GST Department not allowed to collect any tax/ interest/ penalty without issuance of notice u/s 74(1)

Telangana HC: Department not allowed to collect any tax, interest or penalty before enquiry and without issuance of notice u/s 74(1) of the GST Act, 2017

On investigation, it was revealed that the Petitioner was receiving fake invoices from fictitious suppliers/firms were fictitious with an intent to pass on ITC, and it appeared that the said credit was availed by the petitioner in a fraudulent manner without receiving any material. Accordingly, the Respondent issued a letter to the Petitioner saying that the petitioner had availed input tax credit on the basis of invoices issued by certain suppliers/firms. The petitioner was requested to reverse the input tax credit of Rs. 1,52,35,820/- availed on such invoices immediately. Further, the 3rd respondent sent an intimation of tax ascertained as being payable on 22-1-2021 saying that petitioner is liable to pay Rs. 1,17,35,822/- for the period February, 2018 to March, 2018 and he was being advised to pay it, failing which a show cause would be issued under sub-Section (1) of Section 74 of the Act.

The petitioner filed an instant writ petition on ground that liability could not be determined before conducting enquiry when even the investigation was incomplete; and any advise or demand by the department could at best be a provisional one. When no enquiry was initiated, petitioner could not be compelled coercively to pay amounts to the department.

It was observed by the Hon’ble Bench that a notice in sub-Section (1) of Section 74 of the Act may be issued by the proper officer if he is of the opinion that the input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts, to the person who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he 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, sub-Section (5) of Section 74 of the Act gives a choice to the tax payer to make any payment, if he so chooses, but it does not confer any power on the respondents to make a demand as if there has been a determination of liability of the Assessee and demand tax along with interest and penalty.

It was held that no tax demand can be issued or raised when investigation is still in progress. The respondents cannot be allowed to collect any tax, interest or penalty before they determine, in an enquiry, after putting the petitioner/assessee of notice, and that the action of the respondents was held to be wholly arbitrary and without jurisdiction. Accordingly, the Writ Petition was allowed; the respondents were restrained from coercing the petitioner to make any payment without issuing notice under section 74(1) of the Act and following the procedure therein; and they were directed to refund the amount already paid by petitioner with interest @ 7% p.a from the date of payment till date of refund within four (04) weeks from the date of receipt of a copy of order.