The Bombay High Court ruled that show cause notices under Section 74 of the CGST Act must be issued separately for each financial year, as limitation periods differ annually, making consolidated notices across multiple tax periods inconsistent with the statutory framework.
MUMBAI: The Bombay High Court ruled that show cause notices issued under Section 74 must be provided separately for each financial year or tax period. The Court highlighted that Sections 73(10) and 74(10) of the CGST Act specify distinct limitation periods for each financial year, allowing tax authorities to issue orders within five years from the due date for submitting the annual return for that specific financial year.
If a consolidated notice encompassing multiple years were permitted, it would effectively combine different tax periods with varied limitation timelines, contradicting the statutory framework.
Facts of the Case:
In this matter, the petitioner contested a show cause notice (SCN) issued by tax authorities under Section 74, claiming the suppression of taxable value and subsequent short payment of Central GST. The notice in question spanned a composite timeframe from Financial Year 2018-19 to 2022-23, alleging that the petitioner had suppressed taxable turnover during these years, resulting in tax shortfalls.
The petitioner approached the High Court, asserting that the notice lacked jurisdiction as it combined multiple financial years into a single SCN. They argued that the GST regulatory framework necessitates a year-wise assessment of tax liability, making the issuance of a consolidated notice across several financial years impermissible. The petitioner referenced the High Court’s previous judgment in Milroc Good Earth Developers v. Union of India, which determined that the CGST Act does not allow for the consolidation of different financial years or tax periods into a single SCN under Section 74.
In opposition, the tax department contended that the case involved fraudulent claims of Input Tax Credit (ITC) over multiple years. They posited that when fraudulent activity spans several years, a consolidated SCN can be issued to showcase the pattern of fraud. The department cited the Delhi High Court’s ruling in Mathur Polymers v. Union of India, which stated that the CGST Act does not explicitly prohibit a consolidated SCN for multiple years in cases of fraudulent ITC claims. They further mentioned that this decision had been challenged in the Supreme Court, which declined to intervene, thereby suggesting that the legal position was settled.
Issue:
Whether a single consolidated SCN under Section 74 of the CGST Act could be issued for multiple financial years (2018-19 to 2022-23), alleging suppression of taxable value and fraudulent ITC claims, or if the GST statutory framework mandated separate notices for each financial year or tax period?
Observations of the Court:
The Court noted that Sections 73(10) and 74(10) of the CGST Act outline distinct limitation periods for each financial year, thereby permitting tax authorities to act within five years from the due date for the annual return of that specific financial year.
It emphasized that allowing a consolidated notice covering multiple years would effectively blur the lines between different tax periods with varying limitation timelines, which would contradict the statutory design. The Court relied heavily on previous rulings in Milroc Good Earth Developers and Rite Water Solutions, which thoroughly examined the GST statutory framework.
The Court observed that the GST system is built around separate tax periods, where tax liability is determined based on the returns submitted for each financial year. While returns may be filed monthly, the statutory structure ultimately ties assessment, recovery, and time limitations to the financial year and annual return.
Furthermore, the Court referred to the definition of “tax period” under Section 2(106) of the CGST Act, signifying the period for which returns must be submitted. This legal framework indicates that each financial year constitutes a distinct tax period for assessment and recovery.
Consequently, the Court determined that Section 74 does not permit the consolidation of notices for multiple financial years, even in instances of alleged fraudulent ITC claims. Therefore, the impugned show cause notice was quashed and set aside.
The High Court ruled in favor of the petitioner, quashing the show cause notice and establishing that combining multiple financial years into a single notice under Section 74 of the CGST Act is impermissible.
Case Title: M/s. Hakikatrai and Sons, Akola Versus Union of India and Ors.,
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