Why best judgement assessment on failure to file return under GST is more dangerous?

[kollengode venkitaraman]

It has been two years since the inception of GST and there has been a steady decline in compliance of GSTR-3B return filing from 92.6% in August 2017 to just 71.25% in November 2018.  This article analyses the legal consequences of non filing of returns.

Notice for non filing of returns

Section 46 of the CGST Act, 2017 provides that notice shall be issued to return defaulters requiring him to file the return within 15 days of service of the notice. Section 46 is reproduced as below:

Where a registered person fails to furnish a return under section 39 or section 44 or section 45, a notice shall be issued requiring him to furnish such return within fifteen days in such form and manner as may be prescribed.

Rule 68 provides that a notice in FORM GSTR-3A shall be issued, electronically, to such defaulters.

Assessment of non-filers of returns

Sub-section (1) of section 62 provides for assessment of non-filers of return which is reproduced as follows:

Notwithstanding anything to the contrary contained in section 73 or section 74, where a registered person fails to furnish the return under section 39 or section 45, even after the service of a notice under section 46, the proper officer may proceed to assess the tax liability of the said person to the best of his judgement taking into account all the relevant material which is available or which he has gathered and issue an assessment order within a period of five years from the date specified under section 44 for furnishing of the annual return for the financial year to which the tax not paid relates.

Thus a proper office can make a best judgement assessment where the registered person fails to furnish returns after the expiry of 15 days from the date of service of GSTR-3A notice to him.

The best judgement assessment may be completed on the basis of available materials or information gathered by the proper officer. Thus, where the registered person has filed GSTR-1 for the tax period to be assessed, it may be relied upon as available records for determining the output tax liability. Similarly, the input tax credit reported in GSTR-2A for the said tax period can be used to determine the input tax credit.

Following points are important for best judgment assessment –

1. Registered person should fail to furnish the return u/s 39 even after 15 days of service of GSTR-3A.
2. Power of best judgment assessment should be exercised by Proper Officer only and not by any other person below his rank.
3. Before such assessment, proper officer should take into account all relevant material available on record.
4. Best judgment assessment order has to be in writing.
5. Order must be made within 2 years from due date of furnishing the annual returns.

Best judgement assessment in erstwhile service tax regime

Section 72 of the Finance Act provides for best judgement assessment in service tax. The provisions of section 70 are reproduced as below:

If any person, liable to pay service tax,-  

(a) fails to furnish the return under section 70;

(b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules made there under, the Central Excise Officer, may require the person to produce such accounts, documents or other evidence as he may deem necessary and after taking into account all the relevant material which is available or which he has gathered, shall by an order in writing, after giving the person   an opportunity of being heard, make the assessment of the value of taxable service to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment.

While Section 62 of CGST Act, 2017 seems to be in pari materia with Section 72 of Chapter V of Finance Act, a noticeable difference is that GST law does not explicitly require the proper officer to call for accounts, documents or other evidences unlike in erstwhile regime, the central excise officer had discretionary powers to do so. Thus, under GST law, the proper officer is empowered to make a best judgement assessment with only those documents and information which are available with him and need not gather accounts, documents and evidences from the registered person.

In Raghubar Mandal v State of Bihar 1957 (5) TMI 28, Supreme court has held that best judgment assessment is an estimate and involves guess work, the estimate must relate to some evidence or material and it must be something more than mere suspicion. Similarly, in Kathyaini Hotels v. ACCT 2002 (1) TMI 1134, Supreme Court has held that even a best judgment assessment must be made reasonably and not on surmises.

Is assessment under section 62 of CGST Act, 2017 primarily an ex-parte assessment?

In M/S. Shubham Electricals v CST & ST, Rohtak 2015 (6) TMI 786 the New Delhi CESTAT held that the disinclination to employ the ample investigatorial powers conferred by the Act is illustrative of gross Departmental failure and cannot afford justification for passing an incoherent and vague adjudication order.

In N.B.C. Corporation Ltd. v. CST 2014 (1) TMI 151, Delhi High Court held that the scope of best judgment assessment is ordinarily understood under Income Tax Act, 1961 and section 72 of Finance Act, 1994 which mandates assessee to appear and furnish books of account, documents and material accordingly assessing officer is required to pass order. Thus, assessment order passed under best judgment assessment was not ex parte order. It will be akin to ex parte order when assessee fails to produce records and assessing officer pass the order on the basis of other information or data available.

However, section 62 does not explicitly require the proper officer to call for accounts, documents or other evidences or provide for an opportunity of being heard. This gives power to proper officer to pass an ex-parte order based on documents and records available with him and without employing any investigatorial powers. Thus, it seems the provisions of GST law have deviated from the ratio of New Delhi CESTAT and Hon’ble Delhi High court in cases cited supra.

This omission in section 62 is in violation of the basic principle of natural justice – Audi Alteram Partem (hear the other side). The rules of natural justice operate as implied mandatory requirements, non-observance of which invalidates the exercise of power. The court presumes that the requirements are implied in the absence of indication to the contrary in the Act, confirming the power or in the circumstances in which the Act is to be applied.

However, this intentional omission of these clauses in section 62 of CGST Act, 2017 maybe to suppress the mischief in erstwhile service tax law (Heydon’s rule) which may be indicative of the contrary to requirements of principles of natural justice in the Act itself.

Automatic withdrawal of order

The sub-section 2 of section 62 deals with automatic withdrawal of best judgement assessment order if a valid return is filed within 30 days of the service of the said assessment order save for the continuance of the liability to pay interest for late payment of the tax. Section 62(2) is reproduced as below:

(2) Where the registered person furnishes a valid return within thirty days of the service of the assessment order under sub-section (1), the said assessment order shall be deemed to have been withdrawn but the liability for payment of interest under sub-section (1) of section 50 or for payment of late fee under section 47 shall continue.

Section 2(117) defines a valid return as “a return furnished under section 39 (1) on which self-assessed tax has been paid in full. Thus, for suo moto withdrawal of best judgement assessment order, the registered person has to furnish GSTR-3B and pay the tax in full”.

The very reason that taxpayers are unable to file return is because of the cash crunch to pay taxes. On a combined reading of section 46 and section 62 the assessee is given a time of 45 days to pay the tax in full.

In M/s Bridge hygiene services private limited v state tax officer, second circle, kottayam 2019 (9) TMI 1184 - KERALA HIGH COURT the Kerala High Court has held that the statutory prescription of 30 days from the date of receipt of the assessment order passed under Section 62(1) has to be strictly construed, since this is a provision in a taxing statute that enables an assessee to get an order passed against him on best judgment basis set aside. The provision must be interpreted in the same manner as an exemption provision in a taxing statute.

Moreover, the hon’ble Kerala High Court seems to have overlooked the arbitrary assessment made by the proper officer without adhering to guideline on the ground that the statutory provision enables the tax payer to get the order automatically withdrawn.

Conclusion

Compared to pre-GST regime, the power to conduct best judgement assessment u/s 62 given to proper officer is arbitrary and against the principles of natural justice. The automatic withdrawal of best judgement assessment order seems to be the last option available to tax payer to save himself from the arbitrary assessment of the proper officer. Moreover, the recent judgement of the Kerala High Court is also in favour of the department.

In genuine cases, where the tax payer are unable to file the returns owing to cash crush and economic distress faced by the industries across the country, the department must take a reasonable stand and do the best judgement assessment in a fair and judicial manner by calling for all the relevant information from the taxpayers and using such information and records available with him while carrying out the assessment.