Appellate Authority Cannot Convert Section 74 Proceedings Into Section 73: Gstat

1.1 The distinction between initiation of proceedings under Section 73 (where there is no allegation of fraud, wilful misstatement or suppression of facts) and Section 74 (where such elements are alleged) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) has significant implications for taxpayers. These provisions are part of the tax recovery and demands adjudication process under the CGST Act. In many cases, revenue authorities initiate proceedings under Section 74, even where the ingredients of fraud, wilful misstatement or suppression of facts are ultimately not established such as in case of discrepancies in GST returns due to system limitation or bonafide mistakes of taxpayers, etc. This is because of the availability of an extended period of limitation under Section 74 and also, higher penalties in such cases.

1.2 A recurring question in such cases is whether, once the ingredients of Section 74 are found to be absent, the proceedings can be simply converted into proceedings under Section 73 by the appellate authority, or whether the statutory framework requires a fresh determination by the Proper Officer in terms of Section 75(2) of the CGST Act.

1.3 The recent decision of the Hon’ble Goods and Services Tax Appellate Tribunal (“GSTAT/ Tribunal”), Principal Bench, New Delhi in Sterling & Wilson Pvt. Ltd. v. Commissioner, Odisha, Commissionerate of CT & GST has examined this issue in detail. 

1.4 The Tribunal also clarified the scope of its appellate jurisdiction under Section 112 of the CGST Act, holding that it is empowered to examine questions of fact and is not confined to questions of law alone.

1.5 In this article, we briefly discuss the facts of this case, the arguments advanced by the parties, the findings of the Tribunal, and certain key takeaways.

2.1 M/s Sterling & Wilson Private Limited ("the Appellant") was engaged in the business of engineering, procurement and construction (EPC) services and obtained GST registration in Odisha.

2.2 For FY 2018–19, the Appellant reported a higher outward tax liability in Form GSTR-1 (INR 31.36 crore) compared to Form GSTR-3B (INR 31.09 crore). This difference resulted in an alleged short payment of tax of about INR 27.06 lakh.

2.3 Due to this mismatch between the returns, the Proper Officer issued a Show Cause Notice under Section 74 of the CGST Act (i.e., alleging fraud, wilful misstatement, or suppression of facts), proposing recovery of the alleged short-paid tax along with interest and an equivalent penalty. The demand was subsequently confirmed through an Order-in-Original (“OIO”).

2.4 In its Appeal against the OIO, the Appellant contended that the difference arose merely due to certain debit/credit notes and advance adjustments relating to different periods which were reflected in GSTR-3B but could not be updated in GSTR-1 due to portal limitations. However, these transactions were properly recorded in the books of accounts.

2.5 The Appellate Authority, vide the Order-in-Appeal (“OIA”), held that there was no fraud or wilful misstatement or suppression of facts. Accordingly, the Appellate Authority converted the proceedings from Section 74 to Section 73, reduced the penalty to 10% under Section 73(9), but upheld the demand of tax and interest.

2.6 Aggrieved by the OIA, the Appellant filed an appeal before the GSTAT.

3.1 Whether an improper invocation of Section 74 can be sustained by converting the proceedings to Section 73 at the appellate stage?

4.1 Arguments raised by the Appellant

• The mismatch between the returns, and the resulting alleged short-payment, arose merely because the GST portal did not allow the Appellant to amend GSTR-1 to report debit/ credit notes and advance adjustment. However, these amendments were duly recorded in the books of account and were also reflected in GSTR-3B.
• The demand was wrongly confirmed solely on account of a mismatch between GSTR-1 and GSTR-3B returns, without proper verification of the detailed reconciliation furnished by the Appellant.
• The issue was purely reconciliatory and revenue neutral.
• Since the Appellate Authority accepted that the intent to evade tax by way of fraud or suppression or wilful-misstatement could not be established, the proceedings under Section 74 should have been dropped.

4.2 Arguments raised by the Respondent (Revenue):

• GST returns are self-assessed declarations and any mismatch between GSTR-1 and GSTR-3B must be properly reconciled.
• The Appellate Authority had examined the records and rightly upheld the demand of tax and interest. Further, acting in accordance with law, it reduced the penalty by converting the proceedings from Section 74 to Section 73.
• Relying on Hamida v. Md. Khalil [1] , it was contended that new factual issues cannot be raised at the appellate stage. Accordingly, the Tribunal, in second appeal, could not re-examine the questions of fact.

GSTAT is empowered to examine questions of fact

5.1 The Tribunal distinguished the case of Hamida v. Md. Khalil (supra) and held that the restrictions applicable under Section 100 of the Code of Civil Procedure, 1908 are confined to the jurisdiction of the High Court. The appeal provisions under Section 112 of the CGST Act read with Rule 112 of the CGST Rules do not impose similar limitations on the Tribunal. Accordingly, the Tribunal is empowered to examine the questions of fact and is the final fact-finding authority in GST appeals.

Conversion of Proceedings from Section 74 to Section 73

5.2 The Tribunal examined Section 75(2) of the CGST Act which mandates that where a notice issued under Section 74 is held to be unsustainable as there was no fraud, wilful misstatement or suppression of facts, the tax liability is required to be re-determined by the Proper Officer by treating the show cause notice to have been issued under Section 73. 

5.3 The Tribunal also noted that CBIC Circular No. 254/ 11/ 2025 - GST dated 27.10.2025, clarified that no Proper Officer has been assigned in respect of proceedings under Section 75(2). Accordingly, the Tribunal held that once Section 74 was found inapplicable, the matter had to be remanded to the Proper Officer (who issued show cause notice under Section 74) for fresh determination under Section 73, and the appellate authority could not itself finally determine the liability under Section 73.

Lenient approach for the initial phase of GST implementation

5.4 The Tribunal noted that the dispute arose because certain debit/credit notes recorded in the books were not reflected in GST returns due to portal limitations during the initial phase of implementation of GST. At that time, the system was still evolving, many returns were filed manually, and the GST portal features were not fully operational. Considering these circumstances and the possibility of genuine human errors, the Tribunal held that the matter should be reconsidered by the Proper Officer.

6.1 The Tribunal set aside the OIO and OIA, to the extent they treated the case as one under Section 73.

6.2 The Tribunal remanded the matter to the Proper Officer to re-determine the tax liability under Section 73, after granting the Appellant an opportunity to amend its returns and substantiate the reconciliations.

6.3 However, the Tribunal clarified that it was not setting aside the finding of the Appellate Authority that the case did not fall under Section 74 of the CGST Act.

7.1 The ruling affirms that GSTAT is empowered to examine questions of fact and is not confined to questions of law alone, reiterating its role as the final fact-finding authority under the GST law. The said judgment is also in line with a catena of judicial precedents under various tax laws, which have held that Tribunals are the final fact finding authority.

7.2 While the judgment is silent on the aspect of limitation, one must ensure that if a notice issued under Section 74(1) fails on account of not fulfilling the ingredients therein and therefore, maybe treated as issued under Section 73, the limitation for the same will be as provided under Section 73. Therefore, even if treated as a Section 73 notice, the proceedings should have been initiated within the limitation given under Section 73. 

7.3 The ruling is also noteworthy as it adopts a pragmatic and lenient approach for the initial years of GST, recognising the technical limitations of the portal and the procedural teething issues faced during the initial phase of implementation of GST.