Case Law Details
Rahul Steels Through Its Authorised Signatory Rahul Gadnhi and Others Vs Union of India and Others (Madhya High Court)
The petition challenged the validity of a common show cause notice issued under Sections 74 and 122 of the Central Goods and Services Tax Act, 2017. The petitioners, two proprietorship firms engaged in the business of cement, steel and TMT bars, questioned the show cause notice issued by the CGST authorities in connection with an investigation into alleged circular trading and passing of ineligible Input Tax Credit (ITC).
The respondents submitted that information had been received indicating that certain entities were availing and passing ineligible ITC without actual supply or receipt of goods through circular trading. Pursuant to this information, searches were conducted under Section 67(2) of the CGST Act at the premises of various entities. During the investigation, statements of proprietors and other persons were recorded. The investigation allegedly revealed that 43 vehicles shown as having transported goods in the transactions included vehicles registered as two-wheelers. Notices were issued to the vehicle owners.
According to the investigation, invoices relating to the same goods issued by M/s Panjon Limited ultimately returned to M/s Panjon Limited itself through M/s Rahul Steels, M/s Sagar Steels Suppliers, M/s Sanitex Chemicals Ltd., M/s Raunaq Laboratories Ltd. and M/s Purjaw Chemicals Pvt. Ltd. without actual movement of goods. It was alleged that the transactions were intended to inflate turnover for obtaining higher loans from banks or non-banking financial corporations and to avail fake input tax credit. After the preliminary investigation, a common show cause notice was issued to six noticees under Sections 74 and 122 of the CGST Act.
The allegations against petitioner No.1 were that it had passed on ineligible input tax credit of ₹1,74,82,834 by showing fake taxable supplies of ₹14,45,73,325 during the financial years 2017-18, 2018-19 and 2019-20. Against petitioner No.2, it was alleged that it had passed on ineligible input tax credit of ₹3,10,13,486 by showing fake taxable supplies of ₹25,84,45,714 during the financial years 2017-18 and 2018-19.
The petitioners submitted that although they had already filed replies to the show cause notice, the notice was uploaded on the GST portal only on 13.03.2024. They contended that the notice under Section 74(1) had therefore been issued beyond the limitation prescribed under Sections 74(2) and 74(10) of the CGST Act. They also relied upon decisions of the Andhra Pradesh, Karnataka and Orissa High Courts to contend that separate show cause notices were required for each assessment year and that a common notice covering multiple assessment years was not permissible.
The respondents opposed the writ petition, contending that it was not maintainable as it challenged only a show cause notice while adjudication was still pending. They further submitted that the notice had been served on the petitioners on 29.09.2023 and that any delay in uploading it on the GST portal was attributable to a technical glitch. It was also argued that Section 160 of the CGST Act protected the proceedings from being invalidated on the grounds relied upon by the petitioners.
After considering the rival submissions, the High Court observed that the investigation disclosed involvement of multiple firms in alleged circular trading with a common objective of inflating turnover, increasing company valuation for obtaining higher loans and availing fake ITC. The Court noted that the alleged transactions covered the period from 2017 to 2022 and held that, in such circumstances, a joint assessment of all six entities was liable to be conducted. It held that, in cases involving alleged circular trading, assessment could be undertaken jointly by the proper officer by calling all firms involved in the relevant transactions. The Court further observed that, except for the petitioners, the remaining entities had not challenged the common show cause notice.
Holding that the common show cause notice had been rightly issued for undertaking joint proceedings under Section 74 of the CGST Act and that the petitioners could not be separated from those proceedings, the High Court found no merit in the writ petition and dismissed it.
Cases Discussed:
- Dilip Kumar Swain Vs Deputy Director, GDDI, BBSR
- M/s Veremax Technologie Services Limited Vs The Assistant Commissioner of Central Tax
- M/s New Morning Star Travels Vs The Deputy Commissioner (ST)
FULL TEXT OF THE JUDGMENT/ORDER OF MADHYA PRADESH HIGH COURT
Petitioner has filed the present petition challenging the validity of show-cause notice No. F.No. IV(06)131/Prev/2021-22/4835 dated 29.09.2023 / 13.10.2023 issued under Section 74 and 122 of Central Goods and Services Tax Act, 2017 (hereinafter referred as “CGST Act, 2017”). The petitioner No.1 is a proprietor firm engaged in the business of cement trading and steel trading from its office situated at 78-79, Mahadev Totla Nagar, Indore (M.P.). Likewise, the petitioner No.2 is also a firm engaged in the supply of TMT bars and steel items from its office premises situated at 385/390, Lokhandwala Complex, Goyal Nagar, Indore (M.P.). Both the petitioners are being represented by its proprietor.
02. The respondents No.2 & 3 are the authorities under the CGST & Central Excise posted at Indore. The respondents received an information that few units were engaged in availing / passing of ineligible Input Tax Credit (ITC) to certain units without actual supply / receipt of goods by way of circular trading. Based on the said information, a search was conducted under Section 67(2) of the CGST Act, 2017. The first search was conducted on 07.01.2022 at the premises of M/s Namrata Trade Star and M/s Sagar Steels Suppliers (petitioner No.2). Thereafter, premises of M/s Panjon Limited was searched on 10.01.2022 and it was found that document / record regarding purchase invoice, sale invoice are being maintained at their Head Office at Panjon Farm House, Airport Road, Indore. The statement of proprietor and other concerned persons were recorded. The investigation has revealed that 43 vehicles were declared used in transportation of goods amongst certain companies for circular trading, but few vehicles were found to be registered as two wheelers. Notices were issued to the owners of the vehicles.
03. It has further been revealed that the invoices of the same goods from M/s Panjon Limited finally reached to M/s Panjon Ltd. itself rooted through M/s Rahul Steels, M/s Sagar Steel Suppliers, M/s Sanitex Chimicals Ltd., M/s Raunaq Laboratories Ltd. and M/s Purjaw Chemicals Pvt. Ltd. without any underlying supply of actual goods with an intention to increase the turnover to get higher loans from the bank or non-banking financial corporation and to avail fake input tax credit. After completing the preliminary investigation, impugned show-cause notice was issued to six noticee, namely, M/s Rahul Steel, M/s Sagar Steels Suppliers, M/s Panjon Limited, M/s Sanitax Chemicals Limited, M/s Purjaw Chemicals Pvt. Ltd. and M/s Raunaq Laboratories Limited under Section 74 and 122 of CGST Act, 2017 by respondent No.3.
04. Noticee Nos.3, 4, 5 and 6 have been directed to collect the non-relied documents within 30 days from the date of receipt of the notice. A separate investigation has been conducted against M/s Rahul Steel and M/s Namrata Trade Star Ltd. regarding availing fake Input Tax Credit from non-existant firm. So far as the petitioner No.1 Rahul Steels is concerned, the allegation is that the firm has passed on the ineligible input tax of Rs.1,74,82,834/- by showing the fake supply of taxable value of Rs.14,45,73,325/- in the financial year 2017-18, 2018-19 & 2019-20 and so far as the petitioner No.2 is concerned, the allegation is that the firm has passed on the ineligible input tax of Rs.3,10,13,486/- by showing the fake supply of taxable value of Rs.25,84,45,714/- in the financial year 2017-18, 201819.
05. The petitioners have already filed a reply to the show-cause notice and approached this Court challenging the validity of impugned show-cause notice inter alia on the ground that the impugned show-cause notice came to be uploaded in the electronic form and summary thereof and an official web portal of the GST department only on 13.03.2024 hence, said notice under Section 74(1) of CGST Act, 2017 has been issued beyond the period of limitation specified in Section 74(2) and 74(10) of the CGST Act, 2017.
06. Shri L.C. Patne, learned counsel for the petitioner has placed reliance on the judgments passed by the: (i) High Court of Andhra Pradesh in case of M/s New Morning Star Travels V/s The Deputy Commissioner (ST), (ii) High Court of Karnataka at Bengaluru in case of M/s Veremax Technologie Services Limited V/s The Assistant Commissioner of Central Tax & (iii) High Court of Orissa at Cuttack in case of Dilip Kumar Swain V/s Deputy Director, GDDI, BBSR.
07. Shri Prasanna Prasad, learned counsel for the respondents submits that the petition is not maintainable as the same is filed challenging the show-cause notice. The adjudication is pending before the respondent No.3, therefore, the writ petition is liable to be dismissed. It is further submitted that under Section 160 of the assessment proceedings cannot be declared invalid on the grounds mentioned in sub-section (1) & (2). The impugned show-cause notice was served upon the petitioners on 29.09.2023 and as per requirement of Rule 142, it was uploaded in the website, there could be delay in uploading because of some technical glitch, but that will not give undue benefit to the petitioners.
08. In reply, Shri Patne, learned counsel for the petitioner further submits that the High Courts of Andhra Pradesh, Karnataka and Orissa have categorically held that there cannot be common or joint show-cause notice for multiple assessment years, the authorities are required to issue a notice for each assessment year, therefore, this impugned notice is liable to be quashed however, the liberty can be granted to the respondent to issue fresh multiple notices.
Heard.
09. As discussed above, in this case, the search was conducted initially in the premises of M/s Panjon Limited and the material collected from the premises revealed that as many as 5 firms are involved in “circular trading” with a common object to inflate their turnover, increase of valuation of the company in order to take benefit of higher loans from the bank or financial corporation and to avail fake input tax credit. The total period during which these fake ITCs were generated is from 2017 to 2022, therefore, a joint assessment is liable to be conducted of six companies / noticee in the aforesaid period. In such type of circular trading matters, the assessment can be done by calling all the firm / companies involved in trading in the relevant years by the proper office. This matter cannot be proceeded individually in a given facts and circumstances under Section 74 of CGST Act, 2017. Except petitioner, remaining 4 companies have not approached this Court challenging the show-cause notice.
10. In order to prove the circular trading as explained by way of diagram in the page 20 of the common show-cause notice, said notice has rightly been issued and the joint assessment proceedings are liable to be undertaken under Section 74 of the CGST Act, 2017 by the proper officer. Hence, the petitioners cannot be singled out from this assessment proceedings by entertaining this writ petition.
11. In view of the above, this Writ Petition being devoid of merit and substance stands dismissed.
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