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.

Statutory Framework

Section 73 — Cases without fraud

Section 73 applies when:

• Tax has not been paid or has been short paid; or

• ITC has been wrongly availed or utilized;

but such non-payment is not due to fraud, wilful misstatement, or suppression of facts.

The intention here is bonafide error or inadvertence.

Section 74 — Cases with fraud

Section 74 covers similar scenarios but with an element of intent to evade tax, i.e., when non-payment arises by reason of:

• Fraud,

• Wilful misstatement, or

• Suppression of facts.

Thus, Section 74 applies to malafide conduct or deliberate evasion.

Key Differences Between Section 73 and 74

Particulars	Section 73	Section 74
Nature of default	Bonafide / unintentional	Fraudulent / intentional
Mens Rea	No intention to evade	Intent to evade tax
Show Cause Notice	Issued within 2 years and 9 months from due date of annual return	Issued within 4 years and 6 months from due date of annual return
Time Limit to issue Order	3 years from due date of annual return	5 years from due date of annual return
Penalty (before SCN)	No penalty if tax and interest paid before notice	15% of tax amount
Penalty (after SCN, before order)	10% of tax or ?10,000, whichever is higher	25% of tax amount
Penalty (after order)	10% of tax or ?10,000	50% of tax amount if paid within 30 days
Burden of Proof	On department to prove non-payment	On department to prove fraudulent intent

When Does “Fraud” or “Suppression” Apply?

The term “fraud” is not defined under GST but takes its meaning from general law:

“Fraud is an act of deception intended to gain an advantage or evade an obligation.”

Fraud requires:

• False representation,

• Knowledge of falsity, and

• Intent to deceive.

For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a Taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the Proper officer.

Presence of fraud, wilful misstatement, or suppression of facts is mandatory to fall a demand proceeding under section 74.

Unless there is clear evidence of fraud or suppression, the case should ideally fall under Section 73. However, departments often invoke Section 74 when they believe there's deliberate inaction or if the error was repeated or significant.

Conversion of notice from section 74 to 73 by Appellate authority— As per section 75(2) of CGST Act, where any Appellate Authority or Appellate Tribunal or court concludes that the notice issued under sub-section (1) of section 74 is not sustainable for the reason that the charges of fraud or any wilful-misstatement or suppression of facts to evade tax has not been established against the person to whom the notice was issued, the Proper officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of section 73.

Judicial pronouncements

• ALLAHABAD HIGH COURT in case of HCL Infotech Ltd. V/s Commissioner, [2024] 76 TAXLOK.COM 123 (Allahabad), quashed the show cause notice issued under Section 74 of the CGST Act to the petitioner. The petitioner had already been exonerated in prior proceedings under Section 73, where it was determined there was no Fraud or misstatement. The court held that Section 74 could not be invoked without specific allegations of Fraud, making the second notice void.

• MADRAS HIGH COURT in case of Rashtriya Ispat Nigam Limited [2022] 49 TAXLOK.COM 113 (Madras), held that The provisions of Section 74 would be applicable only in the case of wrongful availment/utilization of ITC by reason of fraud. The precondition for invocation of Section 74 is that the revenue must establish willful misstatement or suppression to evade tax.

• Any assessment u/s 74 of the act without giving any opportunity of hearing the writ applicant is not tenable in law and desires to be quashed. [2019] 15 TAXLOK.COM 085 (Gujarat)

• Section 74(5) enables the dealer to pay 15% penalty on his own accord before receipt of a notice under Section 74(1) of the Act, it does not mean that, even without a show cause notice being issued, the dealer is obligated to pay penalty at 15% under Section 74(5) of the Act. [2018] 04 TAXLOK.COM 139 (Telangana)

• Department is not precluded from initiating Proceedings under Section 74 if order has been already passed under Section 122 of the GST Act [2020] 30 TAXLOK.COM 008 (Kerala)

• The manner in which the demand has been raised and quantified is not in consonance with the mandate of Section 74 and thus on the ground alone, impugned appellate orders as well as the adjudicating authority’s orders are liable to be quashed. [2023] 59 TAXLOK.COM 010 (Allahabad)

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Demand & Recovery under Section 73 vs. 74 — When Does Fraud Apply?

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