No Tax demand can be issued or raised without issuing notice under section 74(1) of the Act

  • vide decision of High Court of Telangana in Deem Distributors (P.) Ltd. v. Union of India

Facts of the case:

  1. The petitioner is a partnership firm and is registered under the Telangana GST Act, 2017, CGST Act, 2017 and IGST Act, 2017 and is involved in the business of dealing in goods and services relating to Ferrous waste and scrap, re-melting scrap ingots of iron or steel, flat rolled products of iron or non-alloy steel of a width of 600 mm or hot rolled, not clad, plated or coated etc.
  2. In the given case, the respondent issued a letter dated 25-4-2019 to the petitioner saying that the petitioner had availed input tax credit on the basis of invoices issued by certain suppliers/firms.

  3. It is stated in the said letter that the investigations conducted by the departmental officials reveal that the said suppliers/firms are fictitious and are issuing fake invoices with an intent to pass on input tax credit.
  4. It appears that the said credit was availed by the petitioner in a fraudulent manner without receiving any material, and the petitioner was requested to reverse the input tax credit of Rs. 1,52,35,820/- availed on such invoices immediately.
  5. The respondent sent an intimation of tax ascertained as being payable on 22-1-2021 saying that petitioner is liable to pay Rs. 1,17,35,822/- for the period February, 2018 to March, 2018 and he was being advised to pay it, failing which a show cause would be issued under sub-Section (1) of Section 74 of the Act.
  6. No doubt summons have been issued to the Director of the petitioner firm under section 70 of the Act to give evidence and to produce certain purchase orders and investigation against the petitioner is not complete
    and no notice under Sub-section (1) of Sec.74 of the Act has been issued to it.
  7. The petitioner is assailing the conduct of respondent in directing it to remit the amount availed as input tax credit at the stage of summons itself without following due procedure under section 74 of the CGST Act, 2017
  8. Petitioner contends that to buy peace with the respondent and to avoid coercion, petitioner had paid Rs. 10.00 lakhs on 30-4-2019 and Rs. 25.00 lakhs on 13-9-2019 and the respondent are not entitled to make such a demand.
  9. Section 74 of the Act deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful-misstatement or suppression of facts.
  10. A notice in sub-Section (1) of Section 74 of the Act may be issued by the proper officer if he is of the opinion that the input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts, to the person who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.
  11. Sub-Section (5) of Section 74 of the Act, however, enables the person chargeable with tax to, before service of notice under sub-Section (1) of Section 74, pay the tax along with interest payable under section 50 and a penalty of 15% of such tax on the basis of his own ascertainment of such tax or the tax ascertained by the proper officer and inform the proper officer in writing of such payment.
  12. Sub-Section (9) of Section 74 of the Act enables the proper officer to determine the amount of tax, interest and penalty due from such person and issue an order, if the contents of the notice are disputed.
  13. The court held that Before ascertainment of liability, the respondent could not have issued the letter dt.25-4-2019 to the petitioner asking him immediately reverse the input tax credit of Rs. 1,52,35,820/- allegedly availed.
  14. Also no advisory jurisdiction is conferred on the respondent to issue any 'advises' of the nature issued to the
    petitioner by respondent on 22-1-2021 asking him to pay Rs. 1,17,35,822/- .
  15. No tax demand can be issued or raised when investigation is still in progress. The respondent cannot be allowed to collect any tax, interest or penalty before they determine, in an enquiry, after putting the petitioner/assessee of notice, and opined that their action is wholly arbitrary and without jurisdiction.

The High Court of Telangana held the case as follows:
The Writ Petition is allowed. The respondent are restrained from coercing the petitioner to make any payment without issuing notice under section 74(1) of the Act and following the procedure and they are directed to refund Rs. 35,00,000/-already paid by petitioner with interest @ 7% p.a from the date of payment till date of refund within four (04) weeks from the date of receipt of a copy of this order.
It is however made clear that respondent can proceed with the investigation as well as enquiry under the provisions of the Act against the petitioner and act strictly in accordance with the Act.