Section 12AA entities undertaking charitable environmental preservation qualify for GST exemption absent wilful suppression or fraud.

The petitioner No. 1 obtained registration under Section 12AA of the Income-tax Act, 1961, and was also registered under Section 25 of the Companies Act, 1956.

The Gujarat High Court had previously held, in Tax Appeal No. 627 of 2015 and allied matters, that the petitioner’s activities involving treatment and disposal of liquid and solid industrial waste constituted “preservation of environment” and were charitable activities under Section 2(15) of the Income-tax Act.

After the introduction of GST, the petitioners claimed exemption under Entry 1 of Notification No. 12/2017-Central Tax (Rate), dated 28 June 2017, applicable to services supplied by an entity registered under Section 12AA by way of charitable activities, including preservation of the environment.

Following a search conducted on 23 November 2022, the Department alleged that GST had not been paid for the period from 1 July 2017 to 12 May 2022.

A notice in Form GST DRC-01A was issued on 21 June 2023, followed by the impugned show-cause-cum-demand notice dated 5 September 2023 under Section 74 of the Central Goods and Services Tax Act, 2017 and the Gujarat Goods and Services Tax Act, 2017.

The Court applied Section 12AA and Section 2(15) of the Income-tax Act, 1961, under which registration and activities qualifying as “preservation of environment” establish the charitable character of the institution.

Under Entry 1 read with clause 2(r)(iv) of Notification No. 12/2017-Central Tax (Rate), services supplied by an entity registered under Section 12AA in the course of charitable activities, including preservation of the environment, carry a nil rate of GST.

Although Notification No. 11/2017 classified sewage and waste treatment services under Heading 9994 at 9%, the Court held that the specific exemption applicable to Section 12AA entities governed the petitioners’ activities.

Section 74 of the CGST Act and the GGST Act applies only where non-payment or short payment of tax results from fraud, wilful misstatement, or suppression of facts with intent to evade tax.

Relying on Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, (2013) 9 SCC 753, and the principles in Pushpam Pharmaceuticals Co. v. Collector of Central Excise and Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, the Court held that mere non-disclosure or a bona fide failure to pay tax does not amount to wilful suppression; a deliberate positive act intended to evade tax is required.

The Court treated the earlier Gujarat High Court judgment as determinative of the character of the petitioners’ activities: the treatment and disposal of industrial waste was held to constitute preservation of the environment, and the petitioner remained registered under Section 12AA.

Applying Entry 1 and clause 2(r)(iv) of Notification No. 12/2017, the Court held that the petitioners’ services fell within the charitable-activity exemption and attracted a nil rate of GST.

The Department’s reliance on Heading 9994 of Notification No. 11/2017 could not override the specific exemption applicable to Section 12AA entities undertaking charitable activities.

Further, the petitioners had acted on a bona fide understanding supported by their Section 12AA registration and the earlier judicial determination; their subsequent decision to pay GST from 13 May 2022 because exemption denied them input tax credit did not demonstrate an intention to evade tax.

In the absence of fraud, wilful misstatement, or deliberate suppression, the jurisdictional conditions for invoking Section 74 were not satisfied.

It further held that the essential ingredients of Section 74—fraud, wilful misstatement, or suppression of facts with intent to evade tax—were absent.

The writ petition was accordingly allowed, and the show-cause-cum-demand notice dated 5 September 2023 was quashed and set aside; the Rule was made absolute.