2025 (5) TMI 136 - HC - GST

Wrongful availment of Input Tax credit - rectification of GST 3B returns for February and March 2018 to correct the inadvertent inter-mingling of input tax credit (ITC) claimed under IGST and Cess heads - whether the petitioner is fully aware of the case that it is required to meet and is being taken by surprise by not making it aware of the adverse material or the case it has to meet or is it only that the petitioner has tried to take advantage of a technical defect? - HELD THAT - Once it is concluded that the petitioner is fully aware of the case it is required to meet then there are no hesitation to conclude that the petitioner is mainly using this argument as a device to stall the proceedings. Even otherwise the petitioner is required to show and establish that non-furnishing of the notice has caused it prejudice and that this has prevented it from effectively defending itself. After all in a matter like the instant one this Court cannot be oblivious that where the procedural and/or substantive provisions of law embody the principles of natural justice the infraction per se does not lead to invalidity of the order passed. The prejudice must be caused to the litigant except in the case of a mandatory provision of law which is conceived not only in individual interest but also in public interest. This issue has been considered in detail by a three Judge Bench of the Hon ble Supreme Court of India in case titled as State of Uttar Pradesh vs. Sudhir Kumar Singh and Others 2020 (10) TMI 746 - SUPREME COURT wherein after taking into consideration the law on the subject the Hon ble Supreme Court has laid down that it is felt that a fair hearing would make no difference meaning that a hearing would not change the ultimate conclusion reached by the decision- maker then no legal duty to supply a hearing arises. Conclusion - The petitioner very well knows the case it requires to meet as the same has been elaborately spelt out in the audit report and therefore there are no hesitation to conclude that no prejudice has been caused to the petitioner by non-issuance of the notice as the petitioner does not dispute the case against it. There are no merit in this petition and the same is accordingly dismissed, .

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the petitioner was entitled to rectify the GST 3B returns for February and March 2018 to correct the inadvertent inter-mingling of input tax credit (ITC) claimed under IGST and Cess heads;

(b) Whether the order dated 29.12.2023, creating a demand of Rs. 35,95,799/- under the category of 'CESS' along with interest and penalty, was legally sustainable given the petitioner's contention of clerical error and no actual excess credit claim;

(c) Whether the petitioner was entitled to avail credit under the IGST head, which was wrongly claimed under Cess, amounting to Rs. 32,53,615/-;

(d) Whether the issuance of only a summary of show cause notice without issuance of the main notice in form GST DRC-01, as mandated under Sections 73(1) or 74(1) of the Act read with Rule 142(1), amounted to a procedural irregularity invalidating the demand;

(e) Whether the petitioner suffered any prejudice due to the alleged procedural irregularity, particularly in light of the petitioner having access to the complete audit report detailing the discrepancies;

(f) The applicability and extent of principles of natural justice in the context of procedural compliance in GST adjudication proceedings;

(g) Whether the petitioner's reliance on technical defects to stall proceedings was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a), (b), and (c): Rectification of GST Returns, Excess Credit Demand, and Inter-mingling of ITC Heads

The petitioner, a registered dealer under GST, had inadvertently inter-mingled ITC between IGST and Cess heads while filing GSTR-3B returns for February and March 2018. Specifically, ITC under IGST was claimed under Cess and vice versa, resulting in excess credit claimed under Cess and short credit under IGST.

The petitioner contended that this was a bona fide clerical mistake without any intent to avail excess credit and that the net effect showed less credit claimed under IGST and excess under Cess, which should be rectified by allowing amendment of returns.

The respondents, following audit under Section 65 of the Act, issued a final audit report identifying discrepancies, including excess credit claimed under Cess. A show cause notice was issued proposing demand recovery under Section 74, which was confirmed by the adjudicating authority through the impugned order dated 29.12.2023.

The Court noted that while the respondents recognized the petitioner's lesser claim under IGST if the excess claim under Cess was considered, they proceeded to confirm the demand for excess Cess credit without allowing adjustment or rectification.

The petitioner argued that no loss was caused to the Government exchequer as the overall credit claimed was less, and the error was inadvertent.

The Court observed that the petitioner's case was essentially one of clerical error during manual filing, and the demand for excess credit under Cess was not sustainable without considering the net ITC position.

Issue (d) and (e): Procedural Compliance Regarding Issuance of Show Cause Notice

The petitioner challenged the demand on the ground that the proper officer issued only a summary of the show cause notice but failed to issue the main notice in form GST DRC-01 electronically, as mandated under Section 74(1) of the Act read with Rule 142(1) of the Rules.

The petitioner contended that this procedural lapse rendered the notice incomplete and the demand unsustainable.

The respondents admitted the non-issuance of the formal notice but argued that the complete audit report was furnished to the petitioner, thus no prejudice was caused.

The Court examined whether supply of the audit report could be treated as substantial compliance with the procedural requirement of issuing the formal notice.

It was held that where the statute prescribes a specific manner and procedure, such must be adhered to strictly. However, the key consideration was whether the petitioner was fully aware of the case it had to meet and whether any prejudice was caused by non-issuance of the formal notice.

The Court found that the petitioner had full knowledge of the discrepancies and the case against it as the audit report detailed the excess credit claim and other issues.

Relying on precedents, including a three-Judge Bench ruling of the Supreme Court, the Court emphasized that breach of procedure does not automatically invalidate an order unless prejudice is caused. The principle that "a breach of procedure cannot give rise to a remedy unless something of substance has been lost" was applied.

Since the petitioner was fully aware of the case and did not dispute the facts, the Court concluded that no prejudice was caused by the procedural lapse.

Issue (f): Application of Principles of Natural Justice

The Court discussed the doctrine of procedural fairness and natural justice, noting that these principles aim to ensure accuracy and fairness in administrative decisions.

However, the Court acknowledged exceptions where a fair hearing would make no difference to the outcome, especially where evidence is compelling and the party is aware of the case.

The Court cited authoritative rulings to underline that procedural non-compliance must be assessed in light of prejudice and overall fairness rather than as a rigid formula.

Issue (g): Use of Technical Defects to Stall Proceedings

The Court observed that the petitioner's reliance on the procedural defect appeared to be a tactic to delay proceedings rather than a genuine grievance, given the petitioner's full knowledge of the audit findings.

The Court declined to entertain such attempts to frustrate statutory processes where no substantive prejudice was demonstrated.

3. SIGNIFICANT HOLDINGS

The Court held:

"Once it is concluded that the petitioner is fully aware of the case it is required to meet, then, we have no hesitation to conclude that the petitioner is mainly using this argument as a device to stall the proceedings."

"Where the procedural and/or substantive provisions of law embody the principles of natural justice, the infraction per se does not lead to invalidity of the order passed. The prejudice must be caused to the litigant except in the case of a mandatory provision of law, which is conceived not only in individual interest, but also in public interest."

"...a breach of procedure...cannot give [rise to] a remedy in the courts, unless behind it there is something of substance which has been lost by the failure. The court does not act in vain."

The Court concluded that non-issuance of the formal show cause notice in prescribed form did not vitiate the proceedings as the petitioner had full knowledge of the case and suffered no prejudice.

Regarding the substantive issue of excess credit claim, the Court found that the demand for excess Cess credit was not sustainable without considering the net ITC position and the bona fide clerical error.

Accordingly, the petition was dismissed due to lack of merit, affirming the demand and rejecting the plea for rectification of returns and adjustment of credits.