21.03.2024: Proceedings u/s 74 of the Act deems to be concluded, once all tax obligations are met before issuance of show cause notice: Telangana High Court

The Telangana High Court in the case of RAYS POWER INFRA PRIVATE LIMITED VERSUS SUPERINTENDENT OF CENTRAL TAX vide WRIT PETITION No. 298 of 2024 dated 28.02.2024, has held that where the assessee clears all the tax obligations including the interest at any day, before the issuance of show cause notice, they shall not be obligated for any additional taxes through the method of penalty or interest and the proceedings will be deemed concluded.

In this case, The Petitioner company underwent a G.S.T. audit by the third respondent for the period from July 2017 to March 2019. After the audit, the petitioner was informed of the findings on October 14, 2021. Upon receipt of the audit findings, the petitioner promptly paid the additional tax owed along with interest, as indicated by the demand made on October 28, 2021. The final audit report, issued on November 10, 2021, acknowledged the petitioner’s payment, which was duly received by the department.

However, despite the complete payment made by the petitioner, the first respondent issued a show-cause notice on April 20, 2022, under Section 74(1) of the C.G.S.T. Act. In response, the petitioner submitted a detailed reply on September 4, 2023, highlighting the discharge of their entire tax liability along with interest on October 28, 2021, and asserting that any irregularly claimed Input Tax Credit (I.T.C.) had already been reversed. Despite this submission, the authorities proceeded with the show-cause proceedings.

The petitioner was granted a personal hearing, but the authorities ultimately confirmed the demand raised, leading the petitioner to file the present writ petition. The counsel for the petitioner argued that initiating proceedings under Section 74(1) of the C.G.S.T. Act was inherently unlawful, and therefore, the entire process and the final order issued by the third respondent should be invalidated.

The Petitioner contended that, they falls squarely within the scope of Section 73(5), thus warranting the setting aside or quashing of both the show-cause proceedings and the final order being challenged in the writ petition.

The Court observed that the petitioner promptly rectified the situation upon being informed of the audit findings, clearing the entire tax liability related to the incorrectly availed Input Tax Credit (I.T.C) and settling the interest amount without delay. Notably, this action was taken even before the submission of the final audit report on October 14, 2021.  In the said circumstances, the case of the petitioner is one which that would fall strictly under Sub-Sections (5) and (6) of Section 73 where it has been emphatically laid down by the law makers that any person chargeable with tax, if he pays the amount of tax along with the interest payable there on, proper officer upon receipt of such information shall not initiate any further proceedings under Sub-Section (1) and all the proceedings shall have to deemed to be concluded.

The Court reaffirms the principle that taxpayers who voluntarily comply with audit findings by settling any additional tax and interest should not be subjected to the punitive provisions designed for fraudulent activities. It was accordingly held that once the assessee discharged all their tax liability by paying interest on the said tax payable, then no further proceedings could be drawn for the same tax any further.

The attempt of the learned Senior Standing Counsel trying to bring the conduct of the petitioner within the purview of fraud, misstatement and suppression of fact would not be sustainable and the said contention stands negated by the Bench simply for the reason that Sub-Section (1) of Section 73 permits a taxpayer to even clear wrongly availed I.T.C. and also wrongly utilized I.T.C. and it is this what is alleged against the petitioner of having wrongfully and irregularly availed I.T.C.

The action on the part of the respondents in initiating the show cause proceedings under Section 74 and passing of the impugned order dated 15.11.2023 both would be in excess of their jurisdiction and the same therefore deserves to be and are accordingly set-aside / quashed.

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