The Supreme Court has laid down that the extended limitation period under Section 74 of the CGST Act is not meant to be invoked through mere lip service or mechanical recitation of words like “fraud”, “wilful misrepresentation” or “suppression”. The foundational facts which led to the inference of fraud, wilful misrepresentation or suppression must be evident from the notice itself, and the satisfaction of the Assessing Officer must be based on a genuine application of mind, not on the mere employment of such words.
A bland statement made at some places of suppression of facts, merely to avail the extended period of limitation, would barely suffice and puts to peril the notice under Section 74. The Court further held that the concept of “protective assessment” is not statutorily permitted under the GST Act, and proceedings under Section 73/74 must be initiated only upon the satisfaction of the Assessing Officer, even where observations or objections are made on audit.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran unequivocally held that the concept of protective assessment is statutorily not permitted under the CGST Act. A notice cannot be revived merely because the limitation period is closing, and the Department’s attempt to issue a fresh notice on July 01, 2025 as a protective measure was rejected outright. The Court drew a bright line that invocation of the extended five-year limitation under Section 74 requires foundational facts of fraud, wilful misrepresentation or suppression to be evident from the four corners of the show cause notice itself. A bland, mechanical recitation of statutory phrases without substantive factual backing will not sustain the notice.
Even where audit objections are raised by the CAG, the Assessing Officer must independently apply his mind and record satisfaction before issuing a notice under Section 73 or Section 74. The Department’s act of referring the objections to the Public Accounts Committee itself demonstrated the absence of such satisfaction. The Court rejected the Department’s reliance on Explanation 2 to Section 74 to establish suppression, noting that the provision stood omitted with effect from Nov 01, 2024 and could not be invoked to sustain the notice.
While setting aside the SCN and the consequential Order-in-Original, the Court granted the Department liberty to initiate fresh proceedings under Section 74 with proper foundational facts, subject to the outer limit of Feb 28, 2027, since the extended two-year period had not yet expired for any of the three financial years. The Court also observed that proceedings under Section 73/74 can be initiated only on the satisfaction of the Assessing Officer, and for a notice under Section 74, the Officer must be satisfied that fraud, wilful misrepresentation or suppression led to the mismatch or short payment of tax.
The Court rejected the Department’s reliance on Explanation 2 to Section 74 since it stood omitted with effect from Nov 01, 2024, and equally rejected the argument that proceedings were initiated prior to the expiry of limitation under Section 73, clarifying that the limitation under Section 73(10) is for issuing the order under Section 73(9) and not for issuing a notice.
The Court noted that the Department’s act of taking up the audit objections with the Public Accounts Committee itself indicated that there was no satisfaction at the end of the Assessing Officer regarding the mismatch or shortfall, and the SCN contained only a bland statement of availing ITC “without documentary evidence and suppress the facts” without any foundational facts to validate the allegation of suppression.
Briefly, Tata Steel Limited, a major corporate assessee, was served with a Show Cause Notice (SCN) under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) for three financial years, namely 2018-2019, 2019-2020 and 2020-2021. The notice was issued pursuant to an objection raised on an audit conducted by the office of the Comptroller and Auditor General of India (CAG), alleging mismatch of input tax credit (ITC) and short payment of tax.
The appellant’s primary contention was that the SCN did not contain any allegation of fraud, wilful misstatement or suppression of facts, which are essential preconditions for invoking Section 74 and its extended five-year limitation period, as distinguished from the three-year period available under Section 73. It was further pointed out that the Assessing Officer himself was not convinced about the audit objection and had kept the matter in the ‘call book’, meaning ‘kept in abeyance’.
A fresh notice was thereafter issued reviving the earlier notice and proposing a “protective demand” since the proceedings were time-bound, a concept alien to the GST regime.The Department, on the other hand, contended that proceedings were commenced even before the limitation under Section 73 expired and that there was suppression of material facts and wilful misrepresentation, relying on Explanation 2 to Section 74.
