2025 (7) TMI 268 - HC - GST

Violation of principles of natural justice - proper service of SCN or not - SCN were issued prior to passing the Impugned Order under Section 73 (9) of the State Act or not - determination of tax as well as the Order attached to the Summary of the Show Cause Notice in GST DCR-01 and Summary of the Order in GST DCR-07 can be said to be the Show Cause Notice and Order respectively or not - impugned orders under Section 73 (9) of the State Act is in conformity with Section 75(4) of the State Act and is in consonance with the principles of natural justice. HELD THAT - The Proper Officer is mandated to issue a SCN only under specific circumstances as outlined in Section 73. Therefore the SCN must clearly state the reasons and circumstances justifying its issuance under this section. Only then can the recipient effectively respond particularly if they wish to challenge the applicability of Section 73. Section 73(9) requires the Proper Officer to determine the tax interest and penalty after considering the representation. Section 73(2) and 73(10) are interconnected while Section 73(10) allows passing the order within three years from the due date of the annual return Section 73(2) mandates that the SCN must be issued at least three months before the deadline. Furthermore a combined reading of subsections (1) to (4) of Section 73 shows that the legislature has made a clear distinction between a Show Cause Notice and a Statement. Even if a Statement is issued under Section 73(3) a separate and proper SCN is still required. From a perusal of Rule142 it would show that in addition to the Show Cause Notice to be issued under Section 73 (1) and the Statement of determination of tax under Section 73 (3) there is an additional requirement of issuance of a Summary of the Show Cause Notice in GST DRC-01 and the Summary of the Statement in GST DRC-02. The natural corollary from the above analysis is that the issuance of the Show Cause Notice and the Statement of determination of tax by the Proper Officer are mandatory requirement in addition to the Summary of Show Cause Notice in GST DRC-01 and Summary of the Statement in GST DRC-02. The Division Bench of the Hon ble Jharkhand High Court in Nkas Services Pvt. Ltd. 2022 (2) TMI 1157 - JHARKHAND HIGH COURT held that a summary in GST DRC-01 cannot replace a proper SCN. Similarly in LC Infra Projects Pvt. Ltd. 2019 (8) TMI 84 - KARNATAKA HIGH COURT the Honble Karnataka High Court emphasized that issuing a proper SCN is essential before the recovery of interest or penalty under the Act. The Court holds that merely attaching a tax determination order to the summary in DRC-01 does not amount to valid initiation under Section 73. The summary is only supplementary to a full SCN. Thus the impugned orders having been passed without a proper SCN are in violation of Section 73 and Rule 142(1)(a). Whether the determination of tax as well as the order attached to the Summary to the Show Cause Notice in GST DRC-01 and the Summary of the Order in GST DRC-07 can be said to be the Show Case Notice and Order respectively? - HELD THAT - As per Section 2(91) a Proper Officer is the Commissioner or someone entrusted by him. Therefore unless these documents are duly authenticated by the Proper Officer they fail to meet the statutory requirements and are rendered invalid and unenforceable. Section 73 of the Act requires that notices and order be issued by the Proper Officer but it does not prescribe the mode of authentication outside Chapter III of the Rules. Since no specific rule under Chapter XVIII (relating to Demand and Recovery) governs authentication a regulatory gap exists. Given the critical importance of authentication by the Proper Officer the Court held that until proper rules or notifications are issued by the Board to address this gap Rule 26(3) which requires digital or e-signature must be applied by default. This ensures that any notice statement or order issued under the Act maintains its legal validity and enforceability. On the question of whether the impugned orders under Section 73(9) conform to Section 75(4) of the State Act and is according to the principles of natural justice the Court observed that the Summary of the Show Cause Notice did not mention any date of hearing leaving the relevant column blank. The petitioner was merely asked to submit a reply without being offered a cleared opportunity for personal hearing. This Court also notes that the impugned order contravenes Section 75(4) of the Act which mandates that the impugned order contravenes Section 75(4) of the Act which mandates that a reasonable opportunity of hearing must be provided either when an adverse decision is contemplated or when a written request is made by the assessee. In the present case although the DRC-01 summary specifies the date for filing a reply it leaves the fields regarding the date and time of personal hearing as NA . In a situation where no reply is submitted the Proper Officer cannot proceed to pass an adverse order without granting an opportunity of hearing as doing so would render the safeguards under Section 75(4) ineffective and violate principles of natural justice. The impugned order dated 19.12.2023 is interfered with and set aside - Petition allowed.

Summary

The Court considered the following core legal questions:

(i) Whether valid Show Cause Notices (SCNs) were issued prior to passing the impugned order under Section 73(9) of the State GST Act;

(ii) Whether the determination of tax and the order attached to the Summary of the Show Cause Notice in GST DRC-01 and the Summary of the Order in GST DRC-07 respectively can be construed as valid Show Cause Notices and Orders;

(iii) Whether the impugned orders under Section 73(9) comply with Section 75(4) of the State Act and adhere to the principles of natural justice, particularly regarding the grant of opportunity of hearing.

Issue (i): Validity of Show Cause Notices prior to passing the impugned order under Section 73(9)

The legal framework revolves around Section 73 of the Central and State GST Acts, which mandates issuance of a Show Cause Notice when the Proper Officer suspects non-payment, short payment, erroneous refund, or wrongful availing of input tax credit (except in cases involving fraud or willful misstatement). Section 73(1) requires a proper SCN to be issued, distinctly separate from a Statement under Section 73(3). The SCN must clearly state the grounds for its issuance to enable the recipient to respond effectively.

Rule 142(1)(a) of the CGST Rules, 2017 mandates that along with the SCN issued under Section 73, a summary thereof must be served electronically in FORM GST DRC-01. However, the Rule explicitly distinguishes between the SCN and its summary, indicating that the summary is supplementary and cannot replace the SCN.

The Court examined the record and submissions, noting that the petitioner was served with a Summary of Show Cause Notice in GST DRC-01 accompanied by a tax determination attachment, but no separate SCN was issued. The respondents conceded that no separate SCN existed apart from the tax determination attachment.

Precedents from the Jharkhand High Court (Nkas Services Pvt. Ltd.) and Karnataka High Court (LC Infra Projects Pvt. Ltd.) were relied upon, which held that a summary in GST DRC-01 or a tax determination statement cannot substitute a valid SCN. The Court concluded that the impugned order was passed without a proper SCN, violating Section 73 and Rule 142(1)(a).

Issue (ii): Whether the tax determination and order attached to the Summary in GST DRC-01 and GST DRC-07 constitute valid SCN and Order respectively

The Court analyzed the nature of the attachments to the summaries in GST DRC-01 and GST DRC-07. It was observed that these attachments lacked authentication by the Proper Officer, specifically digital or electronic signatures, as mandated under Rule 26(3) of the CGST Rules, 2017.

Rule 26(3) requires that all notices, certificates, and orders under the GST provisions be issued electronically with authentication via digital signature, e-signature under the Information Technology Act, 2000, or any other mode notified by the Board. Although Rule 26 is located under Chapter III (Registration), judicial interpretation, including the decisions in M/s Silver Oak Villas LLP and A.V. Bhanoji Row, has extended its applicability to notices and orders under other chapters, including Demand and Recovery (Chapter XVIII).

The Court emphasized that the absence of proper authentication renders the SCN and order invalid and unenforceable. It further noted that Section 73 requires issuance of SCN, Statement, and final Order by the Proper Officer, and these must be duly authenticated. The mere mention of "Sd-Proper Officer" without actual digital or e-signature does not satisfy the statutory requirement.

Therefore, the attachments to GST DRC-01 and DRC-07 lacked legal validity as SCN and Order respectively.

Issue (iii): Compliance with Section 75(4) and principles of natural justice regarding opportunity of hearing

Section 75(4) of the Central and State GST Acts mandates that an opportunity of hearing must be granted either upon a written request by the person chargeable with tax or penalty, or when an adverse decision is contemplated against such person. This provision safeguards procedural fairness and natural justice.

The petitioner contended that the Summary of the Show Cause Notice in GST DRC-01 did not specify any date or time for hearing; the relevant fields were left blank or marked "NA". The petitioner was only asked to submit a reply, without any clear offer of personal hearing.

The Court referred to the Division Bench decision of the Chhattisgarh High Court in Mahindra & Mahindra Ltd., which held that where a statute mandates hearing, it cannot be dispensed with or rendered ineffective. The Court held that failing to provide a hearing when an adverse decision is contemplated violates Section 75(4) and principles of natural justice.

Even if the petitioner did not file a reply, the second limb of Section 75(4) requires the Proper Officer to grant a hearing before passing an adverse order. Passing the impugned order without such hearing rendered the procedural safeguard meaningless and vitiated the order.

Additional observations and conclusions

The Court clarified that the Summary of the SCN in FORM GST DRC-01 is supplementary and cannot replace the proper SCN required under Section 73(1). Similarly, the Statement under Section 73(3) attached to the summary cannot be treated as a valid SCN. The SCN, Statement, and final Order must be issued by the Proper Officer and duly authenticated as per Rule 26(3).

The impugned order dated 19.12.2023 was set aside due to these procedural infirmities. However, the Court granted liberty to the respondents to initiate fresh proceedings under Section 73, if deemed appropriate, excluding the period between issuance of the Summary of the SCN and service of the certified copy of this judgment from limitation computation under Section 73(10).

Significant holdings and principles established:

"The issuance of the Show Cause Notice and the Statement of determination of tax by the Proper Officer are mandatory requirements in addition to the Summary of Show Cause Notice in GST DRC-01 and Summary of the Statement in GST DRC-02."

"A summary in GST DRC-01 cannot replace a proper Show Cause Notice."

"All notices, certificates and orders under the provisions of this Chapter shall be issued electronically by the proper officer or any other officer authorized to issue such notices or certificates or orders, through digital signature certificate or through E-signature as specified under the provisions of the Information Technology Act, 2000 or verified by any other mode of signature or verification as notified by the Board in this behalf."

"Signatures cannot be dispensed with, and procedural provisions cannot cure an unsigned notice or order."

"Non-compliance with Section 75(4) of the Act, which mandates a reasonable opportunity of hearing when an adverse decision is contemplated, violates both statutory requirements and principles of natural justice."

"Passing an adverse order without granting an opportunity of hearing renders the safeguards under Section 75(4) ineffective and vitiates the order."

In conclusion, the Court held that the impugned orders were invalid due to the absence of a proper, authenticated Show Cause Notice and failure to provide an opportunity of hearing as mandated under the GST Act and Rules. The procedural safeguards enshrined in the GST law, including issuance of a valid SCN, authentication by the Proper Officer, and adherence to principles of natural justice, are imperative and cannot be bypassed by relying solely on summaries or unsigned documents.