Stop Waving the Section 74 Sword at PSUs

Why the extended limitation under GST should be rare, reasoned, and reserved for real fraud

When Parliament wrote Section 74 of the CGST Act, it did not intend to gift tax officers a larger window simply to cure weak facts. The extended limitation is a penal lever-triggered only when the revenue can demonstrate fraud, willful misstatement, or suppression of facts with intent to evade. It is the exception, not the default. Yet in day-to-day administration, extended limitation has become a reflex, including against public sector undertakings (PSUs) and government departments-entities that function inside a house of glass: audited, overseen, and largely transparent. That reflex is not merely unlawful; it is counter-productive governance.

What the extended period actually is-and is not

From legacy statutes (Section 11A(4), Central Excise; Section 73(4), Finance Act, 1994) to GST's Section 74, one thread runs unbroken: extended limitation is a punitive response to deceit. It exists to deter and punish dishonest concealment, not to compensate for ambiguity, oversight, or interpretive doubt.

Three elements must co-exist:

1. A positive act or omission of suppression/misstatement

2. With the taxpayer's intent to evade

3. Causal nexus between the deceit and the non-payment/short-payment

If any limb collapses, the edifice of Section 74 falls with it. Disagreement on classification, valuation, exemptions, or place/time of supply-without more-does not transmogrify into "suppression."

Why using Section 74 against PSUs is conceptually flawed

A PSU is an instrumentality of the State. Its budgets are scrutinized, transactions audited

(internal/statutory/CAG), and its books are often accessible to departmental officers. To allege "suppression" by a PSU is, in substance, to claim the State is conspiring against itself. Courts and tribunals have repeatedly signalled this contradiction:

• In disputes involving Steel Authority of India Ltd., the judiciary has been wary of imputing suppression to PSUs absent compelling evidence of intent.

• Oil India Ltd. matters have emphasized that intent to evade cannot be presumed merely because a demand arose; if records are audited and positions are disclosed, intent is missing.

• In cases concerning Hindustan Aeronautics Ltd., tribunals have called the routine invocation of extended limitation against PSUs a logical absurdity where facts were in the department's grasp.

The precise citations will vary by case, but the principle is stable: transparency and continuous oversight create a presumption against suppression. The department bears a heightened burden to show specific, intentional concealment-not just an adverse legal view.

Audit & disclosure defeat "suppression"

PSUs operate under layered audit (internal, statutory, CAG). Many maintain transaction-level trails and share data with departmental teams, sometimes co-located. In such an environment:

• If the primary facts sit in the account books, returns, or correspondence already before the department, the allegation of "suppression" struggles to breathe.

• Audit objections or revenue-neutral disagreements do not retro-create intent. Where the record shows the department could have picked up an issue on a reasonable reading of the accounts, extended limitation lacks legs.

Tribunals have expressed this in various ways: when everything material is on the file, there is nothing left to "suppress."

Interpretation ≠ evasion

A large share of PSU disputes arises from differences on rate, classification, exemption entries, bundled services, valuation add-ons, or place of supply. Those are legal characterizations of disclosed facts. Courts consistently treat such areas as interpretive, not incriminating. Unless the department can show active deceit-fabricated documents, dual sets of books, directional instructions to hide revenue-the extended period cannot be the vehicle. Doubt is not dishonesty.

The mutuality paradox: State vs State

When the tax collector and the taxpayer are both limbs of the Government, extended limitation often degenerates into a mutual blame game:

• One wing issues a Section 74 notice alleging suppression;

• Another wing (the PSU) defends that facts were transparent and subject to Government audits;

• Years of resource-intensive litigation follow, funded by the same consolidated exchequer.

Tribunals have cautioned against this bureaucratic treadmill. The paradox isn't merely philosophical; it is fiscal waste.

The "saving-skin syndrome" in GST administration

Let's name the elephant. When an audit flag appears-or a review points to a potential short levy-some field formations default to Section 74 not because they can prove intent, but because alleging "suppression" feels safer. It inoculates files from internal scrutiny: "We took the harshest route; if the case fails, it's the court's call." This defensive administration imposes four predictable harms:

1. PSUs bleed time and money defending predictable cases.

2. Tribunals carry avoidable dockets, delaying justice for bona fide evasion matters.

3. Genuine detection work gets crowded out by noise.

4. Public trust erodes as the Government appears to accuse itself of deceit.

Section 74 becomes a shield for anxiety, not a sword for fraud.

The real costs no one budgets for

Opportunity cost: Compliance teams at major PSUs-energy boards, port trusts, transport corporations, refineries-divert scarce hours from forward-looking compliance to rear-guard litigation.

• Human capital drain: Officers spend cycles shepherding weak Section 74 notices instead of tackling high-risk tax evasion.

• Financial leakage: Filing fees, counsel fees, internal review committees-costs pile up on both sides of the same public ledger.

• Policy credibility: "Ease of doing business" rings hollow when government undertakings themselves face routine penal proceedings for interpretive disputes.

The correct legal test for PSUs (and everyone else)

Officers should ask, and PSUs should insist on answers to, five crisp questions before Section 74 is even considered:

1. What specific fact was allegedly concealed? (Quote the document and date.)

2. Where is the evidence of intent to evade? (Emails, directives, alterations-mere inference is insufficient.)

3. Could the department have known the fact from the PSU's records or returns? (If yes, suppression collapses.)

4. Is the dispute actually one of law? (Classification, exemption, valuation interpretation-default to Section 73.)

5. Is the invocation proportionate to the evidence? (Penalty follows proof, not presumption.)

If the answers are vague, Section 73 is the rightful path.

Policy reset for GST 2.0: restraint by design

To restore confidence and conserve capacity, CBIC and state administrations can hard-code restraint:

• Bright-line presumption for PSUs: Where CAG/statutory audits cover the period and relevant ledgers were produced, officers should not invoke Section 74 absent documentary proof of deceit.

• "Section 74 Justification Note": Mandate a short internal memo capturing the specific suppressed fact, proof of intent, and why Section 73 will not suffice. Approve it at a senior supervisory level.

• Audit-to-adjudication protocol: When the source is an audit objection, require a legal vetting that distinguishes between interpretive divergence and deception. Only the latter goes to Section 74.

• Accountability loop: Track outcomes of Section 74 cases by commissionerate; where systemic reversals occur, run training and feedback rather than raising more notices.

• PSU liaison cells: Set up dedicated nodes to resolve classification/exemption/valuation questions in advance, through rulings or formal advisories-preventing disputes rather than penalizing them.

A litigation playbook PSUs can use (adapt/adopt)

When confronted with a Section 74 notice that feels routine, PSUs can organize the reply around five pillars:

(A) Full-disclosure record

• Tabulate returns filed, ledgers maintained, correspondence exchanged, and audit reports furnished for the period.

• Annex extracts to show the department's constructive knowledge of the factual matrix.

(B) No positive act of concealment

• Identify the alleged "suppressed" fact and demonstrate where it exists in the records already shared.

• Cite jurisprudence that mere non-acceptance of a legal position ≠ suppression.

(C) Mens rea absent

• Emphasize internal controls, board-approved positions, and reliance on expert opinions or circulars.

• Where classification/exemption entries were arguable, show reasoned interpretive basis.

(D) Correct provision is Section 73

• Argue that the appropriate route for interpretation disputes is Section 73; penal time frames are disproportionate and contrary to legislative design.

(E) Proportionality & public interest

• Remind that both sides are public entities; penal measures must be evidence-led and resource-sensible.

Suggested structure of the reply

1. Preliminary objection to Section 74 invocation (jurisdictional).

2. Factual background with a disclosure matrix.

3. Legal submissions: absence of suppression/intent; interpretive character; proportionality.

4. Prayer: drop Section 74; treat under Section 73 if at all; no penalty; no extended period.

Practical do's and don'ts for field formations

Do

• Use Section 74 only when you can lay your finger on who concealed what, when, and how, and why it shows intent.

• Record a short, reviewable rationale before issuing the notice.

• Consider pre-notice consultation in PSU matters to test whether the issue is interpretive.

Don't

• Don't equate an audit objection with suppression.

• Don't use Section 74 to stretch limitation for a weak Section 73 case.

• Don't presume mens rea because tax is payable; liability and intent are separate questions.

The larger message: credibility follows fairness

A modern tax administration is judged less by how much it demands and more by how it demands. When the State routinely accuses its own undertakings of concealment, it sends three poor signals: that it does not trust its audits, that it does not distinguish error from evasion, and that it is more defensive than deliberative.

The fix is not complicated. Reserve the extended period for evidence-backed fraud. Channel interpretive disagreements-especially with PSUs-through Section 73 and advance clarifications. And require a paper-trail of justification whenever Section 74 is used. This single reform will unclog dockets, re-focus manpower on real evasion, and rebuild trust.

Key takeaways (for quick circulation)

• Extended limitation is penal; it cannot be routine.

• PSUs are transparent by design-audits and disclosures rebut suppression.

• Interpretation disputes belong to Section 73, not Section 74.

• Prove the triad-specific suppression, intent to evade, causal link-or don't invoke Section 74.

• Institutionalize restraint: justification notes, senior sign-offs, and PSU liaison.

• Public interest suffers when the State litigates with itself using a penal hammer for a civil nail.

Closing thought

Section 74 is a scalpel, not a sledgehammer. In capable hands, it excises malignant fraud. In fearful hands, it wounds credibility. If GST 2.0 is to be a maturing regime, the message must be unambiguous: save the extended period for the guilty; spare it for the governed-especially when the governed is the Government itself.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.