The Supreme Court on Tuesday quashed the GST show-cause notice issued to Tata Steel Limited under Section 74 of the Central Goods and Services Tax Act, 2017, for alleged short payment of tax due to suppression of facts. The bench comprising Justice JB Pardiwala and Justice K Vinod Chandran held that the department’s invocation of Section 74, rather than the ordinary mechanism under Section 73, was legally unsustainable as it sought to extend the limitation period merely by using expressions such as ‘fraud’, ‘willful misstatement’ or ‘suppression of facts’ without establishing the foundational facts in the notice itself.
The court observed that the extended limitation period under Section 74 is not a procedural tool to be invoked by rote recitation of certain words. It emphasized that where the department seeks to proceed under Section 74, the show-cause notice must set out the foundational facts establishing how the alleged tax short payment or wrongful availment of input tax credit resulted from fraud, willful misstatement or suppression. Mere lip service to the provisions by employing such terms without substantive basis does not satisfy the legal requirement.
The proceedings against Tata Steel related to alleged irregularities in input tax credit for three financial years. The department had sought to invoke Section 74 on the ground that the non-payment or short payment of tax, or wrongful availment/utilisation of ITC, was ‘by reason of fraud, or any wilful misstatement or suppression of facts’. Tata Steel challenged the notice, arguing that it did not disclose any material demonstrating fraud, willful misstatement or suppression, and that the department had not reached the requisite satisfaction regarding the audit objection.
Quashing the notice, the judgment authored by Justice Chandran observed that the show-cause notice ‘failed to make out a case of a deliberate device employed to evade tax or avail excess ITC’. The court stressed that a Section 74 proceeding requires more than a finding of tax mismatch or alleged wrongful ITC availment; the Assessing Officer must also be satisfied that the alleged short payment or wrongful ITC occurred because of fraud, willful misrepresentation or suppression of facts.
The court further noted that proceedings under Section 73 or 74 can be initiated only on the satisfaction of the Assessing Officer. Even if observations or objections are made during audit, the Assessing Officer must enter his satisfaction before issuing a notice. In the case of a Section 74 notice, the satisfaction must extend beyond the mere mismatch of ITC and short payment of tax to include a conclusion that fraud, willful misrepresentation or suppression led to such mismatch or shortfall.
The court pointed out that the department had taken up the audit objections with the Public Accounts Committee, which indicated that there was no satisfaction at the departmental level regarding the mismatch or shortfall of tax payment, let alone any finding on suppression. This undermined the basis for invoking Section 74.
The court faulted the show-cause notices for containing bland statements such as ‘suppression of facts’ merely to avail the extended period of limitation, stating that such vague allegations would barely suffice and put the validity of the notice under Section 74 in peril. It specifically noted that apart from a generic allegation of availing ITC for three years ‘without documentary evidence and suppress the facts’, the notice contained no foundational facts to validate the allegation of suppression.
As a result, the appeal was allowed. The court granted liberty to the department to initiate an appropriate Section 74 proceeding, if permissible in law, with the foundational facts emerging from the notice itself, on or before 28 February 2027.
The cause title of the case is M/s Tata Steel Limited v. Union of India.