Executive Summary of the Article:
An attempt is made through this article to come out with key points one shouldn’t miss addressing in Show Cause Notice -the bedrock of one’s case. Cautious consideration of these aspects would aid the litigation journey of the case.
It is a relief that we are (slowly) returning to normalcy after a strict lockdown imposed to break the chain. Alongside this, The GST authorities are also returning to train their guns on the Tax Payers. Spike is seen in cases taken up for audit and investigation. Follow-ups are rigorous and (few) propositions raised are daunting.
It’s time to pull up our socks and attend the (flurry of) Show Cause Notices (SCN/s) underway!
All about SCN:
Leading to SCN…
Before the authority issues notice to show cause, an information/evidence gathering exercise is to be done by the authorities through one or more of the below available powers,
Scrutiny of Returns and related particulars furnished by the GST registered Persons.
Audit of Books and records maintained under GST and under other laws for the time being in force.
Special Audit got done from a Chartered Accountant or a Cost Accountant nominated by the Commissioner to verify records of a registered person, considering the nature and complexity of the case.
Inspection & Search places of business
Inspection of Goods in movement
Summons to give evidence and produce documents
Each of the above powers can be exercised by the officer of a designated rank or with the prior approval of the officer of the designated rank. To chose out of the above, as per the provisions of the law, is the discretion of the officer concerned having regard to the facts of the case.
Upon gathering details, authorities would proceed to propose the demand by the issue of an SCN seeking an explanation on the issues raised.
Some points to consider in SCN…
Provisions of Demand and Recovery are set out in Chapter XV of GST Act. Sec 73 deals with the determination and issue of show cause notice for demand of tax/input tax for reasons other than fraud, willful misstatement, or suppression of facts. Sec 74 deals with cases involving fraud, willful misstatement, and suppression of facts.
It is the Proper Officer who has to issue the show cause notice as per Sec 73/74. For this purpose, circular 3/2017 and circular 31/2018 needs to be referred. Circular 31/2018 also provides for the monetary limits and the rank of officers against such limits, who could exercise the powers of issuing SCN and order. If the officer issuing the notice is not the proper officer, then the SCN lacks the jurisdiction and needs to be challenged.
Notice should contain the details of relied upon documents/details, the reason for arriving at a particular conclusion, clearly set out the ingredients for invoking extended period of limitation u/s 74.
Jurisprudence developed over years requires SCN to be issued out of thorough reasoning than on surmise and expects to be without arbitrariness. In this context, it is worth visiting the SC judgments in the case of Oryx Fisheries Pvt. Ltd. v. Union of India — 2011 (266) E.L.T. 422 (S.C.) where it was said
“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 proceeding becomes an idle ceremony.”
It is onerous on the authorities to provide an opportunity of being heard before adjudicating the matter covered by SCN. This stands on the principle; no one can be a judge in his own case. Non-provision of personal hearing is held a serious violation and proceedings are set aside for its violation of Article 14 - Equality. Few landmark judgments in this regard are –
Maneka Gandhi vs Union Of India 1978 AIR 597
Umanath Pandey v. State of UP  12 SCC 40-43
Courts have gone ahead to also mention that the opportunity of being heard should be real, reasonable, and effective. The same should not be for namesake. It should not be a paper opportunity, in the case of n CIT v. Panna Devi Saraogi  78 ITR 728 (Cal.).
Courts have reiterated that when certain procedures are prescribed in the law, it should be followed in the manner prescribed. Rule 142(1) requires certain notices to be uploaded electronically. Since the notices were served on email and not uploaded electronically, those were held invalid by the Madhya Pradesh High Court in Shri Shyam Baba Edible Oils Vs Chief Commissioner and another in W.P. No.16131/2020
In M/S.Metrolite Roofing Pvt. Ltd vs The Dy. Commissioner of Central Taxes and others, Kerala High Court has made the proceedings invalid for not issuing the personal hearing record post completion of hearing stating that the procedure was devised to address compliance of natural Justice.
Sec 160(2) of the Act creates a bar on questioning the service of notice/order at a subsequent stage if it was acted upon initially. So, the first of the grounds is on the service of notice, if not served as per the provisions of the law.
Limitation for the issue of SCN is pivotal to ascertain the validity of show cause notice. Sec 73 notice needs to be issued at least 3 months prior to the time limit for issuance of the order. The time limit for the issue of order u/s 73 is 3 years from the due date for filing Annual Return for the relevant period. Sec 74 notice needs to be issued at least 6 months prior to the time limit for issuance of the order. The time limit for the issue of order is 5 years from the due date for filing Annual Return for relevant period. Such limitation, however, doesn’t apply to the issue of SCN where taxes are collected and not paid.
Interesting to note - Government always Extends the due date for filing Annual return but waives late fee for other returns (till now). Extension of due date means the extension of time for assessment u/s 73 / u/s 74 of the Act. No doubt it is a new law and even the revenue is in the same train, (un)/learning and needs time to take its position.
Voluntary compliance by paying missed tax/ineligible ITC and interest, either on own or on being pointed by the officer, before issuance of SCN or within 30 days of issue of SCN, is rewarded with waiver of penalty and non-issuance of SCN for cases not involving ingredients like fraud, etc.
If the issue involves fraud, then to obtain such immunity, the amount of tax, interest, and 15% penalty needs to be paid before issuance of notice or 25% penalty within 30 days of service of notice. Or the proceeding will be considered as closed if the tax, interest, and 50% penalty is paid within 30 days of issue of order. This would best suit a situation where the mistake is inadvertent and would also help in concluding the issue. But the tussle is between the officer’s inclination towards Sec 74(5) and the taxpayer’s towards Sec 73(5) (for obvious reasons).
Deeming fictions have always been (highly) favoring revenue to support their stance. One such explanation finds a place in Sec 74 where they explain Suppression to mean
Non-declaration of facts or information required to be declared in return, statement, report, or any other document furnished
Failure (i.e. a subjective and revenue biased term) to furnish any information on being asked for in writing by the proper officer.
This casts a burden on the registered person to declare everything required under the Act/rules (even beyond the best of his knowledge?). It is important to note that invoking an extended period of limitation is the Peril of non-declaration.
In contrast with laws hitherto, there is a limit of 3 for adjournments allowed (if sufficient cause is shown) in SCN proceedings. So, due care needs to be taken, and only for a compelling reason, adjournment should be sought.
Some of the potential GST issues for which SCNs are being issued, requiring caution in exercising appropriate action, are:
Difference between GSTR 2A & GSTR 3B
Taxability of Ocean Freight on Import
Non-payment to vendors within 180 days
Classification and Rate of Tax on various goods
ITC reversal u/s Rule 42 & Rule 43 for real estate sector
GST exemption on Annuities for Construction of Roads
Resident Welfare Associations exemption of up to Rs. 7,500/-
Supplies between related/distinct persons
Charge of GST on Personal Guarantee provided by Director to Company
SCN forms the basis for revenue’s case and becomes imperative on the taxpayer not to leave any stone unturned to venture into all possibilities of challenging the notice to start the litigation journey. Recent Judicial Pronouncements along with relevant ones from erstwhile laws could be of avail in understanding and defending the case.
The author can be reached at: firstname.lastname@example.org
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