Calcutta HC set aside Show Cause Notice issued Without Due Application of mind

Diamond Beverages Private Limited Vs Assistant Commissioner of CGST & CX (Calcutta High Court)

Calcutta High Court sets aside show cause notice in Diamond Beverages case, emphasizing the necessity of thorough examination and due application of mind.

The recent judgment by the Calcutta High Court in the case of M/s. Diamond Beverages (P.) Ltd. v. Assistant Commissioner of CGST & CX [M.A.T. No. 1948 of 2023 and I.A. No. CAN of 2023 dated December 15, 2023] has brought attention to the necessity of a thorough application of mind in issuing Show Cause Notices (SCNs). The court’s observation that the SCN lacked due application of mind, despite considering appellant submissions, sets a significant precedent. This article delves into the details of the case, highlighting the facts, issues, and the court’s directive to remand the matter back to the Adjudicating Authority.

Hon’ble Calcutta High Court held that submissions made by appellants in their reply to pre-show cause notice appeared to have been considered. However, except extracting the reply given by the appellants, the authority has not dealt with the contentions, which were placed by the appellants in the reply to the pre-show cause notice. Thus, this would be sufficient to hold that the show cause notice has been issued without due application of mind. Hence, Show Cause Notice was set aside and subsequently, the matter was remanded back the matter to the Adjudicating Authority at the level of pre-show cause notice and the writ petition was allowed.

Facts:

M/s. Diamond Beverages (P.) Ltd. (“the Petitioner”) was issued the Show Cause Notice dated August 16, 2023 (“the Impugned SCN”), alleging that the Petitioner had availed/utilized input tax credit (“ITC”) arising out of debit notes by the suppliers, who had not filed FORM GSTR-3B returns and whose registration was canceled retrospectively. The Petitioner replied within 30 days as permitted by law and submitted their reply placing the necessary information. Thereafter, the authority issued a pre-show cause notice in Part A of Form GST DRC-01A dated March 31, 2023 (“the Impugned pre-SCN”).  The Petitioner also submitted their reply to the Impugned pre-SCN dated April 11, 2023, and sought an opportunity for the personal hearing. However, the Revenue Department (“the Respondent”) issued the order dated September 25, 2023 (“the Impugned Oder”) under section 73(1) of the Central Goods and Services Act, 2017 (“the CGST Act”) without considering the contentions of the Petition.

Thus, aggrieved by the Impugned Order and Impugned SCN, the Petitioner filed the writ petition in the Calcutta High Court and contended that the Respondent has to investigate or inquire into the matter by taking note of the relevant details at the supplier’s end. If that is not done, the true facts will not emerge and consequently, the issuance of any SCN will be a fait accompli. In the instant case, the Respondent has not conducted any such investigation and proceeded to issue the Impugned SCN.

Issue:

Whether Show Cause Notice can be set aside if issued without due application of mind?

Held:

The Calcutta High Court in M.A.T. No. 1948 of 2023 and I.A. No. CAN of 2023 held as under:

• Observed that, the submissions made by the appellants in their reply to the Impugned pre-SCN appear to have been considered. However, on closer scrutiny of the Impugned SCN, it is seen that except extracting the reply given by the appellants, the authority has not dealt with the contentions, which were placed by the appellants in the reply to the Impugned pre-SCN. Thus, this would be sufficient to hold that the Impugned SCN has been issued without due application of mind.
• Noted that, the Impugned SCN was issued without due application of mind, without considering the reply to the Impugned pre-SCN, and without conducting any inquiry or investigation at the supplier’s end, the Impugned SCN would call for interference.
• Directed that the Respondent shall, first inquire/investigate the matter from the supplier’s end, collect the necessary information, afford an opportunity to the Petitioner to put forth further submission on such and allow the personal hearing and then proceed to decide as to whether the Impugned SCN under Section 73(1) of the CGST Act has to be issued or otherwise.
• Held that, both appeal and writ petition were allowed. The matter was remanded back the matter to the Respondent to the stage of the Impugned pre-SCN. Hence, the impugned SCN was set aside.

Conclusion: The Calcutta High Court’s decision serves as a cautionary note for tax authorities, emphasizing the need for a diligent and comprehensive approach in issuing SCNs. The judgment highlights that a mere extraction of appellant submissions is insufficient, and authorities must engage in a meaningful consideration of contentions raised during the pre-SCN stage. This ruling reiterates the principles of natural justice, ensuring that show cause proceedings are conducted with fairness, transparency, and due diligence. As the matter is remanded back to the Adjudicating Authority, this case sets a precedent for meticulous scrutiny and thoughtful consideration in the issuance of SCNs, promoting a more just and equitable adjudication process in GST matters.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

This intra-Court appeal by the writ petitioner is directed against the order dated 25^th September, 2023 in W.P.A. 22295 of 2023. In the said writ petition, the appellant had challenged a show cause notice dated 16^th August, 2023 issued under section 73(1) of the CGST Act, 2017 (for brevity ‘the Act’). The learned Single Bench disposed of the writ petition by directing the appellants to submit a reply to the show cause notice and raise all issues of facts as well as on law and also place the decisions on which they placed reliance. Aggrieved by such order, the present appeal has been preferred.

2. We have elaborately heard the learned advocates for the parties. Under normal circumstances, the Court seldom interferes at the stage of the show cause notice unless it is established that the show cause notice was issued without jurisdiction or it suffers from perversity or in cases, where the allegations are absolutely vague and noticee will not be in a position to submit an effective reply. In the instant case what persuades this Court to interfere with the show cause notice is on account of the following facts.

3. The appellants were issued a show cause notice intimating certain discrepancies on 30^th December, 2022. The allegation was that the appellants had availed/utilised input tax credit during the financial year 2018-19 on supplies whose registration was cancelled retrospectively. The other allegation was that the appellants had claimed input tax credit arising out of debit notes by suppliers, who have not filed GSTR3B Returns during the financial year 2018-19. The appellants were granted 30 days time to file their reply. The appellants, within the time permitted, submitted their reply on 10^th February, 2023 placing necessary information. After receipt of the reply, in which the assessee had pointed out that relevant details have not been furnished, the assessing authority issued another notice dated 1^st March, 2023 and purported to have enclosed the relevant details. Thereafter the appellants had submitted their reply to the notice of intimation of discrepancies on 13^th March, 2023. Subsequently, the authority had issued a pre-show cause notice dated 31^st March, 2023 in Part A of Form GST DRC-01A. In the said pre-show cause notice, the allegations as mentioned in the notices intimating discrepancies were reiterated. The appellants were advised to pay the tax, as ascertained, failing which, show cause notice will be issued under section 73(1) of the Act. The appellants had submitted their reply to the pre-show cause notice on 11^th April, 2023 on perusal of which it appears that it is a very detailed reply giving all the factual details and also placing reliance on certain decisions of this Court as well as the Hon’ble Supreme Court. The appellants specifically sought for an opportunity of personal hearing.

4. Essentially, in the reply the appellants requested the authority to investigate at the supplier’s end, where there was an allegation of retrospective cancellation of the supplier’s registration and allegations, where the suppliers filed the returns for the concerned financial year. Thus, what was required by the authority to do, was to examine the reply given in the pre-show cause notice and considering the nature of allegations in the pre-show cause notice, it goes without saying that the authority has to investigate or inquire into the matter by taking note of the relevant details at the supplier’s end. If that is not done, the true facts will not emerge and consequently, issuance of any show cause notice will be a fait accompli. However, in the instant case, the authority has not conducted any such investigation and proceeded to issue the impugned show cause notice dated 16^th August, 2023 under section 73(1) of the Act.

5. The learned standing counsel appearing for the respondent pointed out that in the show cause notice, the reply given by the appellants to the pre-show cause notice was considered and thereafter a notice has been issued under section 73(1) of the Act and it is a detailed show cause notice.

6. At the first blush, on perusal of the show cause dated 16^th August, 2023, it appears that the submissions made by the appellants in their reply to the pre-show cause notice appears to have been considered. However, on a closer scrutiny of the show cause notice dated 16^th August, 2023, it is seen that except extracting the reply given by the appellants, the authority has not dealt with the contentions, which were placed by the appellants in the reply to the pre-show cause notice. Thus, this would be sufficient to hold that the show cause notice dated 16^th August, 2023 has been issued without due application of mind.

7. The learned advocate appearing for the appellants placed reliance on the decision of this Court in the case of Suncraft Energy Private Limited & Anr. vs. The Assistant Commissioner, State Tax, Ballygunge Charge & Ors. reported in 2023 SCC Online Cal. 2226. It is submitted that the facts dealt with by this Court in the said case were identical and the Court has allowed the appeal and set aside the orders passed by the authority. It is submitted that the Special Leave Petition filed before the Hon’ble Supreme Court against the said decision was dismissed by the Hon’ble Supreme Court on 14^th December, 2023.

8. Be that as it may, this Court is satisfied that since the show cause notice dated 16^th August, 2023 has been issued without due application of mind, without considering the reply to the pre-show cause notice and without conducting any inquiry or investigation at the supplier’s end, the show cause notice would call for interference. Thus, the Court is satisfied that the case on hand falls within one of the exceptional circumstances, where the Court will exercise its jurisdiction to interdict a show cause notice.

9. For the above reasons, the appeal is allowed and consequently, the writ petition is allowed and the show cause notice dated 16^th August, 2023 is set aside and the matter is remanded back to the adjudicating authority to the stage of pre-show cause notice dated 31^st March, 2023.

10. The adjudicating authority shall, first inquire/investigate into the matter from the supplier’s end, collect the necessary information, afford an opportunity to the appellants to put forth further submission on such information and thereafter afford an opportunity of personal hearing and then proceed to take a decision as to whether a show cause notice under section 73(1) of the Act has to be issued or otherwise.

11. No costs.

12. Urgent photostat certified copy of this order, if applied for, be furnished to the parties expeditiously upon compliance of all legal formalities.

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