SCNs Under Section 74 of CGST Act – Scope and Penalties

Show Cause Notices (SCNs) under Section 74 of the Central Goods and Services Tax (CGST) Act are formal notices issued by tax authorities when tax dues arise due to fraud, wilful misstatement, or suppression of facts with the intent to evade tax. These notices initiate proceedings for recovery of unpaid taxes, interest, and penalties, and are applicable in cases involving “special circumstances” that justify an extended limitation period of five years from the relevant date.

Table of Contents

1. Anatomy of a Notice
2. Exceptions to Pre-notice Consultations
3. Pre-notice Penalty
4. Post-notice Penalty
5. Post-adjudication Penalty
6. Additional Aspect About Evasion
7. Disputed Tax Period

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SCN under section 74 cannot be issued to Public Sector Undertakings as the ‘end objective’ cannot be established because any savings in tax (by evasion) will eventually belong to Consolidate Fund.

Where divergent views are expressed by different authorities (Tribunals or Courts), SCN cannot be issued under section 74. Entertaining a favourable view may be mischievous (if taxpayer does not believe in said view) but it is not so improbable (since it is shared with these authorities) to support allegation of ‘special circumstances’ to support demand under section 74.

An important aspect is the ‘source’ of information to inquire and issue notice under section 74. Where taxpayer’s own contemporaneous records make up this ‘source’ with Revenue merely canvassing an alternate interpretation, it does not augur well with the allegation about the existence of ‘special circumstances’. While this is not a rule of universal applicability, information sourced from taxpayer’s own records may be compatible with bona fide recording of mala fide interpretation adopted. It is clear that levelling allegations about ‘special circumstances’ is not without work cut out for Revenue and one that will occupy an important part of taxpayer’s defence, where the demand is disputed.

1. Anatomy of a Notice

Notice under section 74 is a must not only for the additional time allowed or statutory minimum penalty applicable, when there is allegation of ‘evasion of tax’. Notice under section 74 procures jurisdiction to raise demand in ‘special circumstances’. It would be a grave contradiction that special circumstances are alleged, but notice is issued under section 73. It is also a contradiction that notice is issued under section 73 pursuant to investigation under section 67. Taxpayer is welcome to assail validity of notice due to inherent admission of ‘no evasion’ when notice is issued under section 73. And omission to issue notice under section 74 cannot be revised by section 75(2).

Reference to discussion under section 73 will supplement this discussion under section 74. Cause of action to issue notice under section 74 remains same as under section 73. However, “where” such cause of action arises due to ‘special circumstances’ then the notice must be issued under section 74 and NOT under section 73. To allege ‘special circumstances’ and issue notice under section 73 is contradictory, incompatible with each other and a clear misapplication of law. Section 75(2) allows relief where notice issued under section 74 but not sustained in later proceedings will be “deemed as if” the notice was issued under section 73. But the converse is not true, that is, there is no provision that ‘deems’ notice issued under section 73 to be a notice under section 74 if any of the special circumstances come to light in the course of later proceedings. In fact, there is an express embargo in section 75(7) on Adjudicating Authority and in second proviso to section 107(11) on Appellate Authority, from enhancing liability as originally proposed in notice.

Notice under section 74 must be adjudicated within five (5) years from the ‘relevant date’. Detailed discussion on ‘Limitation’ under section 73 may be considered. The table provided regarding the timelines to issue notice under section 74(2) and to complete adjudication under section 74(10), as applicable to notices under section 74 are –

Demand	Notice (Start Date)	Order (End Date)
Tax not paid	54 months from due date of annual returns for FY	60 months (5 years) from due date of annual returns for FY
Tax short paid
Credit wrongly taken
Credit wrongly utilised
Erroneous refund	54 months from date of refund sanction	60 months (5 years) from date of refund sanction

Note – No extension of dates is notified under section 168A in respect of notices under section 74 for 2017-18.

Requirement of accompanying documents under rule 142(1) for notice and SOD issued under section 74 are the same in case of notice issued under section 73. But it is interesting to mention that where SOD is issued under section 74(3) in respect of a demand for a subsequent period where an earlier notice was issued under section 74, it (SOD) will be considered to be a demand under section 73 as per section 74(4). That is, SOD will always be ‘deemed’ to demand under section 73 even though it is issued with reference to notice issued earlier under section 74. All attendant relief such as that under section 73(8) and 73(11) will apply to this SOD, even though it is issued under section 74(3). Care must be taken not to overlook this significant difference, especially, when Adjudication Orders for the earlier notice under section 74(1) and subsequent SOD under section 74(3) may be passed in the same proceeding.

2. Exceptions to Pre-notice Consultations

Procedure of pre-notice consultations is applicable even in respect of
notices to be issued under section 74, even when ‘special circumstances’ are involved. No assumption of guilt is inherent in ‘due process’ but is an additional allegation that must be established in adjudication.

Rule 142(1A) which contained the words “Proper Officer shall……communicate the details” notified from 9 Oct 2019 has been substituted with the words “Proper Officer may……communicate the details” by an amendment from 15 Oct 2020. This amendment is in the rules and as such does not eclipse the requirement of pre-notice consultations in section 73(5) or 74(5). Situations may present themselves where taxpayers may not be traceable after committing any of the offences, especially, those punishable under section 132. While section 73(5) and 74(5) permit concessional penalty and conclusion of proceedings if the amounts specified are discharged on (i) own ascertainment or (ii) as ascertained by Proper Officer, mandate to issue Form GST DRC1A in all cases would offer a defence for racketeers against notices issued without such pre-notice consultations. Such persons could evade pre-notice consultations and then claim (in later proceedings) that pre-notice consultations were bypassed by Revenue. It is for this reason, that an exception has been made effective in the rules with sufficient leeway being already available in the statute.

Another instance where pre-notice consultations is observed to be bypassed is where refund sanctioned is pending in departmental appeal and notice is issued in the meanwhile under section 73 for recovery of such refund by way of ‘dual notice procedure’. Where taxpayer has opposed the departmental appeal, pre-notice consultations will be empty formality and for this reason, notice will be issued in respect of erroneous refund sanctioned, whether under section 74 or section 73.

3. Pre-notice Penalty

Once a decision is taken by Revenue that notice merits to be issued for sufficient and defendable actionable causes under section 74, pre-notice consultations must still be carried out by issuing Form GST DRC1A as required in rule 142(1A). Although post-adjudication penalties under section 74(11) are severe, taxpayers are offered an opportunity to conclude proceedings by discharging entire amount of demand with interest and 15 per cent of demand by way of penalty. Backed by legislative wisdom, there remains nothing to debate by either side whether extent of concession allowed is fair or equitable.

All too often, it is reported that tax Officers insist taxpayers discharge liability under section 74(5) via Form GST DRC3 with penalty of 15 per cent. Such taxpayers may be misled into believing that all further proceedings will be concluded, and when payment is made without Form GST DRC1A issued, demand can be revived by issuing notice under section 74(7) citing reasons that payment made is without discharging applicable penalty and finality to proceedings allowed in section 74(6) is not available. Taxpayers need to consider that relief under 75(2) will be available if ‘special circumstances’ involved are held unsustainable in later proceedings. These are the perils of bypassing ‘due process’ laid down by Legislature or failure to object to invalidity of proceedings and hoping truth and innocence will assure relief to taxpayers.

4. Post-notice Penalty

It is not uncommon for taxpayers to await and consider the grounds on which notice is issued before deciding to discharge demand. After all, notices issued with deficiencies and discrepancies are fatal to the demand. Once notice has been issued, there is a short window of thirty (30) days under section 74(8) where taxpayer is allowed yet another opportunity to discharge dues but on payment of penalty of 25 per cent of the demand (excluding interest or penalty). Below is a tabulation of the penalties applicable –

Stage of Proceeding	Demand	Interest	Penalty
Pre-notice consultations	Full	Full	15% *
Post-notice	Full	Full	25% *
Post-adjudication	Full	Full	50% **

* NIL in proceedings under section 73

** 10% in proceedings under section 73

When Legislature has laid down these percentages, question whether this interferes with quasijudicial proceeding of adjudication, is a debate that is yet to come up before Courts but is an important question that should be at least to examine of Court can impose penalty below these statutory percentages. When the overarching principle of separation of powers is accepted as superior to the requirement of uniformity in action in adjudication, it appears that these percentages are not binding on Courts. Conclusion of proceedings is contingent upon taxpayers accepting specific penalty limits but not at the risk of forfeiting their rights in law. It appears that these limits are binding on Revenue not to demand anything more than that specified, provided payments are correctly made at the appropriate stage of proceeding. It must also be considered that taxpayers may consider discharging dues and penalty up to limit applicable under section 73 (at appropriate stage of proceeding) and contest the notice under section 74 seeking relief under section 75(2).

5. Post-adjudication Penalty

Although this aspect has been discussed under section 73, it is important to address certain additional aspects that are pertinent under section 74.

As discussed earlier, notice under section 74 is not only issued due to the extended period of limitation applicable but when the demand arises in ‘special circumstances’. Notice under section 74 can be issued even within three (3) years of the ‘relevant date’. In fact, where inspection or search and seizure have been conducted, issuing notice under section 73 is a contraindicator of the very question of jurisdiction to undertake proceedings under section 67.

Question of levy of penalty discussed under section 73 may be visited again while considering it under 74 because the language in section 74(1) reads as

“….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.”.

However, the levy of penalty when special circumstances alleged will remain under section 122(2)(b) and not under section 74(1) itself.

When notice issued under section 74 has been adjudicated under section 74(9), existence of special circumstances must be considered and accepted in adjudication and the demand on rest of the merits be confirmed. When such an Adjudication Order is passed, section 74(11) allows taxpayer to discharge 50 per cent of the penalty confirmed in the Order. In other words, Adjudicating Authority is guided by the minimum amount post-notice penalty (of 25 per cent) under section 74(8) and the maximum penalty (of 100 per cent) under section 122(2)(b). Proper Officer must adjudicate based on the facts and circumstances of each case, make a determination of the quantum of penalty without ‘acting under dictation’ in discharging quasijudicial responsibility. And as such, this penalty may be somewhere between this minimum and maximum.

Should the taxpayer desire conclusion of proceedings, Legislature (and not Revenue) offers a revised penalty of 50 per cent of the demand and not a 50 per cent abatement of that levied in adjudication, which is illustrated below –

Leviable (max.)	Adjudicated	Reduced*
100	100	50
100	60	50
100	40	NA

* if deposited within 30 days from date of communication of Order

In order to avail reduced penalty, taxpayer must discharge the demand (tax or credit or refund) with applicable interest and such penalty within thirty (30) days. All the slips in counting days must be considered. Deposit into Electronic Cash Ledger (ECL) does not suffice unless the amount deposited is appropriated against the dues admitted.

6. Additional Aspect About Evasion

Evasion may have many facets that are alleged in notice. One important aspect is to examine if the notice admits that evasion also involves non-payment of tax which is collected or non-payment of tax but without collecting it (tax) from Customers.

Absence of allegation of non-collection of said tax from Customers is a very important aspect that assists in taxpayer’s defence. Not only will relief of cum-tax computation under rule 35 become available, but Revenue will come under ‘additional’ burden to demonstrate exactly how evasion of tax has been perpetuated because non-collection and non-payment of tax brings no gains to taxpayer. An inability to discharge this ‘additional’ burden implies taxpayers’ bona fide belief in non-taxability of the transaction being admitted by Revenue. And then notice runs risk of being relegated to section 73 and demand adjusted.

Bona fide belief of taxpayer in entertaining an interpretation (now assailed by Revenue as untenable and non-payment of tax alleged as deliberate) cannot be straightaway assumed to be ‘wilfully mischievous’. It is not impossible for a taxpayer to be wrong and still be bona fide about such interpretation. After all, Courts too, admit that views expressed earlier may sometimes need revision when another occasion to consider the same provision presents itself again. Courts have shown by example, that it is not always mala fide to have pursued a line of interpretation that is discovered (or declared by judicial authority) to be incorrect. As long as the view entertained was plausible and consequent tax treatment honestly applied with full disclosure, where required, allegation of evasion of tax cannot be easily sustained. Often divergent views emerge until they are settled by Apex Court. And adopting a view which is more favourable to taxpayer cannot be smeared with mala fides automatically, and Revenue must be alert to issue notices in cases where the law is yet to be settled authoritatively and keep demands ‘alive’ by issuing notice and placing them in the call-book.

Example – Taxpayers who had not paid RCM on ‘ocean freight’ on their own interpretation of law, which came to be settled in their favour by Apex Court in UOI v. Mohit Minerals (P) Ltd. [2022] 138 taxmann.com 331/61 GSTL 257/92 GST 101 (SC) SCN must be issued under section 73 in all cases and not under section 74.

Taxpayers have taken credit on inward supplies towards construction services citing decision in Safari Retreats (P) Ltd. v. Chief Commissioner CGST [2019] 105 taxmann.com 324/74 GST 500/25 GSTL 341 (Ori.) even if they do not agree with it. But still, SCN cannot be sustained under section 74 since view entertained by taxpayer is supported by no less than a High Court (notwithstanding outcome on appeal to Apex Court).And although not a proper expression to use, especially, in deliberations that younger people may read, it begs to be used (apologetically) to strongly convey the principle of law by stating ‘being stupid, is not violation of law’. That is, where ‘such’ a view is entertained by a taxpayer which no prudent person might entertain (read Bolam’s test of reasonableness) would still fail to satisfy the ‘special circumstances’ needed to support a demand under section 74.

Not every non-payment of tax is evasion of tax, much less, with mala fide intent. If it can be shown that the view entertained was implausible, wild and recklessly erroneous, no demand under extended period of limitation will sustain. Intention or animus is baked into ‘evasion of tax’ and this requirement cannot be proved by presumption or assumed to exist in every instance where notice under section 74 is sustained.

7. Disputed Tax Period

Demand for ‘financial year’ is out-of-fashion in GST. It is time for ‘tax period’ as defined in section 2(106). Self-assessment is in respect of ‘each’ tax period and not a ‘financial year’ or any ‘block’ of tax periods. When liability of one tax period is discharged in returns of another tax period, Revenue cannot be expected to silently watch credit of the later period be utilised to discharge arrears of earlier tax period. Circular 172/4/2022-GST dated 6 Jul 2022 (at para 6) clarifies utilisation of balance lying in Electronic Credit Ledger (ECrL) across tax periods, whether the same is payable in self-assessment or pursuant to any proceedings in law (para 6(4)).

Role of sections 41 and 49 must be considered in harmony with each other and not in derogation of each other. Reading these two provisions, one cannot lose sight of ‘tax period’. Output tax of Tax Period 1 must be discharged out of input tax credit available in Tax Period 1 via returns filed under section 39. When output tax liability of Tax Period 1 is NOT discharged via returns filed under section 39, this liability may be discharged on ‘own ascertainment’ vide DRC3.

Common Portal is ‘tax period agnostic’ when permitting utilisation of balance available in ECrL to via DRC3. ‘Availment and utilisation’ of input tax credit was circumscribed by section 41-Old (up to 30 Sept 2022). As a result, up to 30 Sept 2022, it appears taxpayers must be mindful as to ‘identity’ of tax period and its liability. And must enquire – liability belonging ‘to which’ tax period is being discharged out of credit available ‘in which’ tax period. It seems the point is made.

Example – Contractor collects advances in Apr 2021 of ` 100 cr. There is no credit available in Apr 2021 as all inward supplies are expected to arrive from Jun to October 2021. Output tax liability is settled in November 2021 after accumulating sufficient input tax credit, along with interest.

Event organiser collects registration fee in January 2022 from participants for a GST Workshop to be held in Aug 2022. Input tax credits become available from auditorium rental, travel and accommodation, AV equipment hire and other inward supplies after the event is conducted. Credit available in Aug 2022 will need to be carried forward (and utilised for next event in 2023) when output tax is fully discharge ‘in cash’ in returns filed for Jan 2022 in Feb 2022.

But section 41-New (with effect from 1 Oct 2022) omits the ‘utilisation’ aspect of input tax credit and concerns itself only with the ‘availment’ aspect. Entire aspect of ‘utilisation’ of credit is left to section 49. Permitting utilisation of credit to discharge ‘any’ tax in section 49, refers to concept of ‘one-to-one’ correlation that is not required in GST.

Example – Taxpayer has furniture business in Jaisalmer where there is accumulation of input tax credit on account of inventory build-up and investment in capital goods. This credit is permitted to be utilised to discharge output tax liability on outward supply of renting immovable property in Jaipur. Both businesses operated under common GSTIN. There is no requirement in section 49 that admissible credit of furniture business must be utilised only to discharge liability of furniture business.

Utilisation of balance in ECL (Electronic Cash Ledger) and ECrL (Electronic Credit Ledger) must conform to the mandate in section 49 –

Provision	Operation
S.49(1)	Cash deposited to flow into ECL
S.49(2)	Credit availed in 3B to flow into E CrL
S.49(3)	Balance in ECL to be utilised to discharge any liability
S.49(4)	Balance in ECL to be utilised to discharge output tax