Bombay High Court Sets Aside GST Demand Notice Consolidating Multiple Financial Years Under Section 74 CGST Act

Introduction

The Bombay High Court has delivered a significant ruling concerning the procedural validity of show cause notices issued under the Central Goods and Services Tax Act, 2017. In the matter of Rite Water Solutions (India) Ltd. Vs Joint Commissioner, the Court examined whether tax authorities possess the statutory power to consolidate demands spanning multiple financial years within a single notice issued under Section 74 of the CGST Act, 2017. The verdict reinforces the principle that the GST legislative framework mandates year-specific assessments and does not permit clubbing of different tax periods into one composite demand notice.

Background of the Dispute

The assessee, Rite Water Solutions (India) Ltd., approached the High Court challenging the legality of a show cause notice dated 4 August 2024. The contested notice was issued by the Joint Commissioner demanding recovery of ₹2,12,16,300 by invoking the provisions of Section 74 read with Section 9 of the CGST Act, 2017, and Section 20 of the Integrated Goods and Services Tax Act, 2017.

The distinguishing feature of this notice was its coverage of an extended consolidated tax period commencing from July 2017 and continuing through March 2022. Effectively, the tax authority had amalgamated liabilities pertaining to approximately five financial years into a single composite demand notice.

Contentions Raised by the Assessee

Challenge to Consolidation of Tax Periods

The primary contention advanced by the assessee was that the statutory scheme under the CGST Act does not authorize consolidation of multiple financial years or distinct tax periods into a single show cause notice. The petitioner argued that each financial year constitutes a separate and independent tax period, and assessment proceedings must correspond to specific periods as contemplated under the Act.

Reliance on Judicial Precedent

The assessee's counsel placed substantial reliance on a Division Bench judgment rendered by the Goa Bench of the Bombay High Court in the case of M/s. Milroc Good Earth Developers Vs. Union of India & Ors. [Writ Petition No. 2203/2025 decided on 9/10/2025]. This precedent had extensively examined the structural framework of assessment, return filing, limitation provisions, and recovery mechanisms embedded within the CGST Act.

The Division Bench in that matter had categorically held that GST liability determination is intrinsically linked to specific tax periods—whether monthly or annual—and that Sections 73 and 74 prescribe stringent time limits correlated to the relevant financial year. The Court observed that the legislative scheme does not contemplate or permit consolidation of multiple financial years into a single assessment or demand notice.

Legislative Framework and Statutory Interpretation

Structure of Assessment Under CGST Act

The CGST Act establishes a comprehensive regime for assessment and recovery of tax. Under this framework, the determination of tax liability is intimately connected with returns filed for each designated tax period. The Act envisages that where assessment is based on annual returns, the relevant unit of assessment is the financial year itself.

Time Limitation Provisions

Section 74(10) of the CGST Act prescribes a five-year limitation period calculated from the due date for furnishing the annual return for the relevant financial year. This provision reinforces the principle that demands and recovery proceedings must be year-specific and cannot transcend or conflate distinct financial years.

The statutory prescription mandates that show cause notices must be issued at least three months prior to the time limit specified under Section 73(10) and Section 74(10) for issuance of assessment orders. This temporal framework is deliberately designed to ensure that each financial year is treated as a discrete assessment period with its own limitation schedule.

Return Filing Mechanism

The entire scheme of tax determination under the CGST Act operates on the basis of returns filed for each tax period. These returns may be monthly or annual depending on the nature of the assessee's registration and turnover. When assessment is predicated on annual returns, the corresponding tax period is the financial year.

This periodicity is not merely procedural but substantive, as it determines the commencement and expiry of limitation periods, the scope of assessment, and the framework for recovery proceedings.

Analysis from Milroc Good Earth Developers Judgment

Key Observations of the Division Bench

The Division Bench in M/s. Milroc Good Earth Developers Vs. Union of India & Ors. undertook a detailed examination of the assessment and recovery provisions within the CGST Act. The Court observed that taxes payable under the Act are commensurate with returns filed for each tax period, whether through self-assessment or provisional assessment.

The Court emphasized that Section 74(10) prescribes a five-year limitation from the due date for filing the annual return for the relevant financial year. This statutory provision reinforces that demands and recovery actions must be specific to individual financial years.

Rejection of Composite Assessment

The Division Bench categorically stated: