Goods & Services Tax (GST) in IndiaDismissal of Writ Petition challenging invocation of Section 74 under CGST/SGST Acts

The Kerala High Court, in the case of Ayyappan Pillai v. The State Tax Officer, Kerala & Ors. WP(C) NO. 29409 OF 2024 decided on 30 September 2024 dismissed a writ petition challenging the invocation of Section 74 of the CGST/SGST Acts. The Court emphasized that disputes involving factual issues, such as tax evasion, should be resolved by the appropriate authorities rather than through judicial intervention under Article 226 of the Constitution.

FACTS

Ayyappan Pillai (hereinafter referred to as “the Petitioner”) is a registered dealer under the CGST/SGST Acts. He received a show cause notice under Section 74 of the CGST Act from the State Tax Officer, Kerala (hereinafter referred to as “the Respondent”) which required him to explain why certain proposed measures should not be taken against them. The petitioner responded with a reply (Ext. P4). After considering the response and giving the petitioner the chance to be heard, the second respondent issued an order (Ext.P5) confirming the proposals in the show cause notice and finalising a demand against the petitioner. The petitioner then submitted a rectification application (Ext.P6) under Section 161 of the CGST Act, which was evaluated and dismissed using Ext.P10. The petitioner has thus approached Kerala High Court, contesting the legitimacy of Orders Ext.P5 and Ext.P10 on several grounds.

ISSUES BEFORE THE KERALA HIGH COURT

1. Whether the order (Ext.P5) finalizing a demand against the petitioner was issued in accordance with the law?
2. Whether the rejection of the petitioner’s rectification application (Ext.P6) was justified under Section 161 of CGST Act?

CONTENTION OF THE PARTIES

The petitioner submitted that the major issue of disagreement is the lack of reasons for implementing Section 74 of the CGST/SGST Acts in this case. It is contended that the wording of provision 74 implies that not all cases of concealment or misrepresentation constitute action under this provision; only those that are ‘wilful’ and ‘intended’ to evade tax justify such actions. The show cause notice falsely states that the petitioner is unregistered, which is factually erroneous. The justification given in the notice for invoking Section 74 appears to be a general, copied statement and having no nexus to the specifics of the petitioner’s case.

Referring to Ext.P5, the petitioner adds that there is a substantial factual misconception, as the authorities made a huge demand against the petitioner without confirming inventory or taking into account explanations given by him. Furthermore, when the petitioner requested correction for evident mistakes in Ext.P5, Ext.P10 denied the request summarily. Given these concerns, the counsel believes that Exts.P5 and P10 orders should be overturned and the case remitted to the second respondent for a proper re-evaluation. Furthermore, it is asserted that the proceedings should be dismissed due to the improper implementation of Section 74 of the CGST/SGST Acts.

The learnt Government Pleader (hereinafter referred to as “GP”) for the respondents is adamantly opposed to awarding any remedy to the petitioner. It was emphasised that, based on the show cause notice and Ext.P5 order, there are adequate reasons to invoke Section 74 of the CGST/SGST Acts in this matter. Specifically, records known as ‘estimates’ were found, which shows that the petitioner failed to report sales appropriately and that resulted to loss of revenue. Furthermore, inconsistencies in the stock indicate that some unaccounted transactions were made by the petitioner.

The GP refutes the petitioner’s claim that Section 74 was invoked because the petitioner was unregistered entity.  He clarifies that the opening paragraph of the show cause notice clearly identifies the petitioner as registered. The phrase ‘registered’ in paragraph 46 of the notification refers to the failure to report sales and suppression, not the petitioner’s registration status. Furthermore, it is worth noting that the petitioner made no objections throughout the proceedings to the inappropriate interpretation of Section 74. The GP further alleges that throughout the rectification process, the officer sought additional information, but the petitioner failed to produce the requisite paperwork to back up their assertions, which resulted in the denial of the rectification application, as seen in Ext. P10.

DECISION AND FINDINGS

After hearing the arguments of both the sides, the court came to a conclusion that the petitioner has failed to establish a cause for the relief sought in the writ petition. A examination of the show cause notice indicates multiple instances of suppression, which have been used as grounds to invoke Section 74 of the CGST/SGST Acts. While the petitioner has offered several arguments contesting the veracity of these claims, addressing such factual disputes needs adjudication by the proper statutory authorities. It is not within the scope of this Court under Article 226 of the Constitution to rule on contested facts, especially given the procedural constraints in writs.

The petitioner has not proved that the alternative remedy offered under the CGST/SGST Acts is ineffective, more specifically, in establishing whether there was a genuine reason for claiming the extended limitation period under Section 74. The GP correctly claims that the officer invoked the extended term of limitation not because the petitioner was unregistered, but because of wilful concealment of sales to evade tax. The text of Section 74 clearly supports this approach. Furthermore, a study of Ext.P10 shows that, while the rectification procedure was not part of the initial proceedings, the officer did request more information from the petitioner. However, the petitioner failed to supply this information, resulting in the denial of the correction request.

For the grounds stated above, the writ petition was dismissed. However, because the rectification application was filed on 22.01.2024 and rejected on 08.05.2024, and the writ petition was filed in August 2024, the time between the filing of the rectification application and the date of pronouncement of this judgment (30.09.2024) was excluded when calculating the limitation period for the petitioner to appeal the Ext.P5 order. It was further noted by the Court that nothing in this decision bars the petitioner from bringing up the matter as basis for invoking Section 74 before the Appellate Authority.

AMLEGALS REMARKS

The decision in this case emphasises the importance of following procedural guidelines under the CGST/SGST Acts and reaffirms the principle that disputes involving factual allegations, such as tax evasion or sales suppression, are best resolved by statutory authorities rather than through writ petitions under Article 226 of the constitution. The court emphasises that the legislative remedy is the appropriate way to resolve such conflicts. The judgement supports the government’s efforts to combat GST evasion by ensuring that legal remedies remain in place while minimising court interference in routine administrative affairs. It reinforces the GST framework by promoting the timely and efficient use of administrative procedures.

Team AMLEGALS