The Madras High Court has ruled that GST officers need not conclusively establish fraud before issuing a notice under Section 74 of the CGST Act. The judgment clarifies the legal threshold for invoking fraud proceedings under the GST law.
The Madras High Court has clarified that GST authorities are not required to conclusively establish fraud before issuing a show cause notice under Section 74 of the Central Goods and Services Tax (CGST) Act, 2017.
In M/s Fastenex Private Limited vs State Tax Officer & batch matters, Justice C. Saravanan held that a proper officer can issue a notice under Section 74 if the material available on record is sufficient to form a prima facie opinion that tax has not been paid, has been short paid, or input has been wrongly availed or utilised because of fraud, wilful misstatement or suppression of facts. Whether those allegations are ultimately proved will be decided during adjudication after the taxpayer is given an opportunity to respond.
What does the CGST Act provide?
According to Section 73 of the CGST Act, proceedings can be initiated where tax has not been paid, has been short paid, has been erroneously refunded, or input tax credit has been wrongly availed or utilised for reasons other than fraud, wilful misstatement or suppression of facts.
According to Section 74 of the CGST Act, proceedings apply where the tax shortfall or wrongful input tax credit is alleged to have resulted from fraud, wilful misstatement or suppression of facts to evade . The Act prescribes a longer limitation period and higher penalties for proceedings under Section 74 than those under Section 73.
Before the High Court, the petitioners argued that the department should establish fraud before invoking Section 74 and that notices based solely on audit reports or inspection findings were invalid.
The court rejected these arguments, observing that both Sections 73 and 74 begin with the words “where it appears to the proper officer.” It held that this requires only a prima facie opinion based on the material available at the time of issuing the notice and not conclusive proof of fraud.
What else did the court clarify?
The court observed that the proper officer may rely on material gathered during scrutiny, audit, inspection or investigation while issuing a notice under Section 74.
It also held that principles governing reassessment proceedings under the Act cannot automatically be applied to GST because the two laws use different statutory language.
At the same time, the court clarified that a notice under Section 74 cannot be issued merely on suspicion or conjecture. The officer’s prima facie opinion must be supported by material available on record.
The judgment also referred to Section 75(2) of the CGST Act, which provides that where allegations of fraud are ultimately not established, proceedings initiated under Section 74 shall be treated as proceedings under Section 73.