Legality, Validity of notice and Interference of High Courts against any Show Cause Notice

[Navjot Singh]

1. Changes in the Procedure of Show cause Notice

Vide Notification No. 49/2019 – Central Tax dated 9th October 2019, below mentioned Sub Rules were inserted in Rule 142 of CGST Rules, 2017

“(1A) The proper officer shall, before service of notice to the person chargeable with tax, interest, and penalty, under sub-section (1) of Section 73 or sub-section (1) of Section 74, as the case may be, shall communicate the details of any tax, interest, and penalty as ascertained by the said officer, in Part A of FORM GST DRC-01A.”;

 “(2A) Where the person referred to in sub-rule (1A) has made a partial payment of the amount communicated to him or desires to file any submissions against the proposed liability, he may make such submission in Part B of FORM GST DRC-01A.”

This rule relates to the demand being raised by the department through the issuance of show cause notice through FORM GST DRC-01. If any differential amount is being determined by the proper officer, subsequently Form GST DRC-01 is issued normally.   

2. Analysis of DRC-01A

After the introduction of Rule 142(1A) proper officer has to issue FORM GST DRC-01A before service of notice to the person chargeable with tax, interest, and penalty, under section 73 or section 74, as the case may be, shall communicate the details of any tax, interest, and penalty as ascertained by the said officer, in Part A of FORM GST DRC-01A.

Earlier, show cause notice was being issued directly but after the intro-duction of this new sub-rule it is the responsibility of the proper officer to issue intimation under sub-rule 1(A) for the determined amount regarding tax, interest & penalty before serving the show cause notice under section 73(1) or 74(1) and the taxpayers get extra time to submit the differential amount.

Proper office after determining any amount the first communication would be through intimation under rule 142(1A) through FORM GST DRC-01A.

After receiving intimation in FORM GST DRC-01A taxpayer can pay under section 73(5) or 74(5) as the case may be and there would not be any penalty that can be imposed by the proper officer.

Reply to FORM GST DRC-01A would be made in part B of FORM GST DRC-01A and after that, if the proper officer is not satisfied then he will issue FORM GST DRC-01 and normal adjudication will continue.

3. Synopsis of the judgment held by the GUJARAT HIGH COURT in the case of M/S. CERA SANITARYWARE LIMITED VERSUS STATE OF GUJARAT & 1 OTHER (S) [2020 (7) TMI 445 - GUJARAT HIGH COURT]

• The petitioner challenged the notice of intimation under Section 74(5) of the Goods and Service Tax Act, 2017 of the amount of tax as ascertained by the authority. The impugned order is in the FORM GST DRC- 01A dated 03.03.2020 issued by the Jurisdictional Authorities. By the impugned communication, the
• The learned counsel appearing for the writ applicant submitted that the impugned communication under Section 74(5) of the Act, 2017 is illegal and his second submission is with regard to the illegal access made in the business premises as provided under Section 71 of the Act, 2017.
• Court held that:-

1. The second submission with regard to Section 71 of the Act, is not the subject matter of challenge in this petition. The subject matter of challenge is only the legality and validity of the notice of intimation under Section 74(5) of the Act, 2017.
2. A writ application challenging the notice of intimation in the FORM GST DRC-01A issued under Section 74(5) of the Act is not maintainable in law.
3. It is just an intimation. It is up to the writ applicant whether to pay attention to such intimation or not.
4. If the writ applicant deems fit to ignore it, the same may entail the consequence of further show cause notice under Section 74(1) of the Act, 2017.
5. In any view of the matter, even if a further notice under Section 74(1) of the Act, 2017 is issued, an opportunity of the hearing will definitely be given to the writ applicant before his actual liability is determined under the Act, 2017. 

5. Exercising the right under article 226 of the Indian constitution (challenging the show cause notice)

The Article 226 empowers High Courts to issue directions, orders or writs in the nature of habeas corpus, mandamus, prohibition, quo war-anto and certiorari.

Such directions, orders or writs may be issued for the enforcement of fundamental rights or for any other purpose.

It is well established that the remedy provided for in Article 226 of the Constitution of India is a discretionary remedy and the High Court has always the discretion to refuse to grant such a relief in certain circumstances even though a legal right might have been infringed.

Availability of an alternative remedy is one of such considerations that the High Court may take into account to refuse to exercise its jurisdiction, but this principle does not apply to the enforcement of fundamental rights either under Article 32 or under Article 226 of the Constitution.

The only exception was stated by The Supreme Court in MOHAMMAD YASIN VERSUS. THE TOWN AREA COMMITTEE, JALALABAD AND ANOTHER. [1952 (2) TMI 21 - SUPREME COURT] wherein it was held that an alternative remedy is not a bar to move a writ petition in the High Court to enforce a fundamental right.

The rule of exhaustion of a remedy before invoking jurisdiction under Article 226 has been characterized as a rule of policy, convenience and discretion rather than a rule of law, as per the decision of the Supreme Court in THE STATE OF UTTAR PRADESH VERSUS MOHAMMAD NOOH [1957 (9) TMI 42 - SUPREME COURT] and BABURAM PRAKASH CHANDRA MAHESHWARI VERSUS ANTARIM ZILA PARISHAD NOW ZILA PARISHAD MUZAFFARNAGAR [1968 (8) TMI 189 - SUPREME COURT]

The rule has been justified on the ground that persons should not be encouraged to circumvent the provisions made by a statute, providing for a mechanism and procedure to challenge administrative or quasi-judicial actions taken thereunder (UNION OF INDIA VERSUS TR. VARMA 1957 (9) TMI 41 - SUPREME COURT).[1]

Therefore a detailed discussion on the Interference of High Courts vide exercising the ‘Article 226 of Indian Constitution’ against any Show Cause Notice” is also relevant here:-

6. Why Courts should not entertain Writs challenging the Show Cause Notices?

The scope of judicial review, against the show cause notice, is required to be dealt with. In the case of STANDARD CHARTERED BANK VERSUS DIRECTORATE OF ENFORCEMENT [2006 (2) TMI 272 - SUPREME COURT], it is held that ordinarily, the Court should be reluctant to interfere with the show cause notice unless the notice is shown to have been issued apparently without any authority of law.

In the case of COMMISSIONER OF CUS. & C. EX. VERSUS CHARMINAR NONWOVENS LTD. reported in 2004 (5) TMI 67 - SUPREME COURT dispute involved therein was a classification dispute and challenge was made to a show-cause notice wherein it is held that the High Court should remit the matter to the concerned authority for adjudication.

However, in the case of STATE OF UP. AND ANOTHER VERSUS ANIL KUMAR RAMESH CHANDRA GLASS WORKS AND ANOTHER reported in 2005 (5) TMI 322 - SUPREME COURT, the Apex Court carved out an exception that if the facts, narrated in the show cause notice, are not accepted to be correct; if it can be demonstrated that offense is not disclosed; or the show cause notice is without jurisdiction, the Court should not entertain the writ petition.

The Supreme Court, in the case of UNION OF INDIA VERSUS VICCO LABORATORIES, reported in 2007 (11) TMI 21 - SUPREME COURT also deprecates interference at the stage of issuance of show cause notice by the authorities unless it is without jurisdiction or in abuse of process of law

The ratio which could be culled out from the aforesaid judgment is that the power of judicial review, under Article 226 of the Constitution of India, can be exercised where the challenge to a show-cause notice is made provided it is patently demonstrated that the same is issued without jurisdiction or it does not disclose any offense to have been committed.

Ordinarily High Court should not embark to decide the factual disputes but relegate the party to submit the reply before the authority concerned who is obliged to decide the same. The aforesaid rule is, however, not free from the exception. The exception, carved out in the case of INDIAN CARDBOARD INDUSTRIES LTD. VERSUS COLLECTOR OF CENTRAL EXCISE [1991 (7) TMI 100 - HIGH COURT AT CALCUTTA]

In the case of ‘MEGA CORPORATION LTD. VERSUS COMMISSIONER OF SERVICE TAX -2015 (1) TMI 1095 - DELHI HIGH COURT, the petitioner challenged the show cause notice issued to him. The High Court held that the petitioner should first respond to show cause notice and take recourse to such remedies as are available in law in the circumstances of the case.

In the case of ‘Bhubaneswar Development Authority V. Commissioner of Central Excise & Service Tax’ – 2015 (4) TMI 464 - ORISSA HIGH COURT, the challenge has been made to the demand-cum-show cause notice The challenge is on the ground that the conditions precedent for exercise of jurisdiction to invoke the extended period of limitation is wholly absent. The High Court held that the issue of whether the extended period of limitation was applicable, was yet to be determined by the Adjudicating Authority at the first instance itself.  Hence writ petition was not maintainable.

In ‘Tanushree Logistics Private Limited V. Union of India’ – 2015 (9) TMI 420 - RAJASTHAN HIGH COURT, the High Court perused the show cause notice and found that it is only a prima facie view which the Commissioner, as a quasi-judicial authority, has expressed at this state, placing reliance on the material collected at the time of the search. The High Court further held that if a reply to show cause notice is furnished, it is always open to the authority to consider and decide in accordance with the law.

7. Why Courts should entertain Writs challenging the Show Cause Notices?

The scope of the show cause notice is well explained in TRF Limited V. Commissioner of Central Excise & Service Tax, Jamshedpur’ – 2013 (4) TMI 21 - JHARKHAND HIGH COURT in which it was held that neither the issuing authority nor assessee should make a prestige issue. It is especially so as quasi-judicial proceedings are initiated by officers exercising vast statutory power and jurisdiction, which should not be misunderstood to have been exercised to humiliate a person holding the position in assessee company.  The reasons for forming opinions against assessee are required to be reflected in the notice itself.  It cannot render notice illegal as being issued with a pre-determined mind.  

However, notice reflecting in unequivocal terms decision on contentious issues rather than pulling question to the assessee, may something reflect the pre-determined mind of issuing authority. Such notice cannot be treated to be a notice to show cause in any manner.

In the case of Creative Travel Private Limited V. Commissioner of Central Excise & Service Tax, New Delhi’- 2015 (10) TMI 1305 - CESTAT NEW DELHI before the issuance of show cause notice the assessee was asked to provide details/document/information. The appellant challenged the issuance of show cause notice before the High Court, Delhi.  The High Court, Delhi directed the Adjudicating Authority to decide the matter with regard to jurisdiction tacit basis taken into consideration the stand and stances put forth by the assessee, whether the show cause notice was issued correctly or not.

In ‘Infinity Infotech Parks Limited V. Union of India’- 2014 (12) TMI 36 - CALCUTTA HIGH COURT the High Court is of the view that the conditions precedent for exercising of jurisdiction to invoke extended period of limitation were wholly absent.  The High Court set aside the impugned show cause notice.

In ‘Naresh Kumar & Co, Private Limited V. Union of India’ – 2013 (2) TMI 676 - CALCUTTA HIGH COURT the High Court held that the invocation of writ jurisdiction is permissible as the question of limitation is the question of jurisdiction in the sense that the authority has no jurisdiction to issue a show-cause notice which is barred by limitation.  

Furthermore, the High Court might also interfere with a show-cause notice which does not fulfill the statutory conditions for issuance thereof or ex-facie does not disclose any offense, misconduct or other cause of action for which action is contemplated in the show cause notice can be initiated.  For this purpose the court may examine whether jurisdiction to issue show cause notice has been properly exercised or such jurisdiction is usurped by the pretended invocation of a provision of a statute.  Thus the High Court is entitled to examine whether the extended period of limitation could have been invoked and if so, whether any cogent grounds have been made out in the impugned show cause notice for invocation of the extended period of limitation and if the same is supported by materials on record.

The question of whether any particular legislation suffers from excessive delegation has to be decided having regard to the subject matter, the scheme, the provisions of the Statutes including its preamble and the facts and circumstances in the background of which the Statute is enacted. (REGISTRAR OF CO-OPERATIVE SOCIETIES VERSUS K. KUNJABMU, 1979 (11) TMI 263 - SUPREME COURT and STATE OF NAGALAND VERSUS RATAN SINGH AND ORS. 1966 (3) TMI 100 - SUPREME COURT). It is also well settled that in considering the vires of subordinate legislation one should start with the presumption that it is intra vires and if it is open to two constructions, one of which would make it valid and another invalid, the Courts must adopt that construction which makes it valid and the legislation can also be read down to avoid it is being declared ultra vires [See ST. JOHNS TEACHERS TRAINING INSTITUTE VERSUS REGIONAL DIRECTOR, NATIONAL COUNCIL FOR TEACHER EDUCATION & ANR. reported in 2003 (2) TMI 479 - SUPREME COURT].

In the case of AJAY CANU VERSUS UNION OF INDIA AND OTHERS, 1988 (8) TMI 422 - SUPREME COURT, the Supreme Court held that it was the well-established proposition of law that where a specific power is conferred without prejudice to the generality of the power already specified, the particular power is only illustrative and it did not in any way restrict the general power.

Further, as per the commentary by HWR Wade in “Treatise on Administrative Law”, the High Court held that the underlying object of the rule is that High Courts are the apex judicial institutions in the States, and it is but natural that if an alternative suitable equally efficacious remedy is available to the party, they may refuse to exercise the extraordinary jurisdiction under Article 226 and direct the aggrieved party to first avail of the said alternative remedy before approaching the High Court. The extraordinary jurisdiction of the High Court under Article 226 cannot be reduced to an ordinary jurisdiction of the High Court.

OUR VIEW

It is being noticed that the department has issued FORM GST DRC-01 without first communicating through FORM GST DRC-01A, in case your client receives any show-cause notice directly through FORM GST DRC-01 then you can ask you’re the proper officer to first communicate through FORM GST DRC-01A.

Further, In cases where no fundamental right is involved, it has been ruled that the High Court would not exercise its jurisdiction under Article 226 when an alternative, adequate, and efficacious legal remedy is available and the petitioner has not availed of the same before coming to the High Court. Of course, Article 226 is silent on this point. It does not say in so many words anything about this matter, but the Courts have themselves evolved this rule as a kind of self-imposed restraints and limitations in exercise of the power granted to the Court by the Constitution under Article 226. The Court can take judicial notice of the fact that large numbers of writ petitions are filed in the High Court by persons without exhausting statutory alternative remedies or other remedies available to them.

Further, what can be gathered from the decisions of the Supreme Court in U.P. JAL NIGAM VERSUS NARESHWAR SAHAI MATHURA 1994 (10) TMI 310 - SUPREME COURT; TITAGHUR PAPER MILLS CO. LIMITED. AND ANOTHER VERSUS STATE OF ORISSA AND ANOTHER 1983 (4) TMI 49 - SUPREME COURT and HB. GANDHI, EXCISE AND TAXATION OFFICER-CUM-ASSESSING AUTHORITY, KARNAL AND OTHERS VERSUS GOPI NATH & SONS AND OTHERS 1989 (12) TMI 306 - SUPREME COURT is that where statutory remedies are available or a statutory Tribunal has been set up, a petition under Article 226 should not be entertained, unless

• the statutory remedies are ill-suited to meet the demands of an extraordinary situation,

for example, where the very vires of the statute are in question,

• Where private or public wrongs are so inextricably mixed up and
• The prevention of public injury and the vindication of public justice require that recourse should be had to Article 226;
• Where the alternative remedy is onerous or burdensome or inadequate;
• Where it involves inordinate delay or is illusory in nature; where the impugned action is palpably wrong or goes to the root of the jurisdiction or where there is a total lack of jurisdiction in the authority.

Likewise, the existence of an alternative remedy is not an absolute bar to the issue of a writ of certiorari; and a writ of mandamus would not be refused merely because the assessee could have filed a suit. A writ of prohibition or mandamus may be issued to restrain recovery proceedings in pursuance of an assessment order made without or in excess of jurisdiction, even if such a plea as to jurisdiction was not raised in the assessment proceedings.

CA Navjot Singh

Partner

TaxTru Business Advisors

canavjotsinghbrar@gmail.com ; 9953357999

[1] https://www.financialexpress.com/archive/writ jurisdiction-of-high-courts/53998/