Lack of clarity w.r.t. reasons/ contraventions in SCN violates principles of natural justice

Chitra Automobile Vs State of Jharkhand (Jharkhand High Court)

Issue of DRC-07 within 5 days of issuance of DRC-01 is violation of principles of natural justice

Lack of clarity w.r.t. reasons/ contraventions in SCN violates principles of natural justice

The Hon’ble Jharkhand High Court in the matter of M/s. Chitra Automobile v. the State of Jharkhand and Ors. [W.P. (T) No. 4784 of 2022 dated January 24, 2023] quashed and set aside the Show Cause Notice (“SCN”), and consequential summary of the SCN in Form GST DRC-01 and summary of order in Form GST DRC-07, issued to the assessee, on the grounds that the SCN did not fulfil the ingredients properly and thus amounted to the violation of the principles of natural justice. Held that, the SCN must clearly state the contravention for which the assessee is charged, in order to have the opportunity to the assessee for defending themselves.

Facts:

M/s Chitra Automobile (“the Petitioner”) is engaged in the business of trading of two wheeler bikes and its parts. For the furtherance of its business, the Petitioner receives input services and goods and claims Input Tax Credit (“ITC”) on such inward supplies in accordance with Section 16 of the Central Goods and Services Act, 2017 (“the CGST Act”).

The Petitioner was served with a SCN dated February 12, 2022 (“the Impugned SCN”) along with the summary of the SCN in Form GST DRC-01, for alleged violation of the provisions of the CGST Act for the period March, 2019 and a total demand of INR 30,22,586/- including GST and interest was made. However, the Revenue Department (“the Respondent”) issued summary of the order in Form GST DRC-07 dated February 12, 2022 (“the Impugned Order”) for non-furnishing of reply to the SCN by the Petitioner.

The Petitioner contended that the Impugned SCN was vague and did not mention the reasons for which it was charged and for such reasons the Impugned SCN was in violation of the rule of law and principles of natural justice. Further, the Impugned Order was issued just within five days of issuance of the Impugned SCN.

The Respondent contended that the writ petition was not maintainable as the Petitioner has alternative remedy of filing appeal against any decision or order before the Appellate Authority under Section 107(1) of the CGST Act but it has not availed the same. Further, the Petitioner filed its Form GSTR 3B after the due-date and hence ITC to the tune of INR 22,01,732.12/- cannot be availed as it is in violation of Section 16(4) of the CGST Act and therefore the Petitioner is liable to pay the GST liability as issued in the Impugned Order.

Issue:

Whether the Impugned SCN and the Impugned Order are sustainable?

Held:

The Hon’ble Jharkhand High Court in W.P. (T) No. 4784 of 2022 held as under:

• Noted that, the Impugned SCN did not spell out the contraventions for which the Petitioner was charged and thus it would not be an exaggeration in treating the same as vague.
• Observed that, the Respondent without giving the opportunity of hearing the Petitioner had issued the Impugned Order, just within five days of issuance of the Impugned SCN.
• Further observed that, according to Rule 142(1)(a) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), a summary of the SCN in Form GST DRC 01 should be issued along with the SCN under Section 73 of the CGST Act, which shall explain the contraventions in detail for which the assessee is being charged.
• Relied on its earlier Judgment in M/s NKAS Services Pvt. Ltd. v. State of Jharkhand & Ors. [W.P.(T) No. 2444 of 2021 dated October 6, 2021] wherein, it was observed that, if the SCN is not specific and contains vague or unintelligible allegations, it is sufficient to hold that the assessee is not given a proper opportunity to meet the allegations made in the SCN. It was held that, the SCN must clearly state the specific reasons for the action being taken against the assessee as enumerated in the CGST Act in order for the assessee to have the opportunity to defend themselves.
• Held that, the Impugned SCN does not fulfil the ingredients of a proper SCN and thus amounts to the violation of natural justice.
• Quashed and set aside the Impugned SCN, Summary of the SCN in Form GST DRC-01 and the Impugned Order.
• Allowed the Respondent to initiate fresh proceedings from the stage of issuance of SCN in accordance with law.

Relevant Provisions:

Rule 142(1)(a) of the CGST Rules:

“The proper officer shall serve, along with the

(a) notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC-01”

Section 73 of the CGST Act:

“73. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful-misstatement or suppression of facts. –

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

(2) The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in sub-section (10) for issuance of order.

(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax.

(4) The service of such statement shall be deemed to be service of notice on such person under sub-section (1), subject to the condition that the grounds relied upon for such tax periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

(5) The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1) or, as the case may be, the statement under sub-section (3), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded.

(9) The proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order.

(10) The proper officer shall issue the order under sub-section (9) within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund.

(11) Notwithstanding anything contained in sub-section (6) or sub-section (8), penalty under sub-section (9) shall be payable where any amount of self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax.”

FULL TEXT OF THE JUDGMENT/ORDER OFJHARHANDHIGH COURT

The petitioner has prayed for following reliefs:

I. For issuance of an appropriate writ(s), order(s) or direction(s) quashing and setting aside the impugned purported Show Cause Notice dated 12.02.2022 bearing No.ZD200222000811G which is Annexure-1 here to, issued by the Respondent No.03 in purported exercise of powers under Section 73 of the Jharkhand Goods and Services Tax Act, 2017.

II. For issuance of an appropriate writ(s), order(s) or direction(s) quashing and setting aside the consequential impugned Summary of Show Cause notice in FORM GST DRC-01 dated 12.02.2022 issued by the Respondent No.03 which is at Annexure-2 here to, in purported exercise of powers under Rule 142(1) (a) of the Jharkhand Goods and Services Tax Rules, 2017.

III. For issuance of an appropriate writ(s), order(s) or direction (s) quashing and setting aside the consequential impugned Summary of the order in FORM GST DRC-07 dated 17.02.2022 issued by the Respondent No.3 which is at Annexure-3 hereto, in purported exercise of powers under Rule 142(5) of the Jharkhand Goods and Services Tax Rules, 2017.

IV. For issuance of an appropriate writ(s), order(s) or direction(s) to the respondents to not attach the business bank Account no. 37038649040 of the petitioner running in the State Bank of India, Deoghar Branch.

AND/OR

V. For any other appropriate writ(s)/order(s)/direction(s) as this Hon’ble Court may deem fit and proper for doing conscionable justice to the petitioners.

2. The brief facts of the case are that the petitioner firm is engaged in trading of Two Wheeler Bikes and its parts which are sold to the various customers. The petitioner is registered under the Central Goods and Services Tax Act, 2017 and the Jharkhand Goods and Service Tax Act, 2017 (hereinafter to be referred as the ‘JGST Act’) vide GSTIN 20AMQPK5542B1ZF with the Commissioner of Commercial Taxes, Commercial Tax Department, Project Bhawan, Dhurwa, Ranchi-834004 for supply of taxable services in the State of Jharkhand. Further, the petitioner for supply of taxable services, receives input services, inputs and capital goods for use in the course or furtherance of its business and claims input tax credit on such inward supplies in accordance with Section 16 of the JGST Act, 2017/CGST Act, 2017.

During the period under dispute the petitioner had regularly filed its monthly returns of outward supplies in FORM GSTR-1 under Section 37 of the JGST Act read the Rule 59 of the JGST Rules, monthly return of self assessment in FORM GSTR-3B under Section 39 read with rule 61 (5) of the Act.

All of a sudden, a Show Cause Notice under Section 73 of the JGST Act, 2017 was issued on 12.02.2022 along with FORM GST DRC-01 of even date stating that the petitioner has violated provisions of the JGST Act, 2017 related to the Tax Period: MAR 2019 and the petitioner was asked to reply the show cause notice vide Reference No. ZD200222000811G. The total demand was to the tune of Rs. 30,22,586.00 including CGST, SGST and interest. Since the petitioner has not presented any reply of the show cause notice dated 12.02.2022; summary of order in FORM GST DRC-07 as per Rule 142(5) of the JGST Act, 2017 was issued on 17.02.2022.

3. Learned counsel for the petitioner submits that the show-cause notice under Section 73(1) of the JGST Act, 2017 dated 12.02.2022 (Annexure-1) for the tax period March 2019 is in a format without striking out the irrelevant particulars, is vague and does not spell out the contravention for which the petitioner is charged. It is in fact, worse than the Summary of Show-Cause Notice in FORM GST DRC-01 of the same date (Annexure-2). It is submitted that the State Tax Officer, Dumka has thereafter proceeded to issue Summary of the Order in FORM GST DRC-07 on 17.02.2022 (Annexure-3). The impugned proceedings, show cause notice and the Summary of the Order are in teeth of the decision rendered by this Court on this subject.

Learned counsel for the petitioner contended that the show cause notice issued is in violation of rule of law and principles of natural justice. He contended that the initiation of proceeding under Section 73(1) of the JGST Act is not an empty formality or a mere pretext but integral of principles of natural justice and fair play.

He lastly submits that on the one hand, the show cause notice which was issued under Section 73 (1) of JGST Act, 2017 (Annexure-1) dated 12.02.2022 was in format without striking the irrelevant particulars; on the other hand, summery of order in Form GST DRC-07 was issued just within five days of issuance of show cause notice dated 12.02.2022 i.e., on 17.02.2022.

4. He further relied on the judgment passed by this Court in the case of M/s NKAS Services Pvt. Ltd. vs. State of Jharkhand & Ors., passed in W.P.(T) 2444 of 2021 and submits that the impugned show cause notice dated 12.02.2022 issued under Section 73(1) of the Act (Annexure-1), summary of show cause notice of the even date issued under FORM GST DRC-01 (Annexure-2) and summary of order issued in FORM GST DRC-07 on 17.02.2022, are liable to be quashed and set aside.

5. Mr. Sachin Kumar, learned AAG-II for the respondent State relied upon the counter affidavit and submits that the present writ petition is not maintainable in the eye of law as the petitioner has efficacious and alternative remedy available of filing the appeal against any decision or order before the Appellate Authority under Section 107(1) of the GST Act. The petitioner despite having knowledge of the issuance of summary order in FORM GST DRC-07 dated 17.02.2022 has not availed the same.

Further, the prayer of the petitioner is primarily concerned with the realization of its Input Tax Credit (ITC) to the tune of Rs.22,01,732.12/- lying in the electronic credit ledger of the petitioner as for the Financial Year 2018-19 last date for availing ITC as per provisions under Section 16(4) of Jharkhand Goods & Service Act, 2017 was 20.10.2019; however, petitioner filed his GSTR-3B returns for the tax period mentioned above after 20.10.2019, as such, ITC availed to the tune of Rs.22,01,732.12 is in utter violation of Section 16(4) of JGST Act, 2017.

Accordingly, ASMT-10 notice under Section 61 of JGST Act, 2017 and Rule 99 of JGST Rule, 2017 was issued as per the provisions of law on 26.10.2021. Since the petitioner has not given any reply to the ASMT-10; the show cause notice under Section 73 of the JGST Act, 2017 was issued on 12.02.2022 stating that the petitioner has violated provisions of the JGST Act, 2017 related to the Tax Period: MAR 2019 and the petitioner was asked to reply the show cause notice along with FORM GST DRC-01 as per Rule 100(2) & 142(1)(a) of the JGST Act, 2017 stating the ground as “ITC AVAILED AFTER DUE DATE” of the JGST Act, 2017. Since the petitioner has not presented the reply of the show cause notice dated 12.02.2022 summery of order in FORM GST DRC-07 as per Rule 142(5) of the JGST Act, 2017 was issued on 17.02.2022.

6. He lastly submits that the petitioner is liable to pay the tax liability as issued by the Department in FORM GST DRC-07 as the same is legal and fully justified.

7. Having heard learned counsel for the parties and after going through the documents available on record, it appears that a show cause notice under Section 73(1) of the Act dated 12.02.2022 (Annexure-1) was issued to the petitioner which was issued in a format without striking out the irrelevant particulars and thus, there won’t be an exaggeration in treating the same as vague as it does not spell out the contraventions for which the petitioner is charged. As a matter of fact, it is worse than the summary of show cause notice issued under FORM GST DRC-01 of the even date (Annexure-2).

It further transpires that without giving any opportunity of hearing State Tax Officer was in so hurry, that he finally issued summary of order in FORM GST DRC-07 on 17.02.2022 (Annexure-3); that means just within five days from issuance of show cause.

8. Now the law is no more res integra, inasmuch as, Rule 142(1) (a) of the JGST Rules provides that the summary of show cause notice in Form DRC-01 should be issued “along with” the show cause notice under Section 73(1) which will spell out the contraventions in details for which the Assessee is charged. The word “along with” clearly indicates that in a given case show cause notice as well as summary thereof both have to be issued. As per Rule 142(1)(a) of the JGST Rules, the summary of show cause notice has to be issued electronically to keep track of the proceeding initiated against the registered person whereas a show cause notice need not necessarily be issued electronically.

This Court in the case of M/s NKAS Services Pvt. Ltd. vs. State of Jharkhand & Ors., passed in W.P.(T) No. 2444 of 2021 in which one of us (Aparesh Kumar Singh, J.) was the member, has taken note of the said position of law. For brevity, Paragraph-14, 15 & 16 of the said judgment is quoted herein below:

“14. A bare perusal of the impugned show-case notice creates a clear impression that it is a notice issued in a format without even striking out any irrelevant portions and without stating the contraventions committed by the petitioner i.e. whether its actuated by reason of fraud or any willful misstatement or suppression of facts in order to evade tax. Needless to say that the proceedings under Section 74 have a serious connotation as they allege punitive consequences on account of fraud or any willful misstatement or suppression of facts employed by the person chargeable with tax. In absence of clear charges which the person so alleged is required to answer, the noticee is bound to be denied proper opportunity to defend itself. This would entail violation of principles of natural justice which is a well-recognized exception for invocation of writ jurisdiction despite availability of alternative remedy. In this regard, it is profitable to quote the opinion of the Apex Court in the case of Oryx Fisheries P. Ltd. (supra) at para 24 to 27 wherein the opinion of the Constitution Bench of the Apex Court in the case of Khem Chand versus Union of India (AIR 1958 SC 300) has been relied upon as well :

“24. This Court finds that there is a lot of substance in the aforesaid contention. It is well settled that a quasi-judicial authority, while acting in exercise of its statutory power must act fairly and must act with an open mind while initiating a show-cause proceeding. A show cause proceeding is meant to give the person proceeded against a reasonable opportunity of making his objection against the proposed charges indicated in the notice.

25. Expressions like “a reasonable opportunity of making objection” or “a reasonable opportunity of defence” have come up for consideration before this Court in the context of several statutes. A Constitution Bench of this Court in Khem Chand v. Union of India, of course in the context of service jurisprudence, reiterated certain principles which are applicable in the present case also.

26. S. R. Das, C.J. speaking for the unanimous Constitution Bench in Khem Chand held that the concept of “reasonable opportunity” includes various safeguards and one of them, in the words of the learned Chief Justice, is:

“(a) An opportunity to deny his guilt and establish his innocence, which he can only do if he is told what the charges levelled against him are and the allegations on which such charges are based;”

27. It is no doubt true that at the stage of show cause, the person proceeded against must be told the charges against him so that he can take his defence and prove his innocence. It is obvious that at that stage the authority issuing the charge-sheet, cannot, instead of telling him the charges, confront him with definite conclusions of his alleged guilt. If that is done, as has been done in this instant case, the entire proceeding initiated by the show-cause notice gets vitiated by unfairness and bias and the subsequent proceedings become an idle ceremony.”

15. The Apex Court has held that the concept of reasonable opportunity includes various safeguards and one of them is to afford opportunity to the person to deny his guilt and establish his innocence, which he can only do if he is told what the charges leveled against him are and the allegations on which such charges are based.

16. It is also true that acts of fraud or suppression are to be specifically pleaded so that it is clear and explicit to the noticee to reply thereto effectively [See Larsen & Toubro Ltd. Vs. CCE, (2007) 9 SCC 617 (para 14)]. Further in the case of CCE Vs. Brindavan Beverages (P) Ltd. reported in (2007) 5 SCC 388 relied upon by the petitioner, the Apex Court at para-14 of the judgment has held that if the allegations in the show-cause notice are not specific and are on the contrary, vague, lack details and/or unintelligible i.e. its sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show-cause notice. We do not agree with the contention of the respondent that the notice ought not to be struck down if in substance it contains the matters which a notice must contain. In order to proceed under the provisions of Section 74 of the Act, the specific ingredients enumerated thereunder have to be clearly asserted in the notice so that the noticee has an opportunity to explain and defend himself.”

9. Though, in the instant case purported show cause notice has been issued but at the cost of repetition, the same was issued in a format without striking out irrelevant particulars which is not the intent of the legislature. Thus, this Court holds that the foundation of the proceeding in the instant case suffers from material irregularity and hence not sustainable being contrary to Section 73 (1) of the JGST Act. Thus, the subsequent proceedings/impugned orders issued under DRC-07 dated 17.02.2022 cannot sanctify the same and liable to be quashed and set aside. At the cost of repetition, DRC-07 has been issued within five days of issuance of DRC-01 is a clear picture of violation of principles of natural justice.

10. As we are of the considered view that the impugned show cause notice in the instant case does not fulfill the ingredients of a proper show cause notice and thus amounts to violation of principles of natural justice; the challenge is maintainable in exercise of writ jurisdiction of this Court. Accordingly, the show cause notice under Section 73(1) of the Act dated 12.02.2022 (Annexure-1), summary of show cause notice in FORM GST DRC-01 of the same date (Annexure-2) and also the summary of order dated 17.02.2022 in FORM GST DRC-07 (Annexure-3), are, quashed and set aside.

It is made clear that since this Court has not gone into the merits of the case, the respondents are at liberty to initiate fresh proceeding from the stage of issuance of show cause notice under Section 73 (1) of the JGST Act, 2017 in accordance with law. As a result, the instant application stands allowed. I.A. No. 11817 of 2022 is also disposed of.

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