V.R.S. Traders Vs Assistant Commissioner (State Taxes) (Madras High Court)
The Madras High Court considered writ petitions challenging orders dated 05.08.2021 concerning GSTIN Nos. 33CDVPR5729K1ZP/2017-2018, 33CDVPR5729K1ZP/2019-2020 and 33CDVPR5729K1ZP/2018-2019. The petitioner, a sole proprietary concern engaged in iron and steel scrap business, had received Form DRC-01A dated 15.10.2020 alleging wrongful availment of ITC on purchases from suppliers alleged to be non-existent or not conducting business. The proposed amount was Rs.3,60,02,382/-. The petitioner replied on 19.10.2020 without accepting the proposal. The Revenue thereafter passed orders under Section 75(1), involving ITC reversal under Section 74 and penalty. The Court noted that, after a DRC-01A notice under Section 74(5), where the proposal is not accepted, the next step is issuance of a notice under Section 74(1) in DRC-01. On the Court’s specific query, the Revenue confirmed that no DRC-01 notice under Section 74(1) had been issued. The Court held that DRC-01 under Section 74(1) is an independent and mandatory notice before passing the assessment order. Since it was not issued, the proceedings culminating in the impugned orders were vitiated. The Court therefore quashed the respective impugned orders and remitted all three matters to the respondent for reconsideration from the stage where proceedings had stopped, namely after DRC-01A, with directions to issue DRC-01, provide the petitioner a fair opportunity of being heard and pass necessary orders. No costs were imposed and connected miscellaneous petitions were closed.
Assessment Proceedings and DRC-01A Notice
The petitioner was a sole proprietary concern engaged in the business of iron and steel scrap and was registered under GST with the GSTINs stated in the judgment.
The petitioner had regularly filed returns under the GST Act. According to the Department’s investigation, certain suppliers who had supplied iron and steel scrap to the petitioner were either non-existent or were not conducting any business. On this basis, the Department alleged wrongful availment of Input Tax Credit during 2017-2018 to 2019-2020 involving Rs.3,60,02,382/-.
Form DRC-01A dated 15.10.2020 was issued to the petitioner. The petitioner replied on 19.10.2020 and did not accept the proposal contained in the notice.
Impugned Assessment Orders
After the petitioner’s response to DRC-01A, the Revenue passed the orders dated 05.08.2021 under Section 75(1) of the Act. The orders involved ITC reversal under Section 74 and penalty under Section 74(5), with instructions that electronically generated summaries specifying the ITC reversal, penalty and interest payable were to be uploaded on the common portal.
The petitioner challenged the assessment orders before the Madras High Court on the ground, among others, that the procedure prescribed under Section 74 had not been followed.
Requirement of Notice under Section 74(1)
When the writ petitions came up for hearing, the Court specifically considered whether, after the petitioner had not accepted the proposal in DRC-01A, the Revenue had issued a notice under Section 74(1) of the Act before passing the impugned orders.
The Court recorded that Section 74(1) provides for service of notice where the proper officer considers that tax has not been paid or has been short paid, has been erroneously refunded, or input tax credit has been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts to evade tax. The notice requires the person chargeable with tax to show cause why the specified tax, interest under Section 50 and penalty equivalent to the tax should not be paid.
The Court also considered Section 74(5), under which the person chargeable with tax may, before service of notice under Section 74(1), pay the tax along with interest under Section 50 and a penalty equivalent to 15% of the tax on the basis of the person’s own ascertainment or the tax as ascertained by the proper officer and inform the proper officer in writing.
Revenue Admits DRC-01 Was Not Issued
The Court had directed the learned Special Government Pleader appearing for the Revenue to obtain instructions as to whether a DRC-01 notice under Section 74(1) had been issued before the impugned orders.
On instructions, the learned Special Government Pleader submitted that, except for the DRC-01A notice, no further notice in DRC-01 under Section 74(1) had been issued.
The Court therefore found that the petitioner had received DRC-01A, but the Revenue had proceeded directly to pass the impugned assessment orders without issuing DRC-01 under Section 74(1).
Madras High Court’s Findings
The Court held that where the Revenue proposes to initiate proceedings under Section 74, the initial proposal may be intimated through notice under Section 74(5). If the assessee accepts the proposal, the matter may reach a conclusion on that basis. However, where the assessee does not accept the proposal sent under Section 74(5), the next course of action is to issue a notice under Section 74(1).
The Court specifically distinguished the two notices. A notice under Section 74(1) is an independent notice to be issued in DRC-01, whereas the notice under Section 74(5) is issued in DRC-01A.
In the present case, DRC-01A had been issued, but DRC-01 under Section 74(1) had not been issued. The Court held that the DRC-01 notice under Section 74(1) was mandatory before passing the impugned assessment order. In its absence, the proceedings culminating in the assessment order were vitiated.
Impugned Orders Quashed and Matters Remitted
The Court held that the impugned orders could not stand in legal scrutiny and quashed the respective impugned orders in all three writ petitions.
The matters were remitted to the respondent for reconsideration. The Court directed that the proceedings should commence from the stage where they had stopped, namely the DRC-01A notice. The respondent was directed to issue DRC-01 and thereafter provide the petitioner a fair opportunity of being heard before passing necessary orders with regard to the assessment, if any.
The writ petitions were disposed of accordingly. No costs were imposed and the connected miscellaneous petitions were closed.
Cases Discussed
No judicial precedent is expressly cited or discussed in the supplied judgment.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The prayer sought for herein is for a Writ of Certiori, quashing the impugned order GSTIN: 33CDVPR5729K1ZP/2017-2018, 33CDVPR5729K1ZP/2019-2020 and 33CDVPR5729K1ZP/2018-2019 respectively dated 05.08.2021 passed by the first respondent on the grounds of violation of principles of natural justice.
2. The petitioner is a sole proprietary concern, they engaged in the business of iron and steel scrap. The petitioner is registered under GST with GSTIN Nos: 33CDVPR5729K1ZP/2017-2018, 33CDVPR5729K1ZP/2019-2020 and 33CDVPR5729K1ZP/2018-2019 respectively dated 05.08.202.
3. That the petitioner had filed return under the GST Act regularly, while so, as per the investigation of the Department concerned, a communication in Form No. DRC-01A dated 15.10.2020 was issued to the petitioner alleging that some of the suppliers, who have supplied iron and steel scrap to the petitioner were either non-existent or were not conducting any business therefore, the petitioner had wrongly availed Input Tax Credit i.e., ITC during the period 2017- 2018 to 2019-2020, on such purchase of an amount of Rs.3,60,02,382/- (Rupees 2 / 10 Three crores sixty lakhs two thousand three hundred and eighty two). When such notice was issued in DRC-01A, which is the notice necessarily to be issued under Section 74(5) of CGST Act, 2017(in short, ‘the Act’), the said notice has been replied by the petitioner on 19.10.2020, not accepting the said proposal issued under the notice in DRC-01A.
4. Thereafter the respondent Revenue has passed the order dated 05.08.2021 under Section 75(1) of the Act, whereby, an assessment has been made, where not only ITC reversal under Section 74 of the Act, but also the penalty under Section 74(5) of the Act has been made, thereby, the assessment order has been issued with instructions that the electronically generated summary of the order specifying the ITC reversal, penalty and interest payable by the petitioner is also electronically uploaded in the common portal.
5. Assailing the said order of assessment dated 05.08.2021, the petitioner has moved this writ petition with the aforesaid prayer.
6. When this writ petition came up for hearing on 08.02.2022, after hearing the learned counsel appearing for the petitioner, this Court passed the following order: “In this matter, it is an issue raised by the learned counsel for the petitioner that, before reversal of the alleged wrong claim of input tax credit under Section 74(5) of the Central Goods and Services Tax Act [CGST Act], an option has to be given to the petitioner/assessee, either, he wants to pay tax and penalty and in this regard, notice in Form DRC-01A under Rule 142(1) of the CGST Rules should have been issued which they have admittedly issued on 15.10.2020 and 16.10.2020. In response to the said notice in DRC-01A, the petitioner had given a reply on 19.10.2020 not accepting the proposal issued under the notice in DRC-01A. Thereafter, the next procedure to be followed by the Revenue is that under Section 74(1) of the CGST Act, further notice in DRC-01 should have been issued and an opportunity should have been given, then only final order with regard to reversal as has been done herein, has to be made. However, admittedly, since there has been no notice in DRC-01 under Section 74 (1) of the CGST Act, the proceedings culminated in the impugned order is vitiated. 2.Only to this pointed query, Mr.N.R.R.Arun Natarajan, learned Special Government Pleader seeks shorter accommodation to get instructions as to whether the Revenue has issued DRC-01 notice under Section 74(1) of the CGST Act before passing the order impugned. 3.In view of the limited controversy to be resolved as stated supra and to pass orders on this matter, post this matter on 10.02.2022 immediately after admission under the caption ‘for orders’.”
7. In view of the aforesaid, a specific query was raised on the basis of the ground urged by the petitioner’s side as to whether any notice under Section 74(1) of the Act was issued before passing the impugned order.
8. Mr.NRR.Arun Natarajan, learned Special Government Pleader appearing for the respondent, on instructions would submit that, except the notice i.e., DRC-01A, no further notice i.e., DRC-01 under Section 74(1) was issued.
9. Section 74(1) of the GST Act reads thus: “74(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 by 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 equivalent to the tax specified in the notice.”
10. Sub Section 5 of Section 74 reads thus: “The person chargeable with tax may, before service of notice under Sub-Section(1), pay the amount of tax along with interest payable under Section 50 and a penalty equivalent to fifteen per cent. Of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper office in writing of such payment.”
11. Therefore the first step, if the revenue wants to initiate proceedings under Section 74 of the Act, has to serve a notice to pay the amount of tax along with interest payable under Section 50 and a penalty equivalent to 15% of such tax 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 / 10
12. Therefore, what has been proposed by the revenue would be intimated by way of notice under Sub Section 5 of Section 74 of the Act initially to the assessee/dealer, who on receipt of the same may or may not accept and once he accepted there would be a conclusion. However, if he does not accept the proposal sent by the Revenue under Section 74(5) of the Act, the next course of action to be followed is to issue a notice under Section 74(1) of the Act as has been quoted herein above.
13. Therefore a Section 74(1) notice is an independent notice to be issued in DRC-01, whereas the notice under Section 74(5) was to be issued in DRC- 01A. Herein the case in hand, admittedly DRC-01A was issued, thereafter straightaway the respondent revenue proceeded to pass the impugned assessment order.
14. The DRC-01 notice under Section 74(1) of the Act, which is also mandatory to be issued before passing the impugned order of assessment has not been issued in this case. In the absence of any such notice, the proceedings, which is culminated in the order of assessment, which is impugned herein, is, no doubt, vitiated. 7 / 10
15. Therefore, this Court has no hesitation to hold that the impugned order cannot stand in the legal scrutiny and in that view of the matter, these writ petitions are disposed of with the following orders: “The respective impugned orders in these writ petitions are hereby quashed. All these three matters are remitted back to the respondent for re-consideration. While re-considering the same, they shall commence the proceedings from where, it has already been stopped i.e., till DRC-01A notice, which means, they should issue DRC-01 notice to the petitioner and thereafter after giving a fair opportunity of being heard to the petitioner, necessary orders shall be passed with regard to the assessment, if any.”
16. With these directions, these writ petitions are disposed of accordingly. No costs. Connected miscellaneous petitions are closed.
