Before dwelling into submissions, it is imperative to understand the provisions of Section 74 of the Act in order to know that in which cases penalty under Section 74 can be levied upon a taxpayer. Therefore, relevant extract of Section 74 of the Act is reproduced for ready reference –

 

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised 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.”

• On bare perusal of the above-mentioned provision, it can be seen that extended period can be invoked or penalty under Section 74 of the CGST Act can be levied on a taxpayer, only if the taxpayer fails to pay any tax or short pays the tax or where ITC has been wrongly availed and utilised due to below mentioned reasons –
• Fraud;
• Wilful misstatement; or
• Suppression of facts
• To evade tax

• Further, the word suppression is defined under explanation 2 of Section 74 of CGST Act, 2017.The relevant extract is reproduced for your kind perusal –

 

“Explanation 2. For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.”

• Thus, on bare perusal of definition of term suppression, it can be seen that Section 74 can only be invoked when the Noticee has not declared the facts or information which the Noticee is liable to do in its return, statement, report or any other document furnished under the act. However, contrary to above contentions, the Noticee duly cooperated with the department during the entire proceedings and also all the facts that Noticee has availed ITC from which parties was already available with the department. Therefore, Section 74 cannot be invoked in the instant matter of the Noticee.

• Further, the Hon’ble Supreme Court in the matter of Pushpam pharmaceuticals Co. vs. CCE, Bombay cited in 2016 Taxo.online 46, while interpreting the term ‘suppression’ held that –

“The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different than what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact, it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty.”

• Therefore, as per the ratio laid down by the Hon’ble Apex Court in the matter of Pushpam Pharmaceuticals it can be seen that the suppression shall be deliberate and mere omission cannot be said to be suppression. Moreover, in the instant case of the Noticee, the information based on which the entire case is framed upon the Noticee, were always available with the Revenue Department based on which the Impugned SCN has been issued and thus, it cannot be, in any way said that there was wilful suppression on part of the Noticee.

• Moreover, it is submitted that, even if the extended period is to be invoked, the same can only be invoked only if mala fide intention with an intent to evade payment of tax is involved, for which the burden of proof is cast upon the department.

• Reliance is placed on the Circular No. 1053/02/2017-CX dated 10 March 2017, relevant extract of which is reproduced herein below:

 

 “3.2 Ingredients for extended period: Extended period can be invoked only when there are ingredients necessary to justify the demand for the extended period in a case leading to short payment or non-payment of tax. The onus of establishing that these ingredients are present in a given case is on revenue and these ingredients need to be clearly brought out in the Show Cause Notice alongwith evidence thereof. The active element of intent to evade duty by action or inaction needs to be present for invoking extended period. 

 

3.3 The Apex Court in the case of M/s Cosmic Dye chemical Vs Collector of Cen. Excise, Bombay 2016 Taxo.online 48 has laid the law on the subject very clearly. The same is reproduced below for ease of reference. 

Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word “wilful” preceding the words “mis-statement or suppression of facts” which means with intent to evade duty. The next set of words “contravention of any of the provisions of this Act or Rules” are again qualified by the immediately following words “with intent to evade payment of duty”. It is, therefore, not correct to say that there can be a suppression or mis-statement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11A. Misstatement or suppression of fact must be wilful.

 

3.4 Extended period in disputed areas of interpretation: There are cases where either no duty was being levied or there was a short levy on any excisable goods on the belief that they were not excisable or were chargeable to lower rate of duty, as the case may be. Both trade and field formations of revenue may have operated under such understanding. Thus, the general practice of assessment can be said to be non-payment of duty or payment at lower rate, as the case may be. In such situations, Board may issue circular clarifying that the general practice of assessment was erroneous and instructing field formations to correct the practice of assessment. Consequent upon such circular, issue of demand notice for extended period of time would be incorrect as it cannot be said that the assessee was intentionally not paying the duty. 

 

3.5 On the other hand, there can be Board circulars which only reiterate the correct practice of assessment which is being followed by the compliant segment of the assessees. In such situations, decision to invoke extended period would depend on examination of facts of a case and where the ingredient to invoke extended period is present, show cause notice for extended period can be issued. In such situations it would be unfair to the compliant segment of the assessees to not invoke the extended period of time, if active ingredients are present to invoke extended period. 

 

3.6 Power to invoke extended period is conditional: Power to issue notice for extended period is restricted by presence of active ingredients which indicate an intent to evade duty as explained above. Indiscriminate use of such restricted powers leads to fruitless adjudications, appeals and reviews, inflates the figures of outstanding demands and above all causes unnecessary harassment of the assessees. Therefore, before invoking extended period, it must be ensured that the necessary and sufficient conditions to invoke extended period exists.”

• Additionally, the Noticee relies upon the decision of the Hon’ble Apex Court in the case of Pahwa Chemicals Pvt. Ltd. v. Commissioner of C. Ex., Delhi 2024 Taxo.Online 184 wherein, it has been held that there must be some positive act, with an intent to evade payment of duty or taxes, of the assessee to establish either wilful mis-declaration or wilful suppression. Relevant extract of the judgment is reproduced as under:

 

“…3. The Appellants have all along claimed that merely because they were affixing the label of a foreign party, they did not lose the benefit of Notification No. 175/86-C.E. as amended by Notification No. 1/93-C.E. The view taken by the Appellants had, in some cases, been approved by the Tribunal which had held that mere use of the name of a foreign party did not dis-entitle a party from getting benefit of the Notifications. It is only after Larger Bench held in Namtech Systems Limited v. Commissioner of Central Excise, New Delhi reported in 2000 (115) E.L.T. 238 (Tribunal) that the position has become clear. It is settled law that mere failure to declare does not amount to wilful mis-declaration or wilful suppression. There must be some positive act on the part of the party to establish either wilful mis-declaration or wilful suppression. When all facts are before the Department and a party in the belief that affixing of a label makes no difference does not make a declaration, then there would be no wilful mis-declaration or wilful suppression. If the Department felt that the party was not entitled to the benefit of the Notification, it was for the Department to immediately take up the contention that the benefit of the Notification was lost.

 

4. In this case, as set out hereinabove, all facts were within the knowledge of the Department. Therefore, even if the ratio of Nizam Sugar Factory's case (supra) is applied, there is no justification for invoking the extended period of limitation…”

 

(Emphasis Supplied)

• Further, various judicial authorities across the country had held that the burden to prove that there is wilful suppression or malafide intent to evade payment of taxes is on the department. Reliance in this regard is placed on following judicial pronouncements –

• Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, cited in 2016 Taxo.online 185
• Simplex Infrastructures Ltd. v. Commissioner of S.T., Kolkata, cited in 2016 Taxo.online 3
• Chattisgarh State Industrial Development Corporation Ltd. v. C.C.E. & S.T., Raipur cited in 2016 Taxo.online 188
• Anand Nishikawa Co. Ltd. v. CCE cited in 2016 Taxo.online 186
• Collector of Central Excise v. Chemphar Drugs & Liniments reported in 2016 Taxo.online 187
• Godrej Foods Ltd v. Union of India, cited in 2016 Taxo.online 42

• Additionally, it is submitted that CBIC had issued Instruction No. 05/2023-GST dated 13 December 2023, wherein it was stated that Section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax, however, in present case, there was no suppression of facts as the Noticee had duly filed its return and also all the relevant data was with the knowledge of the department. Relevant extract of the instruction is reproduced herein below:

 

“3.2 In this regard, section 74 (1) of CGST Act reads as follows:

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression f facts to evade tax, “

 

3.3 From the perusal of wording of section 74(1) of CGST Act, it is evident that section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.”

• Further it has been alleged vide the Impugned SCN that if investigation on the basis of __________’ had not been conducted against the Noticee by the Revenue Department, then the alleged suppression of the material facts of the case would have remained undiscovered. The relevant extract of the Impugned SCN has been reproduced below for your further reference:

“….However, the noticee appears to have suppressed the material facts from the knowledge of the department inasmuch as they, wrongly availed/utilized input tax credit (ITC) in respect of the bogus invoice issued by fake entity as discussed in foregoing paras. The Noticee have misstated their registration and received bogus invoices without actual receipt of goods and availed in-eligible Input Tax Credit as discussed in foregoing para. Had M/s XYZ, (07xxxxxxxxxx6J1B9) not been subjected to investigation by CGST Commissionerate, _________, the wrong done by them would have remained unearthed……”

 

• However, in this regard, it is pertinent to note here that even as on date, the department has not conducted any independent search, investigation, inspection or physical verification at the Noticee’s premises or office in relation to this adjudication, in order to perform the physical verification of the stock, review of cash balances and examination of any relevant invoices, ledgers, returns, records, books of account or any other document maintained at the premise or office of the Noticee. Further, no investigation has been conducted by the Revenue Department on the basis of which suppression on the part of the Noticee could be alleged. This absence of investigative action further underscores the lack of any concrete evidence to support the allegation as levied against the Noticee vide the Impugned SCN i.e., wrong availment of fake ITC without any actual supply of goods.

• Despite the seriousness of the allegation concerned, the fact that no such investigative measures have been taken by the department suggests that the concerns raised in the Impugned SCN, may be unsustainable as lacking any independent inquiry, that can be conducted against the Noticee in the instant matter. Without a thorough investigation, it is difficult to substantiate the department’s position that the Noticee has wrongfully availed ITC.

• Therefore, the Noticee submits that if any such investigation as described supra, would have been conducted by the department in the said matter, then it would only further substantiate the legitimacy of the Noticee's records and the genuineness of the inward and outward supplies, that will ultimately prove the genuine contention of the Noticee having compliances with the relevant provisions of the CGST Act.

• Hence, the Noticee submits that when the department had failed to prove that the Noticee availed ITC in a fraudulent manner and also has suppressed material information from the department, extended period of limitation cannot be invoked in the instant matter of the Noticee.

• Thus, concluding the submissions made above, the Noticee is not liable to make any reversal of the ITC as per the submissions made above, and thus, the extended period of limitation has been wrongly invoked by the Revenue Department.

 

• Moreover, the Noticee is also not liable for penal action under Section 74 of the CGST Act in absence of the ingredients required for invoking Section 74 of the CGST Act in the matter. Hence, the demand for penalty amounting to 100% of the amount in dispute shall be dropped on this ground only.