Patna High Court on Voluntary GST Payment and Section 74: Key Takeaways from Manju Devi Agarwal v. Central Board of Indirect Taxes and Customs & Ors.

Background of the Dispute

The Patna High Court, in Manju Devi Agarwal v. Central Board of Indirect Taxes and Customs & Ors., examined whether voluntary payment of GST before issue of a show cause notice (SCN) can prevent the department from invoking Section 74 of the CGST Act when allegations of fraud, wilful misstatement, or suppression are made and remain uncontested.

The assessee operated a business dealing in fertilizers, cement and pesticides, and regularly filed returns in Form GSTR-1 and Form GSTR-3B for the periods from 2017-18 to 2022-23. Audit and scrutiny proceedings flagged multiple discrepancies, including:

  • Short payment of GST
  • Excess availment of input tax credit (ITC)
  • Differences between TDS data in Form 26AS and turnover reflected in the Profit and Loss Account

Pursuant to these findings, the department issued SCNs invoking Section 74, alleging wilful suppression and misstatement with intent to evade GST. The central controversy was whether such proceedings could lawfully continue even after substantial tax payments were made voluntarily through Form GST DRC-03.

Key Allegations Raised in the SCN

The Respondent authorities issued separate SCNs dated July 25, 2024 and July 31, 2024 under Section 74 of the CGST Act. The notices alleged the following:

  1. Short payment of GST

    • Amount alleged: Rs. 10,59,756/-

  2. Excess availment of ITC

    • Amount alleged: Rs. 29,35,892/-
    • Cited as violation of Section 16 read with Rule 36 of the CGST Rules

  3. Non-payment of GST due to Form 26AS mismatch

    • Amount alleged: Rs. 3,43,864/-
    • Based on discrepancies between data in Form 26AS and figures in the Profit and Loss Account

The SCNs specifically invoked the extended period and penal consequences under Section 74, asserting that the conduct involved wilful misstatement and suppression of facts with a view to evade tax.

Voluntary Payments and Outstanding Liabilities

Following the audit findings but prior to issuance of the SCNs, the assessee made substantial payments through Form GST DRC-03, treating such amounts as voluntary discharge of tax liability. However:

  • The entire liability towards interest under Section 50 was not discharged
  • The penalty component under Section 74 was also not paid

The department contended that since the payment was incomplete in terms of tax, interest and penalty, and since suppression-related allegations remained unchallenged, proceedings under Section 74 lawfully continued and culminated in adjudication orders.

Assessee’s Contentions Before the High Court

Aggrieved by adjudication orders dated February 04, 2025 and February 06, 2025, subsequent recovery steps and garnishee proceedings in Form GST DRC-13, the assessee invoked Article 226 jurisdiction of the High Court.

The principal arguments advanced by the assessee were:

  • Bar on Section 74 proceedings post voluntary payment

    • Once the assessee voluntarily paid tax prior to SCN, the department could not invoke Section 74.
    • At best, the case should have been dealt with under Section 73, which covers non-fraud situations.

  • Challenge to penalty on ground of non-quantification in SCN

    • The assessee argued that the SCN did not specify the exact quantum of penalty proposed.
    • On that basis, the final imposition of penalty was said to be contrary to Section 75(7) of the CGST Act, which requires clear communication of tax, interest and penalty payable.

  • Reliance on voluntary payment mechanism

    • It was contended that payment through Form GST DRC-03 before issuance of SCN amounted to full cooperation and should have prevented further coercive proceedings.

Stand of the Respondent Authorities

The department defended the adjudication and subsequent recovery on several grounds:

  1. Clear invocation of Section 74 and extended limitation

    • The SCNs explicitly recorded allegations of wilful suppression, misstatement and fraudulent conduct.
    • The assessee never contested these serious allegations at the adjudication stage.

  2. Admission of liability during personal hearing

    • During personal hearing, the authorised representative of the assessee is recorded as having:
      • Accepted liability towards tax, interest and penalty, and
      • Undertaken to pay the balance dues within a specified time.
    • The assessee did not challenge this recorded admission in any contemporaneous proceedings.