Supreme Court: In a case concerning the validity of a show-cause notice (SCN) issued under Section 74, Central Goods and Services Tax Act, 2017 (CGST Act), pursuant to an audit objection for the Financial Years 2018-2019 to 2020-2021, a Division Bench of J.B. Pardiwala and K. Vinod Chandran*, JJ., held that proceedings under Section 74 could be initiated only upon the satisfaction of the assessing officer that fraud, wilful misrepresentation or suppression of facts had led to the mismatch of input tax credit or short payment of tax. The Court observed that mere mechanical recital of such expressions, without foundational facts in the SCN, would not constitute application of mind. Finding that the SCN contained only a bland allegation of suppression and that the department’s conduct in keeping the matter in the “call book” indicated absence of satisfaction, the Court set aside the SCN dated 13 June 2025 and the consequential order-in-original dated 26 December 2025. However, liberty was granted to the department to initiate appropriate proceedings under Section 74, if so advised, on the basis of foundational facts and to pass an order before 28 February 2027. The appeal was accordingly allowed.
Background
The present appeal arises out of a SCN issued to the appellant under Section 74, CGST Act, in respect of the Financial Years 2018-2019 to 2020-2021. The SCN was purportedly issued pursuant to an audit objection raised by the office of the Comptroller and Auditor General of India (CAG). The appellant contends that the invocation of Section 74 is legally unsustainable in the absence of any allegation of fraud, wilful misstatement or suppression of facts, which are prerequisites for invoking the extended limitation period prescribed thereunder, as distinguished from the limitation applicable under Section 73, CGST Act. It is further contended that the assessing officer was initially not satisfied with the audit objection and had consequently placed the matter in the departmental “call book”, thereby keeping the proceedings in abeyance. However, when the limitation period was nearing expiry, the SCN was subsequently issued as a purported protective measure. The appellant challenges such invocation of Section 74 and contends that the concept of issuing a protective notice, in the absence of the statutory ingredients of Section 74, has no application under the GST regime.
Analysis
The Court held that proceedings under Sections 73/74, CGST Act could be initiated only on the satisfaction of the assessing officer. Even where observations or objections were made in audit, the assessing officer was required to enter his satisfaction before issuing a notice. In the case of a notice under Section 74, such satisfaction had to extend not merely to the mismatch of input tax credit or short payment of tax, but also to the fact that fraud, wilful misrepresentation or suppression had led to such mismatch or short payment. The Court rejected the contention that Explanation 2 to Section 74 could be relied upon, since the Explanation had stood omitted with effect from 1 November 2024. It also rejected the argument that the proceedings had been initiated prior to the expiry of limitation under Section 73, observing that Section 73(10) prescribed the limitation for issuance of the order and not the notice, while Section 73(2) required the notice to be issued at least 3 months before the time-limit under Section 73(10).
The Court further observed that the department having taken up the audit objections before the Public Accounts Committee itself indicated that there was no satisfaction at the end of the department, meaning the assessing officer, as to the mismatch or short payment of tax, much less the alleged suppression. The SCN contained only a bland statement regarding availing of ITC “without documentary evidence and suppress the facts”, without any foundational facts to validate the allegation of suppression. The Court emphasised that the foundational facts leading to an inference of fraud, wilful misrepresentation or suppression had to be evident from the notice itself and that mere employment or mechanical recital of such words would not indicate application of mind.
Decision
The Court, therefore, held that the SCN could not be sustained and consequently set aside the SCN dated 13 June 2025 as well as the order-in-original dated 26 December 2025. However, since the extended period of 2 years had not yet expired, liberty was granted to the department to initiate appropriate proceedings under Section 74, if so advised, on the basis of foundational facts coming out from the notice itself, and to pass an order before 28 February 2027. With the said reservation and liberty, the appeal was allowed.
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[Tata Steel Ltd. v. Union of India, 2026 SCC OnLine SC 1702, decided on 25-8-2026]
*Judgement authored by: Justice K. Vinod Chandran
Advocates who appeared in this case:
For the Appellant: Dr A.M. Singhvi and Kavin Gulati, Senior Counsel
For the Respondent: S. Dwarakanath, A.S.G.
