The Madras High Court has quashed a GST notice issued under Section 74 in a case involving a small retailer from Bargur, Krishnagiri district, highlighting the improper use of fraud-based penalty provisions. According to reports from M/s. Meenakshi Collections vs The Assistant Commissioner (ST), Krishnagiri, the court passed orders on 08/06/2026 quashing the OIO dated 12/08/2024 and remitting the case back to authorities for fresh proceedings. The court emphasized that Section 74 was invoked without proper jurisdiction and directed the Assistant Commissioner to pass a fresh order on merits within three months from the date of receipt of the order, after considering evidence and affording the petitioner an opportunity to be heard.
The Madras High Court has directed comprehensive fresh proceedings after disposing of the writ appeals on 28/09/2023 show cause notices. According to the court's detailed order, the Assessing Officer shall undertake adjudication year-wise from July 2017 to March 2022, maintaining a minimum gap of four weeks between the assessment of each year. The court clarified that time lost would be excluded while calculating the overall limitation period, ensuring proper procedural compliance. The court emphasized that all rights and contentions are kept open and directed that the final order be a reasoned order dealing with all submissions of the assessee. A personal hearing with at least seven working days' notice must be granted, with any judicial pronouncements to be provided to the assessee in advance.
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. According to reports from Mint, 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 tax credit has been wrongly availed or utilised because of fraud, wilful misstatement or suppression of facts. The court emphasized that whether those allegations are ultimately proved will be decided during adjudication after the taxpayer is given an opportunity to respond.
The recent case involving Meenakshi Collections illustrates the critical distinction between system mismatches and fraud cases. The dispute pertained to the period from 01/07/2017 till 31/03/2018, during which GSTR 2A was not reflecting transactions in the way it is reflected currently in GSTR 2B. As reported by M/s. Meenakshi Collections, the Assistant Commissioner wrongly invoked Section 74 despite the fact that there was absolutely no suppression or willful mis-statement or fraud - it was a system related issue which the CBIC admits. The court noted that interest is applicable only if any ineligible ITC is availed and utilized and this must be checked based on records, making the 100% penalty under Section 74 unwarranted in this case.
As reported by Mint, Section 73 of the CGST Act allows proceedings 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. In contrast, Section 74 applies where the tax shortfall or wrongful input tax credit is alleged to have resulted from fraud, wilful misstatement or suppression of facts to evade tax. The Act prescribes a longer limitation period and higher penalties for proceedings under Section 74 than those under Section 73. Before the High Court, 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, but these arguments were rejected by the court. 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.
According to Mint reports, 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. The court also held that principles governing reassessment proceedings under the Income-tax Act cannot automatically be applied to GST because the two laws use different statutory language. Importantly, 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. The court emphasized that no order as to costs would be passed and clarified it had made no observation on the merits of the matter.
