Determining tax liability under Section 74 of UPGST Act, following Income Tax guidelines is impermissible – Allahabad High Court
ABCAUS Case Law Citation:
ABCAUS 3706 (2023) (04) HC
In the instant case, the Petitioner assessee had challenged the order passed by the UPGST Authorities u/s 74 of UPGST Act.
The petitioner was a partnership concern and is duly registered with the UP GST Department. The details of inwards and outwards supply were fully available on the portal of the department and the petitioner uploaded the supply made by him in GSTR-1 and after claiming the Input Tax Credit as reflected in GSTR-2A, filed his return in the form of GSTR-3B claiming the benefit of Input Tax Credit (ITC). The returns filed were accepted by the Department and were never questioned and no proceedings were initiated in the case of the petitioner.
An inspection was carried out on the business premises of the petitioner by the GST Officials and a Panchanama was drawn wherein the stock present in the business premises was recorded and certain papers were seized in exercise of powers under Section 67 of the GST Act.
Subsequently, the GST Officials issued a notice under Section 74 of the UPGST Act. In the show cause notice, in the column indicating the brief fact of the case “Adverse material found in SIB” was mentioned and in the column of grounds for issuance of the show cause notice, it was again mentioned that “Adverse material found in SIB”. Yet another notice was issued calling upon the petitioner to submit reply. In the said notice also, the report of the SIB was mentioned.
The Petitioner alleged that the SIB report, which was the foundation for issuance of the notice under Section 74, was never supplied to it, however, an order was passed under Section 74 of the UPGST Act wherein the demand of tax and penalty was quantified against the petitioner.
The order passed under Section 74, which was based on the SIB report and the documents referred therein, the Assessing Authority was of the view that even under the Income Tax Act, 1961, 8% profit would be an appropriate estimate and on the said basis quantified the demand and penalty against the petitioner.
The petitioner preferred an appeal against the said order. The appellate authority decided the appeal and partly allowed the same. While allowing the appeal it was held that on the basis of the provisions of the Income Tax Act, the manner of assessment done by the adjudicating authority cannot be justified, however, without disclosing any basis, whatsoever, it quantified the tax and penalty at a bit lesser amount.
The satisfied with the relief given by the appellate authority, the assessee challenged it before Hon’ble High Court as the Appellate Tribunal is yet to be constituted.
The Hon’ble High Court observed that in terms of the provisions of the GST Act, the tax is leviable on the supply of goods as specified under Section 7 and the said tax is to be paid at the time of supply of goods, which is clarified under Chapter IV of the UPGST Act. The value on which the tax is to be levied flows from Section 15 of the Act, which mandates the manner in which the value of the taxable supply is to be done. Chapter IX of the said Act prescribes for filing of the returns by the assessee and Chapter X mandates the payment of tax, interest, penalty and other amounts on the basis of the returns filed as prescribed under Chapter IX of the said Act. Chapter XIV of the Act confers the power on the authorized officers with regard to the inspection, search, seizure and arrest and Chapter XV prescribes for demands and recovery in respect of the tax not paid or short paid or erroneously refunded or input tax credit wrongly availed. The distinction between assessment under Sections 73 and 74 is that Section 73 prescribes for normal determination of tax and Section 74 prescribes for determination of tax not paid for the reasons of fraud, willful misstatement or suppression of facts coupled with intent to evade payment of tax. It is clear in the present case that department has taken recourse to Section 74 for assessing the demand of tax and penalty leviable.
The Hon’ble High Court further observed that the sole basis for issuance of the show cause notice under Section 74 was the SIB report. However, the SIB report was ever supplied to the petitioner as contended. Although in the counter affidavit of the Department, it was stated that the SIB report was never demanded by the petitioner, however, on the request of the assessee, the same was given at the time of assessment proceedings and he had submitted a return reply against the said report. However, in the impugned order, there is no mention of SIB report being supplied to the petitioner or his counsel or consideration of the alleged reply while passing the impugned order.
The Hon’ble High Court noted that while passing the assessment order, the adjudicating authority assessed the demand of tax and levied penalty on the basis of some guidelines issued by the Income Tax Authorities and taking the mean average of 8%, which is wholly impermissible while adjudicating Section 74, the said manner of adjudication adopted by the respondents department can at best be termed as best judgment assessment which can be resorted to only under Section 62 and that too only in respect of the persons who have not filed the returns.
The Hon’ble High Court further observed that in respect of the persons who have filed returns, Section 61(3) is very clear under which the department is duly empowered to take action under Sections 73 or 74, in case the returns furnished contain discrepancies and the assessee fails to take corrective measures in respect of the said discrepancies.
The Hon’ble High Court observed that for taking recourse to Section 74, it is essential that along with search and seizure report, certain specific averment is made with regard to the supply of goods and the non-payment of tax coupled with the fact that the same should be by reasons of fraud, willful misstatement or suppression of facts and an intent to evade the tax.
The Hon’ble High Court opined that the adjudicating authority clearly erred in assessing and quantifying the demand and levying the penalty by taking recourse to some guidelines issued by the Income Tax Authorities which is impermissible while determining the tax liability under Section 74.
The Hon’ble High Court further stated that the order of the appellate authority was even further bad in law as it disclosed no reason, whatsoever for assessing the tax and quantifying the liability. While on the one hand, the appellate authority disapproved the manner in which the adjudicating authority had assessed and quantified the demand of tax and penalty, in the same breath, he proceeded to quantify the tax and imposed penalty without disclosing any reasons whatsoever.
The Hon’ble High Court opined that the manner in which the demand had been raised and quantified was not in consonance with the mandate of Section 74 and thus on this ground alone, impugned appellate orders as well as the adjudicating authority’s orders were liable to be quashed.
Accordingly, the Writ Petition was allowed and the appellate order and the order passed by the adjudicating authority were quashed.
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