Kanak Automobiles Private Limited Vs Union of India through Ministry of Finance (Patna High Court)
Patna High Court has set aside Service Tax proceedings against Kanak Automobiles Private Limited, ruling that the tax authorities failed to conclude the assessment within the period intended by law, despite initiating the process within the permissible limitation period. The court’s decision hinged on the interpretation of Section 73(4B) of the Finance Act, 1994, and the impact of delays following the period of limitation extension granted by the Supreme Court due to the COVID-19 pandemic.
The case involved a show-cause notice dated April 19, 2021, issued to the petitioner concerning Service Tax for the period spanning October 2015 to June 2017. The notice was issued under the proviso to Section 73(1) of the Finance Act, 1994, which allows for an extended limitation period of five years (instead of the standard thirty months) in cases where non-payment or short payment of tax is attributed to reasons such as fraud, collusion, willful mis-statement, suppression of facts, or contravention of the Act or rules with intent to evade tax.
The relevant date for the period ending June 2017 would typically be July 10, 2017 (the due date for the monthly return). The five-year limitation period under the proviso would thus extend until July 9, 2022. The show-cause notice, issued on April 19, 2021, was admittedly within this five-year extended limitation period. The petitioner did not challenge the show-cause notice on the merits of the allegations justifying the extended period or on the ground that the notice was initially time-barred.
The core of the petitioner’s challenge lay in the subsequent delay in the conclusion of the proceedings. The petitioner argued that once proceedings are initiated under the proviso to Section 73(1), Section 73(4B) mandates that the proceedings should be completed within one year from the date of service of the notice.
Section 73(4B) of the Finance Act, 1994, stipulates that “the Central Excise Officer shall determine the amount of service tax due… within one year from the date of service of the notice.” The petitioner contended that the failure to adhere to this one-year timeline rendered the continuation of proceedings invalid.
The Additional Solicitor General (ASG), representing the Union of India, countered this argument by submitting that the language of Section 73(4B)—which includes the phrase “wherever it is possible”—indicates that the one-year period is not a strict statutory mandate but rather an advisory guideline for the assessing officer to conclude proceedings expeditiously. The ASG argued that a reasonable period could be taken, and in this specific case, the delay was attributable to the petitioner’s repeated requests for adjournments.
The ASG also referred to a Supreme Court order in Commissioner, GST and Central Excise v. M/s Swati Menthol and allied Chemicals Ltd. & Anr. (SLP (C) No. 20072/2021) to support the contention that delays, even significant ones, may not necessarily lead to the quashing of proceedings.
The High Court acknowledged that the initial show-cause notice was issued within the five-year limitation period. It also agreed with the ASG that the phrasing “wherever it is possible” in Section 73(4B) means the provision is not an absolute, mandatory requirement to conclude the proceedings within one year under all circumstances.
However, the court emphasized that despite not being an absolute mandate, Section 73(4B) clearly reflects the legislative intent for expediency and requires the statutory authority to take “all possible steps” towards concluding the proceedings within the one-year timeframe.
The court then factored in the Supreme Court’s suo motu order regarding the extension of limitation periods due to the pandemic. The Supreme Court, in In Re: Cognizance For Extension of Limitation (Suo Motu Writ Petition (C) No. 3 of 2020), had extended the period of limitation between March 15, 2020, and February 28, 2022. Crucially, the Supreme Court had directed that where a period of limitation would have expired during the protected period, proceedings could be initiated or concluded within ninety days from March 1, 2022, unless a longer period was provided by the statute. The court noted that applying the one-year period from Section 73(4B) after the end of the protected period meant the proceedings should have ideally seen significant action aimed at conclusion within one year from March 1, 2022, i.e., by February 27, 2023.
Examining the facts of the case, the High Court found that after the issuance of the show-cause notice on April 19, 2021, the first notice for hearing was issued only on September 21, 2023. This date was significantly beyond the one-year period (expiring February 27, 2023) following the end of the pandemic-related limitation extension.
The court found that there were “absolutely no proceedings taken within the one year period” subsequent to March 1, 2022, as intended by the application of Section 73(4B) in conjunction with the Supreme Court’s order. The court dismissed the department’s argument attributing the delay to the petitioner’s adjournment requests, noting that these requests were made after the hearing notice of September 21, 2023, long after the critical period of departmental inaction had passed. The court concluded that the assessing officer had failed to take “every probable step” within the statutorily intended timeframe.
The High Court then carefully considered the Supreme Court’s decision in M/s Swati Menthol and allied Chemicals Ltd. cited by the ASG. The court noted that while the Supreme Court had directed the conclusion of proceedings within eight weeks despite a delay of over a decade, that case had peculiar facts. The court highlighted that in Swati Menthol, the assessee had frequently sought adjournments and failed to appear, and the proceedings were adjourned sine die due to related litigation pending before another High Court, only resuming after that High Court’s verdict. The Patna High Court distinguished its own case by pointing out the factual differences and, crucially, stating that the Supreme Court in Swati Menthol appeared to have exercised its extraordinary powers under Article 142 of the Constitution (to do complete justice), powers not conferred upon High Courts to extend statutory periods in this manner.
Based on its interpretation of Section 73(4B) as requiring diligence and taking all possible steps towards conclusion within one year, even if not an absolute mandate in all scenarios, the High Court found that the complete inaction by the department during the critical post-pandemic one-year window amounted to a frustration of the legislative intent for expediency. The court held that in such circumstances, the proceedings could not be permitted to continue.
Accordingly, the Patna High Court allowed the writ petition and held that the Service Tax proceedings initiated by the show-cause notice could not be continued further.
FULL TEXT OF THE JUDGMENT/ORDER OF PATNA HIGH COURT
