Facts of the Case:

In this case, the petitioners challenged a Show Cause Notice dated 05.09.2023 issued under Section 74 of the CGST/GGST Acts for the period from 01.07.2017 to 12.05.2022, alleging deliberate non-payment of GST on services relating to treatment and disposal of industrial effluents. Petitioner No.1 was registered under Section 12AA of the Income-tax Act and was engaged in environmental activities. In earlier income-tax proceedings, the Gujarat High Court, by judgment dated 29.07.2019 in Tax Appeal No.627 of 2015 and allied matters, had categorically held that the petitioner’s activities constituted “preservation of environment” and were charitable activities eligible for exemption under the Income-tax Act.

Relying upon Notification No.12/2017-Central Tax (Rate), the petitioners believed that their services were exempt from GST. They subsequently obtained GST registration and began paying output tax from 13.05.2022, since claiming exemption resulted in denial of input tax credit and consequential losses.

Following a search conducted on 23.11.2022, the Department issued Form GST DRC-01A proposing recovery of GST for the earlier period and, despite the petitioners’ objections relying upon the Gujarat High Court’s earlier judgment, issued the impugned Section 74 SCN alleging fraud, wilful suppression and deliberate intent to evade tax.

Issue:

Whether the Department could invoke Section 74 of the CGST/GGST Acts and demand GST by alleging fraud, wilful misstatement and suppression of facts where the taxpayer had claimed exemption on the basis of its registration under Section 12AA, the nature of its activities had already been judicially recognized by the Gujarat High Court as charitable activity involving preservation of environment, and the taxpayer had subsequently voluntarily started paying GST.

Held That:

The Court noted that Notification No.12/2017-Central Tax (Rate) specifically exempts services provided by an entity registered under Section 12AA by way of charitable activities, including preservation of environment, under Chapter 99. In the petitioners’ case, the Gujarat High Court had already examined the nature of their activities in detail and held that they constituted preservation of environment for purposes of Section 2(15) of the Income-tax Act. The Court found that this earlier judicial determination, read with Notification No.12/2017, could not simply be ignored by the GST authorities.

The Court distinguished Notification No.11/2017-Central Tax (Rate), which prescribed GST on services under Heading 9994 relating to sewage and waste treatment and environmental protection services. According to the Court, the specific exemption contained in Notification No.12/2017 for charitable activities undertaken by entities registered under Section 12AA was applicable to the petitioners, and the general taxable entry under Notification No.11/2017 could not be invoked to deny the exemption in the circumstances of the case.

On the invocation of Section 74, the Court emphasized that fraud, wilful misstatement or suppression of facts with intent to evade tax must be established before the extended machinery under Section 74 can be invoked. Relying upon the Supreme Court’s decision in Uniworth Textiles Ltd. v. Commissioner of Central Excise, along with the principles in Pushpam Pharmaceuticals and Anand Nishikawa, the Court held that mere non-disclosure or failure to pay tax does not automatically amount to wilful suppression. Suppression requires a deliberate withholding of correct information with an intent to evade tax.

The Court found no such mala fide or deliberate intention in the present case. The petitioners had proceeded on the basis of their Section 12AA registration, the nature of their charitable activities and the exemption available under Notification No.12/2017. Their subsequent decision to obtain GST registration and pay output tax from 13.05.2022 because the exemption resulted in loss of ITC was also not indicative of an intention to evade tax for the earlier period.

The Court therefore concluded that the Department could not sustain the Section 74 proceedings by characterizing the petitioners’ bona fide exemption claim as fraud or wilful suppression. The impugned SCN, having been issued in disregard of the earlier judgment concerning the nature of the petitioners’ activities, was held unsustainable and was quashed and set aside.

Case Name: Naroda Enviro Projects Ltd. & Anr. Versus Union Of India & Ors. dated 02.09.2026

Citation No. 2026 Taxo.online 2695