GST demand orders cannot be passed without issuance of SCN: Jharkhand HC

Prity Dokania sole proprietor of M/s Samridhi Enterprises Vs State of Jharkhand (Jharkhand High Court)

In the case of Prity Dokania Vs State of Jharkhand, multiple petitioners, including Prity Dokania, challenged various adjudication orders and subsequent proceedings issued under the Jharkhand Goods and Services Tax (JGST) Act, 2017. The common contention in these writ petitions revolved around the lack of proper show cause notices as required by Section 74(1) of the JGST Act. Instead of a formal notice, summary orders in Form DRC-07 were issued, without detailed explanations of the charges or providing relied-upon materials. The petitioners argued that this violated the principles of natural justice, and the absence of show cause notices undermined the legality of the adjudication process.

During the hearings, it was highlighted that many petitioners were not given a proper opportunity to contest the allegations, with some orders issued without following the requisite legal procedures. Furthermore, the State Tax Officer’s actions, including reliance on external third-party statements without allowing for cross-examination, were deemed unjust. The respondents, representing the State, countered that the petitioners had bypassed the statutory appeal process under Section 107 of the JGST Act. However, the court found that the state’s failure to follow due process in issuing show cause notices or detailing accusations in the DRC-01 forms led to violations of the petitioners’ rights. Ultimately, the Jharkhand High Court underscored the need for adherence to procedural fairness and natural justice in tax adjudication processes.

FULL TEXT OF THE JUDGMENT/ORDER OF JHARKHAND HIGH COURT

Heard learned counsel for the parties.

2. Since in all these writ applications common issue is involved; as such all are being heard together and disposed of by this common order.

3. The petitioners in all these writ applications have challenged the respective summary of SCN issued under Rule 142 of the JGST Rules, respective adjudication orders and all consequential orders and also the entire adjudication proceedings.

4. Initially the petitioners of respective writ applications have challenged the respective summary orders/adjudication orders on the ground that the revisional authority without passing an order under Section 108 of JGST Act had just returned the revision applications filed by the respective petitioners. The revisional authority should have adjudicated the respective Revision Applications as the entire procedure adopted by the respondents suffered from illegality, impropriety, material irregularity and miscarriage of justice, inasmuch as, mandatory show cause notice under Section 74 (1) of JGST Act, 2017 read with Rule 142 (1) (a) of JGST Rules, 2017 was never issued and it was only summary order in Form DRC-07 was issued.

5. The brief facts as emerges by going through the documents/averments made in all these writ applications, it appears that in some cases, the State Tax Officer issued summary of show cause notice in FORM DRC-01 for the respective tax period under Section 74(1) of the JGST Act read with Rule 142 (1) of the JGST Rules along with summary of statement (Gist of accusations) in FORM GST DRC-02 under Section 74(1). The respective petitioners without prejudice filed concise reply in FORM GST DRC-06 disputing the claim. The State Tax Officer arbitrarily confirmed the demand vide summary of order in FORM GST DRC-07 under rule 142 (5) of the JGST Rules. The petitioner obtained certified copy of the order of assessment passed under Section 74 (9) of the JGST Act.

In few other cases the State Taxes Officer, Dhanbad issued Summary of Order in FORM DRC 07 for the relevant tax period under Section 74 of the JGST Act read with Rule 142(5) of the JGST Rules without even issuing DRC-01. In the meantime, notices were also issued to the petitioner’s bank in Form GST DRC 13 for payment of the demand amount lying in the credit of the petitioner’s bank account.

In few cases State Tax Officer issued notice in Form GST REG-17 under Rule 22(1) of the JGST Rules to show cause as to why registration of the petitioner be not cancelled. The petitioner duly furnished its reply to the said notice, contending that input tax credit claimed were duly reflected in its GSTR-3B and GSTR-2A returns. Without issuance of DRC-01 and DRC-02, the respective petitioners were served with DRC-07 dated 27.04.2018 wherein, tax, interest and penalty had been imposed on the petitioner for excess claim of ITC. In the meantime, notices were also issued to the petitioner’s bank in Form GST DRC 13 for payment of the demand amount lying in the credit of the petitioner’s bank account.

The details of notices issued by the Revenue in case of respective petitioners is enumerated herein below:

6. Mr. Kartik Kurmy assisted by Mr. Nitin Kr. Pasari, and Ms. Sidhi Jalan, learned counsel for the petitioners contended that though primarily they argued that the Assessee can invoke jurisdiction of revisional authority under Section 108 of JGST Act, 2017 by way of furnishing information in the Form of application that the decision or order impugned is erroneous in so far as it is prejudicial to the interest of revenue and illegal and improper and has not taken into account of certain material facts, however, during course of the proceedings; Mr. Kurmi submits that leaving the question open that “whether an Assessee can invoke jurisdiction under Section 108 of the JGST Act or not” the petitioners seek to press the challenge on the alternative grounds that the entire summary of orders/ DRC-07 has been issued without following principles of natural justice as well as the provisions of law as enshrined in JGST Act and Rules. The subsequent argument of the petitioners can be summarized in following manner: –

(i) No show cause notices has been issued under Section 74 of the JGST Act. Only DRC-01/DRC-02 issued under Rule 142 of the JGST Rule/CGST Rule. DRC-1 is not a substitute of the show cause notice;

(ii) DRC-01 is vague and lacks in details and is in violation of principles of natural justice. There is no reference to any relied upon adverse materials; DRC-01 is in contravention of Section 75(7) of the JGST Act/CGST Act, 2017. Input Tax Credit has been denied for contravention of 2nd proviso of Section 16(2) of the JGST Act/CGST Act, traversing outside DRC-01;

(iii) Non grant of relied upon documents with DRC-01 is in violation of principles of natural justice;

(iv) Statements of third party have been relied in the some impugned orders which is neither part of DRC-01 nor the third party was confronted/allowed to be cross-examined is in gross violation of principles of natural justice;

(v) Demand of tax, interest and penalty have been confirmed on the ground of paper transaction without proper enquiry. No enquiry with seller of goods, buyers of goods, transporter of goods, driver of vehicles etc. has been done. The findings are based on assumption and presumption. It is an admitted fact that payments were made through banking transactions to seller/buyer/transporter and the same has not been found false or in genuine. ITC has been denied on the basis of few sample invoices.

(vi) ITC cannot be denied to every dealer in the credit chain. It will amount to denial of same credit multiple times.

(vii) It is a case of revenue neutrality; hence, Section 74 cannot be invoked. The petitioner by paying ITC on sale, the purchased irregular ITC stood reversed, hence, no further ITC can be demanded.

7. Counter affidavit has been filed in respective writ applications wherein common stand has been taken. Mr. Sachin Kumar, A.A.G.-II & Mr. Ashok Kr. Yadav, Sr. S.C.-I, appearing for the respondent State submits that the writ petition filed by the petitioner is completely based on misconceived interpretations of the statutory provisions, rather the petitioner only to avoid the availment of statutory appeal as specified under Section 107 of the Jharkhand Goods & Services Tax Act, 2017 as against the adjudication orders passed by the Adjudicating Authority, had preferred the revision under Section 108 of the GST Act, 2017 before the Additional Commissioner, Commercial Taxes Department, Ranchi. The petitioner was rightly directed to file the statutory appeal and accordingly the original application of the petitioner was returned.

Learned counsel further submits that the petitioners in order to avoid the statutory appeal, has invoked the writ jurisdiction of this Court by making the alternative prayer in the writ petition as against the orders which is not maintainable in the eyes of the law. It is evident from the statutory provision that only in order to avoid the payment of ten percent of the tax amount, being a precondition before filing the statutory appeal, the writ petitions have been preferred.

8. As a matter of fact, during course of proceedings, certified copy of original files were brought on record by the department pursuant to the order passed by this Court and it was found that in some cases only penalty order has been passed, in some cases no DRC-01 has been issued. In none of the cases show cause notices as per the provision of the Act has been issued. Though from record it appears that in few cases assessment order has been passed but it is not on record that whether the same has been served to the respective petitioners, inasmuch as, it is a specific case of the petitioners that assessment orders were never served to them.

In crux, the procedure as required under the Act has not been followed at all and learned counsel for the respondents could not bring on record any such document which can satisfy that proper procedure has been followed in passing the orders.

9. Having heard learned counsel for the parties and after going through the documents available on record it appears that in all these writ applications no show cause notice has been issued and no relied upon materials has been given. DRC-01 which was issued is vague and lacks in details and is in violation of principle of natural justice.

For brevity, by way of sample, DRC-01 issued by the department in one case W.P.(T) No. 745 of 2021 is reproduced hereinbelow: –

FORM GST DRC-01

Reference No: 1690

Date:06/01/2020

To,
GSTIN:-20AHIPD5787E1ZK
Name:- M/s Samridihi Enterprises
Adress:- Dhanbad.

Tax period :- 2018-19 F.Y.-2018-19
Act-Jharkhand Goods and Services Tax, 2017
Section/sub-Section under which SCN is being issues-U/s 74 of JGST Act
Summary of Show Cause Noitce

(a) Brief Fact of the Case:- Your inward supply are from non-existence supplier. Hence your claim of ITC are ineligible.

(b) Grounds:- ITC Wrongly Claimed and Utilized.

(c) Tax and other dues:-

As a matter of fact, no detailed order has been passed against either of the petitioners and the petitioners were served DRC-07 notice which is in clear violation of Rule 142 (5) of the JGST Rules and it is also evident that pursuant to the issuance of DRC-07, DRC-13 has been also issued to the petitioners-Bank in few cases. It further transpires from record that no any relied upon documents or statements or enquiry report were made available to the petitioners.

Learned counsel for the respondents failed to bring on record any such document or any chit of paper showing that the so called adjudication orders were served upon the petitioners. In all these cases, opportunity of hearing has not been granted which is in clear violation of Section 75(4) and 75(5) of the Act. In other words, principles of natural justice have not been complied. Reference in this regard may be made to the case of M/s. Godavari Commodities Ltd. Vs. The State of Jharkhand &Ors,[W.P.(T) No. 3908 of 2020 with W.P.(T) No. 3909 of 2020] wherein this Court has held that opportunity of hearing is mandatory as per the Act itself.

10. In nut shell, demand of tax, interest and penalty has been confirmed without proper enquiry. Failure to issue the mandatory Show Cause Notices under Section 73/74 of the JGST Act along with summary Show Cause Notice under Rule 142(1) goes to the root of the matter and vitiates the entire proceeding and violates principles of natural justice. The law is now no more res integra that the show cause notice under Section 73/74 is mandatory in nature. Reference in this regard may be made to the case of M/s NKAS Services Pvt. Ltd. Vs. State of Jharkhand [W.P.(T) No.2444 of 2021] and in the case of M/s NKAS Services Pvt. Ltd. Vs. State of Jharkhand [W.P.(T) No.2659 of 2021].

11. In view of the aforesaid discussions, leaving the question open that “whether an Assessee can invoke jurisdiction under Section 108 of the JGST Act or not” we hold that the summary of orders, adjudication orders and all subsequent orders issued by the department in all the aforesaid writ applications is bad in law, inasmuch as, the same has been issued without issuance of any Show Cause Notice and without affording the opportunity of personal hearing which is mandatory and without passing any detailed order in terms of the provisions of the Act.

12. Consequentially, the following Summary of SCN and orders are quashed and set aside:

(i) DRC-01 & DRC-02 dated 06.01.2020 DRC-07 dated 26.06.2020 26.06.2020 & 27.07.2020, penalty order dated 25.08.2022 and DRC-13 Dated-08.01.2021 in W.P.(T) No. 745 of 2021;

(ii) DRC-01 & DRC-02 dated 01.09.2018 and DRC-07 dated 16.11.2018, Adjudication order-12.11.2018 in W.P.(T) No. 27 of 2021

(iii) DRC-01 & DRC-2 dated 01.09.2018 and DRC-07 dated 30.11.2018 Adjudication order- 28.11.2018 in W.P.(T) No. 28 of 2021

(iv) DRC-01 & DRC-2 dated 01.09.2018 and DRC-07 dated 29.11.2018 Adjudication order- 28.11.2018 in W.P.(T) No. 29 of 2021

(v) DRC-01 & DRC-2 dated 01.09.2018 and DRC-07 dated- 03.11.2018, Adjudication order-03.11.2018 in W.P.(T) No. 37 of 2021

(vi) DRC-01 & DRC-2 dated 01.09.2018 and DRC-07 dated-05.11.2018, Adjudication order- 05.11.2018 in W.P.(T) No. 41 of 2021.

(vii) DRC-01 & DRC-2 dated 01.09.2018 and DRC-07 dated-20.11.2018, Adjudication order-08.11.2018 in W.P.(T) No. 58 of 2021.

(viii) DRC-01 & DRC-2 dated 01.09.2018 and DRC-07 dated-08.11.2018 Adjudication order-08.11.2018 in W.P.(T) No. 59 of 2021.

(ix) DRC-07 dated-27.04.2018 and DRC-13 dated 13.02.2019 and Adjudication Order dated 15.09.2020, in W.P.(T) No. 91 of 2021.

(x) DRC-07 dated-27.04.2018 and DRC-13 dated 13.02.2019 in W.P.(T) No. 94 of 2021.

(xi) DRC-01 dated 03.02.2018, DRC-07 dated-29.09.2018 and DRC-13 dated 02.03.2019 in W.P.(T) No. 96 of 2021.

(xii) DRC-07 dated 07.05.2018, 07.05.2018 and 05.05.2018 and DRC-13 dated 13.02.2019 in W.P.(T) No. 163 of 2021.

13. All these matters are remitted back to the concerned respondents to pass afresh order in accordance with law and specific provision as enshrined under JGST Act, 2017 after following principles of natural justice. Let it be made clear that we have not gone into the merits of case of the parties.

14. As a result, all these writ applications stand allowed and disposed of.

Pending I.A, if any stands disposed of.