Nuances related to Show Cause Notice under GST Laws in light of recent Judicial pronouncements

[Anuj Bansal]

Recently, it would have been observed that GST department has become very aggressive in issuing notices and passing orders. In raising the demands and recovering the same, the GST Department even sometimes ignore issuing Show Cause Notice (hereinafter referred as SCN). The Department should understand and appreciate that issuance of Show cause notice (SCN) is the first step before raising any demand. It has also been observed that many a times SCN is issued without qualifying the conditions / requirements like proper format, specifying the default and its consequences. In the erstwhile laws also, many a times Apex Court has held that SCN should be issued as per law fulfilling all the conditions / requirements.  

In regard to the above, reference can also be made to the case of METAL FORGINGS VERSUS UNION OF INDIA - 2002 (11) TMI 90 - SUPREME COURT, wherein the Hon’ble Apex Court made the following observations in Para 10 of the judgement “Issuance of a show cause notice in a particular format is a mandatory requirement of law. The law requires the said notice to be issued under a specific provision of law and not as a correspondence or part of an order. The said notice must also indicate the amount demanded and call upon the assessee to show cause if he has any objection for such demand. The said notice also will have to be served on the assessee within the said period which is either 6 months or 5 years as the facts demand. Therefore, it will be futile to contend that each and every communication or order could be construed as a show cause notice.” 

Therefore, as per above decision of the Hon’ble Apex Court, the following are the conditions for issuing SCN:

1. The SCN should be in a proper / particular format.

2. The SCN should be served within time as prescribed under law.

3. The SCN should not be issued in a routine manner and every communication cannot be construed as SCN.

4. The proposed demand should have been specifically mentioned in the SCN so that Assessee may specifically revert to the same.

Further, we also refer a landmark decision of the Hon’ble Apex Court i.e. the case of GORKHA SECURITY SERVICES VERSUS GOVT. OF NCT OF DELHI & ORS. - 2014 (8) TMI 1081 - SUPREME COURT, wherein the Hon’ble Supreme Court has made an observation in Para 19 of the judgement that “The fundamental purpose behind the serving of Show Cause Notice is to make the noticee understand the precise case set up against him which he has to meet. This would require the statement of imputations detailing out the alleged breaches and defaults he has committed, so that he gets an opportunity to rebut the same. Another requirement, according to us, is the nature of action which is proposed to be taken for such a breach.” Hence, two necessary elements which a SCN must mention are as follows:

1. The SCN should clearly define the default / breach committed by the   person.

2. The Department should also mention the nature of action which is proposed to be taken for such default / breach.

Therefore, observing that in many a cases the department is not following the settled legal position for issuing the SCNs, an attempt has been made hereunder to summarize nuances related to SCN on the basis judicial pronouncements under GST.

SCN under GST:

GST Law has provision for issuance of SCN under various sections. But GST department many a times issues SCN without keeping basic principles in mind. Therefore, our observations on the basis of various High Courts’ decisions in different circumstances, are as follow:

1. SCN should contain the material particulars / information:

SCN should contain the material particulars / information such as allegations being made, default being occurred, time to submit reply and consequences. In the absence of such information, it would be difficult for an Assessee to revert. It has been held in the following cases that any proceedings initiated on the basis of defective notice, shall stand abated, as it shall be considered as impugned SCN and accordingly, liable to be quashed:

1. SHAH INDUSTRIES THROUGH PROPRIETOR VISHAL HASTIMAL SAKARIA VERSUS STATE OF GUJARAT - 2022 (4) TMI 1093 - GUJARAT HIGH COURT

2. M/S. NKAS SERVICES PRIVATE LIMITED. VERSUS THE STATE OF JHARKHAND, THE COMMISSIONER OF STATE TAXES, RANCHI, DEPUTY COMMISSIONER OF STATE TAXES, GODDA - 2021 (10) TMI 880 - JHARKHAND HIGH COURT

3. VAHANVATI STEELS VERSUS STATE OF GUJARAT - 2022 (4) TMI 1144 - GUJARAT HIGH COURT.

4. BHARAT MINT AND ALLIED CHEMICALS VERSUS COMMISSIONER COMMERCIAL TAX AND 2 OTHERS - 2022 (3) TMI 492 - ALLAHABAD HIGH COURT

2. SCN should specify the grounds / allegations for which action / demand is proposed:

In the following judgements, it is held that since grounds for cancellation of registration are not mentioned in the SCN and accordingly, such notices are against the principle of natural justice:

1. OPC ASSETS SOLUTIONS PVT. LTD., VERSUS THE STATE OF TRIPURA, THE CHIEF COMMISSIONER OF STATE TAX, TRIPURA GOODS & SERVICE TAX DEPARTMENT, THE SUPERINTENDENT OF STATE TAX, SALES TAX OFFICER, TRIPURA - 2021 (9) TMI 53 - TRIPURA HIGH COURT :  SCN has been received by petitioner which is not stating the grounds on the basis of which the registration is liable to be cancelled. The ground on which such registration was liable to be cancelled, according to the Superintendent, was “Non-compliance of any specified provisions in GST Act or the Rules made thereunder as may be prescribed”. Held that if a SCN does not specify the grounds on the basis of which the authority desires to proceed further, it would fail the principle of natural justice and the statutory requirement for issuance of SCN.

2. AGGARWAL DYEING AND PRINTING WORKS VERSUS STATE OF GUJARAT & 2 OTHER (S) - 2022 (4) TMI 864 - GUJARAT HIGH COURT: Where reasons for cancellation were not mentioned in the SCN, Gujarat High Court gave an observation that, “At the outset, we notice that it is settled legal position of law that reasons are heart and soul of the order and non-communication of the same itself amounts to denial of reasonable opportunity of hearing, resulting in miscarriage of justice.”

3. Sufficient time should be given to submit reply to the SCN:

In the following decisions it has been categorically held that the sufficient time shall be given to the assessee to furnish reply to the SCN:

1. NTC INDUSTRIES LTD. VERSUS STATE TAX OFFICER, KARAGPUR ZONE & ORS. - 2022 (6) TMI 466 - CALCUTTA HIGH COURT: Where sufficient time to give reply of SCN was not given, it is observed by the Hon’ble Calcutta High Court that, “Opportunity should be effective and not an empty formality”.

2. M/S. BALAJI TRADERS VERSUS THE STATE TAX OFFICER, MANAPPARAI - 2021 (10) TMI 837 - MADRAS HIGH COURT It is held that sufficient breathing time was not provided to reply against SCN. On the same day of issuance of summary in DRC -01, order of SCN was passed.

Accordingly, in absence of sufficient time to submit the reply to the SCN amounts to not providing of proper opportunity and SCN is merely an empty formality.

4. No order can be passed without giving an opportunity of being heard:     

It is a well settled legal position that an opportunity is required to be given to make personal hearing and submit the reply to SCN. In absence of personal hearing, the order issued may be quashed on the sole ground. In regard to the same, following decisions may be referred:

1. M/S BHARDWAJ CONSTRUCTIONS VERSUS STATE OF UP AND 2 OTHERS - 2022 (3) TMI 491 - ALLAHABAD HIGH COURT

2. VARUNA INTEGRATED LOGISTICS PVT LTD VERSUS STATE OF WEST BENGAL AND ORS. - 2021 (12) TMI 660 - CALCUTTA HIGH COURT

3. SHIV KISHOR CONSTRUCTION PRIVATE LIMITED VERSUS THE UNION OF INDIA, THE PRINCIPAL COMMISSIONER OF CENTRAL TAX AND OTHERS - 2020 (7) TMI 508 - PATNA HIGH COURT

5. Pre - SCN notice should be given in DRC-01A before issuance of SCN u/s 73 & 74 of the CGST Act.

As per the GST Laws, upto 14/10/2020, a notice in Form DRC-01A was required to be given before issuing SCN wherein the Officer shall communicate the details of tax, interest and penalty as may be ascertained by him, to the Assessee. However, vide Notification No. 79/2020 dt 15.10.2020, an amendment has been made wherein the word “shall” has been replaced by “may” which means that it has become optional for the Officer to issue notice in DRC-01A (also referred as pre-SCN notice) before issuing an SCN. The above matter has been challenged before the various High Courts and it has been contended by the Assessees that a notice in DRC-01A is mandatory even after the amendment vide above Notification No. 79/2020. Therefore, it is stated that a notice in DRC-01A is mandatory before issuing a SCN. Otherwise, the whole proceedings may be held as infructuous. Reference can be made to the following decisions:

1. M/S NANHEY MAL MUNNA LAL VERSUS STATE OF U.P. AND 4 OTHERS - 2022 (3) TMI 795 - ALLAHABAD HIGH COURT: “Prima facie, perusal of Form GST DRC-01A under rule 142(1A) of the Rules indicates that it is a pre-show cause notice intimation with reference to Section 73(1)/(5) or Section 74(1)/(5) to an assessee so that either he may deposit the amount of tax and interest or he may disagree to the ascertainment resulting in show cause notice under Section 73(1) or Section 74(1), as the case may be. Likewise, such an intimation in Form GST DRC-01A provides an opportunity to the dealer to resolve the dispute by depositing or in case of disagreement to face the adjudication proceedings under the Act.  Thus, prima facie, it appears that Section 74(1) read with Rule 142(1A) intends to afford an opportunity to the dealer/ assessee on a pre-show cause notice stage which shall ultimately benefit both, i.e the assessee and the department, and shall also reduce litigation. This also indicates to follow the principles of natural justice at a pre-show cause notice stage.”

2. AGROMETAL VENDIBLES PRIVATE LIMITED VERSUS STATE OF GUJARAT - 2022 (4) TMI 823 - GUJARAT HIGH COURT:  It is held in Para 28- “There is a vast difference between Rule 142(1)(a) and Rule 142 (1A) of the Rules. Therefore, from now onwards, if the department deems fit to issue any intimation of tax ascertained as being payable under sub-section (5) of Section 74 in accordance with the Rule 142(1A) of the Rules, it shall issue notice in the Form GST DRC – 01A. In such a notice of intimation, the proper officer shall not threaten the dealer that if he would fail to comply with the intimation, the department shall proceed to recover the tax. The proper officer should inform the dealer that if he would pay the tax, well and good, otherwise the department shall proceed to issue a show cause notice under sub-section (1) of Section 74 in accordance with Rule 142(1)(a) of the Rules, 2017 in Form GST DRC – 01 and carry out regular assessment proceedings.”

Accordingly, a DRC-01A is mandatory before issuing a SCN and in case, the department serves an SCN without issuing DRC-01A, the proceedings may be challenged.

6. Show Cause Notice to be issued before raising demand for Penalty:

It is also state that the department shall also issue a SCN before raising a demand of penalty. In case, the department is issuing an order imposing a penalty without giving an SCN, such order would be infructuous and not tenable under the law.

In regard to the same, reference can be made to the decision of D. RAMA KOTIAH AND CO. VERSUS STATE OF ANDHRA PRADESH - 2018 (9) TMI 2002 - TELANGANA HIGH COURT.

7. Writ Petition against the SCN:

The other important aspect is whether a Writ petition can be filed against an SCN. In regard to same, the High Courts have made observations that writ petition against SCN can only be filed in cases where principle of natural justice is not followed, SCN is issued without jurisdiction or there is a constitutional vires in issuing SCN.

Reference can be made to the decision of MAYA APPLIANCES PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER, THE COMMISSIONER OF GST AND CENTRAL EXCISE, UNION OF INDIA, GOODS AND SERVICES TAX COUNCIL, CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS, THE CHAIRMAN, GSTN, EAST WING, WORD MARK-1 - 2021 (7) TMI 1161 - MADRAS HIGH COURT wherein the Madras High Court held that before Writ Petition is filed against the SCN, case should be adjudicated by competent authority on factual basis. High Court cannot adjudicate issues on merits. High Court observed in Para 5, “A writ against a SCN issued may be entertained only if it is established that the authority issued the SCN has no jurisdiction to issue such notice under the statute or rules or allegation of malafide intentions are raised against official concerned………Therefore, the factual grounds or the mixed question of law and facts deserves complete adjudication on the hands of the competent authority. Only if incompetency of the authority is established through statutory provisions, the writ may be entertained and not otherwise.

Concluding the above discussion, it is stated that an SCN is a very important part of the complete proceedings and we should be very careful in perusing the SCN and replying the same to the department. On receiving the SCN, an attention must be given to the factual position such as whether pre SCN notice is issued by the department, whether the SCN is complete with all its elements like grounds, allegations, demand, etc., whether sufficient time is given to revert to the allegations in the SCN and whether the same has been issued by the proper Officer. On perusing the SCN, it may also be considered and decided whether the SCN issued by the proper Officer is subject to Writ Petition before the High Court, as the same may be violating the principle of natural justice. Therefore, it is suggested that since the SCN is first step of the litigation / proceedings and accordingly, same should be replied in the best possible manner with full legal force and with all averments / contentions.