The Supreme Court on Tuesday (August 25) quashed the GST show-cause notice issued to Tata Steel Ltd. under Section 74 of the Central Goods and Services Tax Act, 2017, for alleged short payment of tax due to suppression of facts.

A bench of Justice JB Pardiwala and Justice K Vinod Chandran called the department's invocation of Section 74 of the Act, rather than the ordinary mechanism under Section 73, to be bad in law just to seek an extension of the limitation period by using expressions such as “fraud,” “willful misstatement” or “suppression of facts”.

The Court said that where the Department seeks to proceed against an assessee under Section 74, the foundational facts establishing how the alleged tax short payment or wrongful availment of input tax credit resulted from fraud, willful misstatement or suppression must be set out in the show cause notice itself.

“It is not mere lip service to the provisions that is intended when an extended limitation period is provided for recovering an excess benefit availed, short payment or excess refund, from the assessee, especially when the allegation is of fraud/willful misrepresentation/suppression. The foundational facts which led to the inference arrived at of fraud/willful misrepresentation/ suppression should be evident from the notice itself. The mere employment of such words will not indicate an application of mind, upon which alone the satisfaction can be arrived at. The words are not to be mechanically recited in the notice to enable recovery outside the normal limitation provided under the statute.”, the court observed.

The proceedings against Tata Steel concerned alleged irregularities relating to input tax credit (ITC) for three financial years.

The Department sought to invoke Section 74, rather than the ordinary mechanism under Section 73, thereby relying on the extended limitation applicable where the alleged non-payment or short payment of tax, or wrongful availment/utilisation of ITC, is “by reason of fraud, or any wilful misstatement or suppression of facts.”

Tata Steel challenged the notice, arguing that the necessary ingredients for invoking Section 74 were absent.

According to the assessee, the notice did not disclose any material demonstrating fraud, willful misstatement or suppression, and the Department had itself not reached the requisite satisfaction regarding the audit objection.

Quashing the show cause notice, the judgment authored by Justice Chandran observed that the show cause notice “failed to make out a case of a deliberate device employed to evade tax or avail excess ITC.” The Court stressed that a Section 74 proceeding requires more than a finding that there has been a tax mismatch or that ITC has allegedly been wrongly availed i.e., the Assessing Officer must also be satisfied that the alleged short payment or wrongful ITC occurred because of fraud, willful misrepresentation or suppression of facts.

“…we have to notice that the proceedings under Section 73/74 can be initiated only on the satisfaction of the Assessing Officer. Even if observations/objections are made on audit, the Assessing Officer should enter his satisfaction before a notice is issued. Insofar as a notice under Section 74, the satisfaction should be not only of mismatch of ITC and short payment of tax having occurred, as is alleged in this case, the Officer should be satisfied that either fraud/willful misrepresentation/suppression had led to such mismatch or short payment of tax… The fact that the Department had taken up the objections on audit with the Public Accounts Committee itself indicates that there was no satisfaction at the end of the Department, meaning the Assessing Officer; as to the mismatch or the short fall of payment of tax having occurred, not to say anything about the suppression alleged.”, the Court observed.

The Court faulted the SCNs for “bland statement made at some places of suppression of facts, merely to avail the extended period of limitation would barely suffice and puts to peril the notice under Section 74.”

“…but for a bland statement of availing of ITC for the three years 'without documentary evidence and suppress the facts' (sic), the SCN did not contain any foundational facts to validate such allegation of suppression.”, the Court added.

As a result, the appeal was allowed, with a liberty granted to the Department to initiate an appropriate Section 74 proceeding, if permissible in law, with the foundational facts emerging from the notice itself before 28.02.2027.

Headnote

– Limitation Period – Invocation of Extended Period of Limitation – Requirements of Fraud, Willful Misstatement, or Suppression of Facts – Protective Demand - Subjective Satisfaction of Proper Officer - Proceedings under Section 73 or Section 74 can be initiated only upon the independent satisfaction of the Assessing Office - Even when audit objections or observations are raised (such as by the CAG), the Assessing Officer must enter his own satisfaction before issuing a notice - Under Section 74, the Officer must be satisfied not merely that a mismatch of ITC or short payment of tax occurred, but specifically that such mismatch or short payment was caused by reason of fraud, willful misstatement, or suppression of facts - Under Section 73(10), the limitation period of three years is prescribed for the issuance of the adjudication order under Section 73(9), and not for issuing the Show Cause Notice - Under Section 73(2), the notice must be issued at least three months prior to the expiry of the time limit specified under Section 73(10).

Requirement of Foundational Facts in Show Cause Notice - Audit Objections and 'Call Book' Procedure - The extended limitation period of five years under Section 74 cannot be availed of by merely reciting statutory words mechanically - It requires more than mere lip service to the statutory provisions - The foundational facts leading to the inference of fraud, willful misstatement, or suppression of facts must be expressly set out in the Show Cause Notice itself - A bland allegation that input tax credit was availed “without documentary evidence and suppress the facts”, bereft of foundational facts evidencing a deliberate device employed to evade tax, does not demonstrate an application of mind and invalidates the invocation of Section 74 - The fact that the Department contested audit objections before the Public Accounts Committee and placed the Show Cause Notice into the 'call book' (kept in abeyance) clearly indicates an absence of satisfaction on the part of the Assessing Officer regarding the alleged tax shortfall, mismatch, or suppression - issuing a subsequent notice to revive proceedings by proposing a 'protective demand' solely because statutory limitation is nearing expiry is impermissible, as the concept of protective demand/assessment is alien to the GST regime. [Relied on IN RE: Cognizance for Extension of Limitation [Suo Motu Writ Petition (C) No. 3 of 2020; Paras 10 - 15]

Cause Title: M/s Tata Steel Limited v. Union of India

Citation : 2026 LiveLaw (SC) 862

Click here to download judgment

Appearance:

For Petitioner(s) :Dr. A.M.Singhvi, Sr. Adv. Mr. Kavin Gulati, Sr. Adv. Ms. Mallika Joshi, Adv. Mr. Amit Bhandari, Adv. Mr. Avishkar Singhvi, Adv. Ms. Nishtha Mittal, Adv. Mr. Abhishek Swaminathan, Adv. Mr. S. Anjani Kumar, Adv. Mr. Suhaas Ratna Joshi, AOR

For Respondent(s) : Mr. S. Dwarakanath, ASG

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