Facts of the Case:

In this case, M/s Tata Steel Limited was subjected to proceedings concerning three financial years, namely FY 2018-19, 2019-20 and 2020-21, pursuant to audit objections raised by the office of the Comptroller and Auditor General of India. The audit observations related principally to an alleged mismatch in input tax credit for all three financial years and short payment of tax for FY 2019-20. Proceedings were sought to be initiated under Section 74 of the CGST Act, 2017, which permits recovery of tax not paid or short paid, or ITC wrongly availed or utilised, where such liability has arisen by reason of fraud, wilful misstatement or suppression of facts with intent to evade tax.

The assessee contended that the invocation of Section 74 was fundamentally defective because the SCN did not contain any specific allegation or material establishing fraud, wilful misstatement or suppression of facts. According to the assessee, in the absence of these ingredients, the extended limitation available under Section 74 could not be invoked and the proceedings, if at all, had to be tested under Section 73, which prescribes the normal limitation period.

The proceedings arising from the audit objection commenced with a communication dated 27.05.2024. The assessee furnished replies and supporting explanations, following which further documents were sought by the Department on 27.06.2024. Subsequently, an SCN dated 13.06.2025 was issued. However, on 27.06.2025, the Additional Commissioner informed the assessee that the SCN had been transferred to the “call book”, meaning that the proceedings were being kept in abeyance. The Department was also contesting the audit objection before the Public Accounts Committee, which was relevant to the Supreme Court’s assessment of whether the Proper Officer was actually satisfied regarding the alleged discrepancy.

Thereafter, on 01.07.2025, the earlier proceedings were sought to be revived and a fresh notice was issued proposing a protective demand, apparently on the premise that the statutory limitation under the GST law was approaching. The assessee challenged the proceedings before the Supreme Court, contending that the concept of a protective demand was not contemplated under the GST statutory framework and that the Department could not use Section 74 merely as a device to overcome expiry of the normal limitation period.

Issue:

Whether a show cause notice issued under Section 74 of the CGST Act could be sustained merely on the basis of a general allegation of “suppression of facts”, without the SCN disclosing the foundational facts and material establishing fraud, wilful misstatement or suppression with intent to evade tax.

Held That:

The Supreme Court allowed the appeal and set aside the SCN as well as the consequential Order-in-Original dated 26.12.2025. The Court held that proceedings under Sections 73 or 74 can be initiated only upon the satisfaction of the Proper Officer. Where the proceedings are initiated under Section 74, the officer must be satisfied not merely that there has been an ITC mismatch or short payment of tax, but also that such mismatch or short payment has occurred by reason of fraud, wilful misstatement or suppression of facts.

The Court rejected the Revenue’s contention that an audit objection by itself could justify invocation of Section 74. It held that even where an audit raises an objection, the Assessing Officer must independently apply his mind and arrive at the requisite satisfaction before issuing the notice. In the present case, the fact that the Department itself had placed the proceedings in the call book and was contesting the audit objection before the Public Accounts Committee demonstrated that there was no clear satisfaction on the part of the Assessing Officer even regarding the alleged mismatch or short payment, much less regarding the allegation of suppression.

The Supreme Court further held that mere use of the words “fraud”, “wilful misstatement” or “suppression of facts” in an SCN is not sufficient to invoke Section 74. The notice must disclose the foundational facts from which the conclusion of fraud, wilful misstatement or suppression is sought to be drawn. The Court observed that these expressions cannot be mechanically reproduced in a notice merely to avail the extended period of limitation. In the present case, apart from a bland assertion that ITC had been availed “without documentary evidence” and that the assessee had “suppressed the facts”, the SCN did not disclose any material facts demonstrating a deliberate device or conduct adopted by the assessee to evade tax or wrongly avail excess ITC. Consequently, the statutory foundation necessary for invoking Section 74 was absent.

On limitation, the Court held that the Section 73 limitation had expired on 28.02.2025 for the financial years involved, whereas the impugned SCN dated 13.06.2025 was issued thereafter. Therefore, the Department could sustain the proceedings only if the extended limitation under Section 74 was validly invoked. Since the SCN failed to establish the essential ingredients of Section 74, the Department could not rely upon the extended limitation merely by inserting the expression “suppression of facts”.

The Court also rejected the Revenue’s reliance upon Explanation 2 to Section 74, noting that the said Explanation had been omitted with effect from 01.11.2024. The Court further clarified that the limitation under Section 73(10) relates to the passing of the order and not merely to issuance of the SCN, while Section 73(2) requires issuance of notice at least three months before the prescribed deadline.

With regard to the protective demand, the Supreme Court held that the GST legislation does not recognise such a device merely to preserve the Department’s claim against expiry of limitation. The subsequent attempt to revive the proceedings and propose a protective demand could not cure the fundamental defect in the original proceedings.

Key Takeaways: For invoking Section 74, the Department must do more than mechanically allege “fraud”, “wilful misstatement” or “suppression”. The SCN itself must disclose the foundational facts and material which establish the existence of such conduct and its connection with the alleged tax short payment or wrongful ITC. An audit objection does not dispense with the Proper Officer’s independent satisfaction, and Section 74 cannot be invoked merely as a protective mechanism to overcome expiry of the normal limitation period.

Case Name: M/s Tata Steel Limited Versus Union of India through the Secretary Ministry of Finance and Ors. dated 25.08.2026

Citation No. 2026 Taxo.online 2588