The Show Cause Notice (‘SCN’) takes the centre stage in any tax proceedings. Any warranted action contemplated against the assessee must begin with an SCN. SCN is the foundation beneath which the tax authorities should build their case. This being said, the role of executives in properly drafting an SCN is immense in collecting the tax revenue, and in turn the development of the country.
In this article, we will bisect the various scheme of things surrounding the contents of SCN and the approach of the executive (tax department) in implementing the same.
Basic postulates of an SCN
A. The very first question that crops up in one’s mind is what is the genesis behind this requirement of issuing SCN before initiating any action against the assessee
The answer to this question lies in the concept and doctrine of natural justice. This is made applicable to the decision-making by judicial and quasi-judicial bodies. It is developed with this fundamental in mind that those whose duty is to decide, must act judicially. They must deal with the question referred both without bias and they must give to each of the parties to adequately present the case made.
It is perceived that the practice of aforesaid attributes in mind only would lead to doing justice. Since these attributes are treated as natural or fundamental, it is known as 'natural justice'. The principles of natural justice developed over some time and which are still in vogue and valid even today were: (i) rule against bias, i.e. Nemo iudex in causa sua; and (ii) opportunity of being heard to the concerned party, i.e. Audi alteram partem. These are known as principles of natural justice. To these principles, a third principle is added, which is of recent origin. It is the duty to give reasons in support of the decision, namely, passing of a 'reasoned order'. [Ref - M/S. DHARAMPAL SATYAPAL LTD. VERSUS DEPUTY COMMISSIONER OF CENTRAL EXCISE, GAUHATI & OTHERS - 2015 (5) TMI 500 - SUPREME COURT]
It is for this reason, the issuance of SCN is treated as an inseparable and inextricable part of the doctrine of principles of natural justice.
B. Whether the tax authorities (either knowingly or because of ignorance of the law) on account of paucity of time (or for any other reason) can issue a letter or advisory in the place of an SCN
The answer to this question can be traced in the judgments pronounced by the Apex court, where the Honourable court has time and again unequivocally held that the communications, orders, suggestions, or advice from the department can no way be equated to the show cause notice. [Ref - METAL FORGINGS VERSUS UNION OF INDIA - 2002 (11) TMI 90 - SUPREME COURT and UNION OF INDIA VERSUS CHARAK PHARMACEUTICALS (INDIA) LTD - 2003 (3) TMI 117 - SUPREME COURT]
C. Whether the SCN can be dictated orally to the assessee, without serving written notice
The answer would be that, unless, as per the law, the assessee has specifically waived the requirement for issuance of SCN by way of a written letter, the tax authorities are duty-bound to issue SCN. Further, even in the event where there is an admission of liability and voluntary payment of tax, it is statutorily incumbent and mandatory for the adjudicating authority to determine duties that are required to be paid and issue an SCN. [Ref - VEERA SPG. MILLS (P) LTD. VERSUS COMMISSIONER OF C. EX., COIMBATORE -2001 (2) TMI 489 - CEGAT, CHENNAI and SAPHAI SAW MILLS & VENEER UNIT VERSUS COMMISSIONER OF C. EX., SHILLONG - 1997 (1) TMI 333 - CEGAT, CALCUTTA]
D. Whether the SCN can be issued without providing the copy of the relied upon documents on the issue catered therein to the assessee
The SCN should place on record all the evidence it has relied upon on the allegation at hand. The copies of the said relied upon documents shall be made available along with the SCN. If the allegations in the show cause notice are not specific and are on the contrary vague, lack details, and/or unintelligible, that is sufficient for the courts to hold that the assessee was not given proper opportunity to meet the allegations indicated in the SCN. (Ref - VINOD SOLANKI VERSUS UNION OF INDIA & ANR. - 2008 (12) TMI 31 - SUPREME COURT)
E. Whether the adjudicating authorities draw their procedures (or deviate) albeit the procedures prescribed by the CBIC
Circulars issued by the CBIC are binding on the tax authorities. They are duty-bound to follow the same. The CBIC master circular mandates the tax authorities to hold a pre-notice consultation in cases involving demand of more than INR 50 lakhs. The intent of this is to narrow down the scope of the dispute by engaging the assessee. [Ref - AMADEUS INDIA PVT. LTD. VERSUS PRINCIPAL COMMISSIONER, CENTRAL EXCISE, SERVICE TAX, AND CENTRAL TAX COMMISSIONERATE - 2019 (5) TMI 669 - DELHI HIGH COURT]
F. Whether based on the evidence gathered (or for whatsoever reason), can the SCN conclude the allegations catered therein
The intent of issuing an SCN is to provide an opportunity of being heard by the other person. Hence, while reading an SCN the person who is subject to this must get an impression that he will get an effective opportunity to rebut the allegations contained in the SCN and prove his innocence. If on a reasonable reading of an SCN a person of ordinary prudence gets the feeling that his reply to the SCN will be an empty ceremony and he will merely knock his head against the impenetrable wall of prejudged opinion, such a show cause notice does not commence a fair procedure. [Ref - Oryx Fisheries Pvtltd (2011) 266 ELT 422 (SC)]
Critical caution points while issuing SCN
The CBEC Master Circular on Show Cause Notice, Adjudication and Recovery No. 1053/02/2017-CX dated March 10, 2017, narrates the structure of an SCN (amongst others) as under -
Introduction of the case
Factual statement and appreciation of evidence
Discussion, facts, and legal framework,
Discussion on Limitation
Calculation of duty and other amounts due
Statement of charges
Authority to adjudicate
As can be seen from the above, the SCN should be detailed enough to accommodate all of the above requirements. The introductory part of the SCN should contain the details of the person (or in the event of multiples persons, the details of everyone should be provided separately) to whom the SCN is issued and what events had led to the issuance of SCN.
The tax officer issuing SCN should precisely cater to the law and the sections/rules contravened by the person. The SCN should contain all relied upon documents. The SCN should throw light on the facts of the case, evidence gathered, contraventions of the law/rules, and consequences/charges created on account of said deviation. The SCN should also clearly adduce evidence for invoking an extended period, if any, and quantify the demand.
Absence of the any of the above ingredients would make the SCN vulnerable to judicial review and finally being quashed by the higher courts. However, minor infractions in the notice may not make the SCN invalid – like notice referring to incorrect section/rule, not been able to quantify the demand at time of issuance of the notice, etc.
Failure of tax authorities – Revenue loss to the exchequer and hinder ease of doing business
The tax authorities have a great responsibility in implementing the law promulgated by the legislature. The tax authorities should draft the SCN with at most care.
A study on the ‘SCNs and adjudication process by the CBIC’ has revealed significant gaps in implementing the law, inter-departmental coordination, which will ultimately lead to loss of tax revenue to the country. It reveals that the loss to the exchequer on account of varied deviations by the tax authorities amounts to INR 4,504.21.
(Source – C&AG Report No. 1 of 2021 (Indirect Taxes – Goods and Services Tax, Central Excise and Service Tax)
# it doesn’t include the host of cases, where the higher courts have quashed the SCN on account of varied statutory violations.
Further, it is also ought to note that the success rate of litigation that the government enters is very low, there is a tendency among the policymakers to appeal to the higher authority. The details of the same are depicted below –
(Source – Economic Survey 2017-18. Also reported in Economic Survey 2020-2021)
Over some time, the success rate of the Department has only been declining, while that of the assesses has been increasing. Nonetheless, the tax department is the largest litigant.
The rationale behind tax departments approach
The ingrained revenue bias and internal targets set by the higher administration.
Existence of different kinds of authorities (adjudication, investigation, audit, preventive, review, etc.), their viewpoints, and practices.
The binding nature of departmental clarifications, fear of inviting the wrath/disciplinary proceedings, or dissatisfaction of superiors for independently deviating from it.
The tendency to postpone decisions/orders citing various administrative reasons are one of the factors that strike at the root of impartiality.
The tax department follows default precedent. Thus, we see routine appeals made by the tax department against unfavorable judgments in higher courts or tribunals to reduce any questioning later on.
The lack of focus/updation by the tax authorities on the orders pronounced by the higher courts on varied tax matters, which either converge or diverge with the legal provisions based on the courts ‘Interpretation’.
India has formed various task forces/committees (till recently the ‘Tax Administration Reforms Commission’) to reform India’s tax system. Every other task force has opined that India has one of the highest numbers of disputes between tax administration and taxpayers, with the lowest proportion of success.
Nothing has drastically changed till now. The operative ways of the tax authorities remain the same. The department is failing miserably in implementing the law to its true spirit. On the one hand, the lack sided and complacent attitude is leading to the loss of tax revenue to the government. On the other hand, the fear of being targeted by the higher-ups is leading to follow the approach set by his higher-ups without application of mind, leading to wastage of judiciary time & money and ultimately hindering the ease of doing business.