’s allegations of fraud were contained within the show cause notice, meeting the necessary legal standards. Regarding the second ground, the court observed that the show cause notice was issued after the amendment to Rule 142(1), making the petitioner’s argument on the amendment’s prospective nature moot. With regards to the third ground, the court dismissed the objection concerning consolidated expenditure figures as insufficient grounds for interference under Article 226 of the Constitution of India. Consequently, the court dismissed the writ petition, allowing the petitioner to respond to the show cause notice. No order as to costs was made, and the connected miscellaneous petition was also closed.