Tax and interest paid based on provisional audit report- notice under section 74 quashed by Telangana High Court
Proceedings under Section 74 Not Sustainable Where Tax and Interest Are Paid Before SCN Based on Audit Findings
Date & Year of Judgment
28 February 2024
The High Court held that where a taxpayer voluntarily pays tax and interest immediately after audit findings and before issuance of show-cause notice, initiation of proceedings under Section 74 alleging fraud or suppression is without jurisdiction.
Case Reference
Rays Power Infra Private Limited Versus Superintendent of Central Tax
Writ Petition No. 298 of 2024High Court for the State of Telangana
Coram:Justice P. Sam KoshyJustice N. Tukaramji
1. Main Issue Involved
Whether the department can initiate proceedings under Section 74 of the CGST Act alleging fraud or suppression when the taxpayer had already paid the entire tax along with interest immediately after receiving the provisional audit report and before issuance of the show cause notice.
The case examines the interplay between Section 73(5) voluntary payment provisions and invocation of Section 74 (fraud proceedings).
2. Sections and Provisions Discussed
Section 73(1) – Determination of tax not paid/short paid (non-fraud cases)
Section 73(5) – Voluntary payment before SCN
Section 73(6) – No SCN after payment of tax and interest
Section 73(8) – Proceedings deemed concluded after payment
The judgment primarily interprets Section 73(5) and (6) as a statutory protection mechanism for voluntary compliance.
3. Facts of the Case
The petitioner company was engaged in generation of electricity through solar plants.
GST audit was conducted for the period July 2017 to March 2019.
The provisional audit findings were communicated on 14.10.2021.
Upon receiving the findings, the petitioner immediately paid the entire tax and interest on 28.10.2021.
The final audit report dated 10.11.2021 recorded that the tax liability had been fully discharged.
Despite this, the department issued a show cause notice under Section 74 on 20.04.2022.
The adjudicating authority subsequently passed an order confirming demand and penalty.
The SCN was issued several months after voluntary payment, which became the central legal issue.
4. Petitioner’s Submissions
The petitioner contended:
Entire tax and interest were paid immediately after the audit findings.
Therefore the case squarely falls under Section 73(5).
Once payment is made before issuance of SCN, no further proceedings can be initiated.
Invocation of Section 74 alleging fraud or suppression is legally untenable.
The petitioner argued that statutory protection under Section 73 had already concluded the proceedings.
5. Department’s Submissions
The department argued:
The wrongful availment of ITC was deliberate and willful.
The conduct of the taxpayer amounted to suppression of facts and misstatement.
Hence proceedings under Section 74 were justified.
The petitioner should avail statutory appeal under Section 107 rather than writ remedy.
The department attempted to characterize the conduct as fraudulent intent to sustain Section 74 proceedings.
6. Analysis and Findings of the Court
The High Court analyzed the statutory scheme of Sections 73 and 74.
A. Legislative Intent Behind Section 73
The Court observed that Section 73 encourages voluntary compliance by allowing taxpayers to pay tax and interest before SCN.
B. Protection Against Penalty and Proceedings
If the taxpayer pays tax and interest before SCN, the law mandates that no further proceedings shall be initiated.
C. Section 74 Requires Strong Evidence of Fraud
The Court held that Section 74 cannot be invoked merely because ITC was wrongly availed.There must be clear evidence of fraud, suppression or misstatement with intent to evade tax.
D. Payment Before SCN Concludes Proceedings
Once the taxpayer pays tax and interest upon audit detection, the statutory protection under Section 73(5) applies.
Important Observations of the Court
(Para 12 – Protection under Section 73(5))
“Section 73(5)… gives a clear indication that in the event if the assessee clears all the tax liability along with interest prior to issuance of show cause notice, they would not be liable for any further additional taxes by way of penalty or interest.”
(Para 15 – No Proceedings After Payment)
“any person chargeable with tax, if he pays the amount of tax along with the interest payable thereon, proper officer upon receipt of such information shall not initiate any further proceedings… and all the proceedings shall have to be deemed to be concluded.”
(Para 16 – When Section 74 Can Be Invoked)
“Section 74 would get attracted only in the event of there being strong materials available on record to show that the petitioner had played fraud or there was any misstatement made by him and there being any suppression of fact.”
(Para 17 – Interplay of Section 73 and 74)
“Section 74 would come into play only if the conditions stipulated in Section 73 has not been met with by the taxpayer.”
(Para 18 – Fraud Cannot Be Presumed)
“The attempt… to bring the conduct of the petitioner within the purview of fraud, misstatement and suppression of fact would not be sustainable.”
(Para 19 – Proceedings Without Jurisdiction)
“the action on the part of the respondents in initiating the show cause proceedings under Section 74… would be in excess of their jurisdiction.”
Insight: The Court clearly established that Section 74 cannot be invoked merely because audit detected irregular ITC if the taxpayer voluntarily reverses it before SCN.
7. Judgment of the Court
The High Court held:
Initiation of proceedings under Section 74 was without jurisdiction.
Order-in-original and demand were set aside.
Writ petition allowed.
The Court treated voluntary compliance after audit as sufficient to bar penal proceedings.
8. Similar / Related Judgments
Mahadeo Construction Co. v. Union of India – Jharkhand HC
R.K. Transport Pvt. Ltd. – Jharkhand HC
Godavari Commodities Ltd. – Jharkhand HC
Emerging Principle:Voluntary payment of tax and interest before SCN triggers statutory protection under Section 73.
9. CA BTA Insights
This judgment is extremely useful in audit-based GST litigation.
Key Legal Principles
Voluntary payment before SCN invokes Section 73(5) protection.
After such payment no SCN should be issued.
Section 74 cannot be invoked without concrete evidence of fraud.
Wrongful ITC alone does not automatically mean suppression.
Courts are willing to quash proceedings at writ stage for jurisdictional error.
Litigation Strategy
When audit issues are settled through voluntary payment:
Invoke Section 73(5) and 73(6).
Argue conclusion of proceedings.
Challenge invocation of Section 74.
Emphasize absence of fraud or suppression.
This judgment strongly supports taxpayers who rectify audit objections promptly and voluntarily.