Supreme Court on Section 74 GST Notices: Mechanical Recital of "Suppression" Cannot Extend Limitation; Foundational Facts Must Appear in the Notice [2026 INSC 920]

The Supreme Court set aside a Section 74 show cause notice and the consequential order against Tata Steel because the allegation of suppression was a bland, mechanical recital without any foundational facts. The extended five-year period under Section 74 cannot be invoked merely by using the words "fraud", "wilful misstatement" or "suppression"; the facts leading to that inference must appear in the notice itself. The Court also held that proceedings under Sections 73/74 require the Assessing Officer's own satisfaction even where an audit objection exists, and that the omitted Explanation 2 to Section 74 could not be invoked. Liberty was given to issue a fresh Section 74 notice with foundational facts and pass an order before 28.02.2027 (paras 11–16).

Headnote

Goods and Services Tax — Show cause notice — Extended period of limitation — Fraud, wilful misstatement or suppression — Foundational facts — Audit objection — "Call book" and protective demand — CGST Act, 2017, Ss. 44, 73(2), 73(9), 73(10), 74 and Explanation 2 to S. 74 (omitted w.e.f. 01.11.2024); CGST Rules, 2017, R. 80.

Show cause notice dated 13.06.2025 for FYs 2018-19 to 2020-21, arising from a CAG audit objection on ITC mismatch and short payment, was issued under S. 74 after the S. 73 limitation (extended by notifications and the Supreme Court's Covid-19 limitation orders to 28.02.2025) had expired; the Department had itself placed the matter in the "call book" and later proposed a "protective demand" — Held, proceedings under Ss. 73/74 can be initiated only on the Assessing Officer's satisfaction, which in a S. 74 case must extend to fraud, wilful misrepresentation or suppression; the foundational facts for that inference must be evident from the notice itself and the words cannot be mechanically recited; Explanation 2 to S. 74, omitted w.e.f. 01.11.2024, could not be invoked; a bland statement of suppression does not suffice. SCN and Order-in-Original dated 26.12.2025 set aside, with liberty to initiate fresh S. 74 proceedings with foundational facts and pass an order before 28.02.2027. Appeal allowed.

(Paras 5–7, 11–16)

Judgment Intelligence

Key Holdings

• Proceedings under Sections 73/74 can be initiated only on the satisfaction of the Assessing Officer, even where objections are raised in audit; for Section 74, the satisfaction must extend to fraud, wilful misrepresentation or suppression (para 11).
• Explanation 2 to Section 74, omitted with effect from 01.11.2024, could not be relied upon (para 12).
• The limitation in Section 73(10) is for passing the order under Section 73(9), not merely for issuing a notice (para 12).
• The foundational facts leading to an inference of fraud, wilful misrepresentation or suppression must be evident from the notice itself; such words cannot be mechanically recited to obtain the extended period (para 14).
• Referring the audit objection to the Public Accounts Committee and placing the notice in the "call book" showed absence of the Assessing Officer's satisfaction (paras 9, 13).

Brief Facts

Following a CAG audit objection on mismatch of ITC for FYs 2018-19 to 2020-21 and short payment of tax for FY 2019-20, the Department issued communications from 27.05.2024 and a show cause notice dated 13.06.2025 described as one under Section 74 (paras 2, 9). On 27.06.2025 the notice was transferred to the "call book" (kept in abeyance), as the Department had contested the audit objection before the Public Accounts Committee; a fresh notice dated 01.07.2025 revived it and proposed a "protective demand" (paras 9–10). An Order-in-Original dated 26.12.2025 followed (para 15). Computing the time for annual returns as extended by notifications under Section 44(1) and excluding 15.03.2020 to 28.02.2022 under the Supreme Court's suo motu limitation orders, the Court found that the Section 73 limitation for all three years expired on 28.02.2025, so the notice was past that period (paras 5–7).

Issue

1. Whether the show cause notice, issued beyond the Section 73 limitation, could be sustained under the extended period in Section 74 on the allegation of suppression made in it (para 8)?

Court's Findings

Satisfaction of the Assessing Officer: Even where an audit raises objections, the Assessing Officer must record his own satisfaction before issuing a notice; in a Section 74 case that satisfaction must cover fraud, wilful misrepresentation or suppression (para 11).

Revenue's arguments rejected: Explanation 2 to Section 74 had been omitted from 01.11.2024; and the argument that proceedings began within the Section 73 period fails because Section 73(10) governs the order, with the notice required at least three months earlier (para 12).

No foundational facts: The Department's referral of the objection to the Public Accounts Committee showed no satisfaction about the mismatch, let alone suppression. Apart from a bland statement that ITC was availed "without documentary evidence and suppress the facts", the notice contained no foundational facts (para 13).

Extended limitation is not lip service: The foundational facts must be evident from the notice itself; mere use of the words does not show application of mind (paras 14–15).

Final Outcome / Directions (paras 15–16)

• Show cause notice and Order-in-Original dated 26.12.2025 set aside.
• As the extended period had not expired (Section 73 limitation having expired on 28.02.2025), the Department is at liberty to initiate appropriate Section 74 proceedings with foundational facts in the notice itself, and pass an order before 28.02.2027.
• Appeal allowed with this reservation and liberty.

Legal Principle

The extended limitation under Section 74 is available only when the notice itself discloses the foundational facts of fraud, wilful misrepresentation or suppression, resting on the Assessing Officer's own satisfaction; a mechanical recital of those words – or reliance on an audit objection the Department itself doubts – will not sustain the notice.

Precedents Relied Upon

• In Re: Cognizance for Extension of Limitation, Suo Motu Writ Petition (C) No. 3 of 2020 (order dated 01.01.2022) – Applied · Discussed at para 7: exclusion of 15.03.2020 to 28.02.2022 in computing limitation.
• No other precedent is discussed in the judgment; the decision rests on the statutory scheme of Sections 73 and 74.

Important Paragraphs of the Judgment

Para 11: "At the outset 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."

Para 14: "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"

Para 15: "…The 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. The SCN on the above reasoning, cannot be sustained and the consequential Order-in-Original dated 26.12.2025 too is put in peril and both are set aside…"

What the Ruling Means: Practical Impact

• Scrutinise every Section 74 notice: If the notice does not set out the facts showing fraud, wilful misstatement or suppression, it can be challenged as a mechanical invocation of the extended period.
• Audit objections are not enough: The proper officer must apply his own mind; a CAG objection the Department itself has contested cannot found a Section 74 notice.
• Compute limitation carefully: Account for extensions of annual return dates under Section 44 and the Covid-19 exclusion (15.03.2020–28.02.2022), and remember that Section 73(10) is the time limit for the order.
• Department may re-issue: Quashing on this ground is not the end – a fresh, properly founded Section 74 notice may follow within the extended period.

Frequently Asked Questions

Can a GST officer invoke Section 74 just by alleging suppression?

No. The foundational facts leading to the inference of fraud, wilful misrepresentation or suppression must be evident from the notice itself; mechanical use of the words is not enough (para 14).

Can a Section 74 notice be issued only because of a CAG audit objection?

Proceedings under Sections 73/74 require the Assessing Officer’s own satisfaction even where an audit objection exists (para 11).

Can Explanation 2 to Section 74 be relied on after 1 November 2024?

The Court refused to apply it as it stood omitted with effect from 01.11.2024 (para 12).

Is a protective demand permitted under GST?

The Court recorded that the fresh notice proposed a protective demand although there is no such statutorily permitted measure of protective assessment under the GST law (para 10).

Can the Department issue a fresh notice after Tata Steel?

Yes. The Court gave liberty to initiate appropriate Section 74 proceedings with foundational facts in the notice and to pass an order before 28.02.2027 (para 15).

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