Whether Scrutiny under GST in terms of Section 61 of CGST Act is Mandatory

The position with respect to scrutiny of returns under GST in terms of Section 61 of CGST Act seems far from being settled considering the ongoing dilemma. From taxpayer stand point, it is preferred that the procedure to scrutinize the returns in terms of Section 61 of CGST Act is followed. The same would provide the taxpayer a fair chance to clarify or rectify its inadvertent mistake made in GST returns considering there is no facility for revision. On the other hand, the officer may consider directly issuing SCN in terms of Section 73/74 or 74A of CGST Act considering that GST is a self-assessment tax and hence any error or omission would invite invocation of adjudication provisions. Additionally, the penalty would also get levied.

In the foregoing paras, we have discussed the provisions related to scrutiny of returns under GST and the recent judicial pronouncements related to the same.

A notice in Form GST ASMT-10 is issued when proper officer selects a taxpayer whose GST returns are to be scrutinized (GSTR-1, GSTR-3B, and GSTR-2B). In terms of Section 61 of the CGST Act and Rule 99 of CGST Rules. In the said notice, the taxpayer shall be informed about the discrepancies, tax, interest, or amounts involved may be quantified (where possible) and shall be provided an opportunity to clarify the same.. If the taxpayer's explanation is found acceptable, no further action is taken. However, if the taxpayer fails to justify discrepancies or fails to take the corrective measure in his return for the same, the proper officer may initiate appropriate action including those under section 65 or section 66 or section 67, or proceed to determine the tax and other dues under section 73, 74 or 74A.

In the recent judgment of Guwahati High Court and Madras High Court, the position with respect to following the procedure prescribed under Section 61 of CGST Act read with Rule 99 of CGST Rule is discussed. We have briefly narrated the same as below:

In the case of M/s. Pepsico India Holdings Pvt. Ltd. Versus The Union of India And 3 Ors, The Additional Commissioner Office of Principal Commissioner GST And Excise Commissionerate, Superintendent Range 1f Goods And Services Tax Guwahati Division-I Guwahati, Principal Commissioner CGST And Excise Commissionerate, Guwahati - 2025 (9) TMI 1593 - GAUHATI HIGH COURT, the assesse was alleged to wrongfully avail and utilize ITC as there was mismatch on account of reconciliation between ITC availed as per returns and expenses as per financials (Difference in Table 14 of GSTR-9C). The mismatch in ITC was intimated by the officer through notice issued under Section 73 of CGST Act.

In the PepsiCo case,the Guwahati High Court affirms that ASMT-10 is a crucial procedural safeguard. The Court held that the notice under Section 61 serves as a preliminary communication informing the taxpayer of discrepancies identified during scrutiny. It provides an opportunity to rectify errors voluntarily before initiating any other proceeding. The procedure prevents arbitrary exercise of power by tax authorities. The Court underscored that the assessment procedure as prescribed in terms of Section 61(3) of CGST Act must be followed scrupulously rather than directly issuing notice under Section 73 of CGST Act.

In contrast, in the case of Mandarina Apartment Owners Welfare Association (MAOWA) Versus Commercial Tax Officer/State Tax Officer And M/s. Gani Fashion Represented by its Proprietor, Mr. Mohamed Gani Versus The Assistant Commissioner (ST) Nandanam Assessment Circle, Chennai - 2024 (7) TMI 1158 - MADRAS HIGH COURT a different perspective was brought forth on the mandate of following the scrutiny procedure as per Section 61 of CGST Act and Rule 99 of CGST Rules, deeming the same notice ASMT-10 as non-mandatory. Herein, one of the writ decided by Court, the issue was with respect to issuance of notice under Section 73 of CGST Act alleging lower sales turnover as compared to purchase turnover. It was argued that the department failed to give a pre-intimation to the taxpayers and hence the said adjudication notice under section 73 is arbitrary.

The Madras High Court observed that Section 61 of CGST Act uses permissive language ('may scrutinize'), not mandatory language. ASMT-10 notices are only required when officers specifically select returns for scrutiny and finds questionable discrepancy. The notice may contain quantified tax, interest or any other amount wherever possible. Also, reassessment or adjudication under this section is not possible. Hence, the only objective achieved by the said notice is firstly, it enables the proper officer to select and scrutinize returns and conclude there are no discrepancies. Secondly, if there are discrepancies, the taxpayer is granted a chance explain or accept the discrepancy. It is emphasized that section 61 and section 73,74 of CGST Act serve independent purposes. Assessment proceedings under Section 73 can be initiated based on information from various sources, not just scrutiny. The phrase 'where it appears to the proper officer' in Section 73 allows adjudication without necessarily going through the scrutiny process.

Conclusion:

GST operates on a self-assessment model, where taxpayers are responsible for calculating and paying their taxes. Since there's no provision for revising returns under GST, and notices under Sections 73 and 74 of CGST Act carry harsh penalties, the scrutiny of returns in Form GST ASMT-10 process serves a pre-intimation tool. Also, considering the amendment in Rule 142 of CGST Rules wherein pre-SCN intimation in Form GST DRC-01A is made optional, it becomes all the more important to take shelter under Section 61 of CGST Act. . The scrutiny process under Section 61 of CGST Act is the primary mechanism for verifying return accuracy. It aligns with the legislative intent behind Chapter XII (Assessment) of the CGST Act, which establishes a systematic framework before moving to demands and recovery provisions. Based on the evolving jurisprudence, we believe ASMT-10 should generally be issued to maintain procedural fairness and transparency.

However, authorities may proceed to issue SCN directly in specific circumstances such as information gathered through sources other than GST returns, or the taxpayer has prima facie tried to defraud the tax authorities. The revenue's interest in preventing tax evasion must be balanced against the taxpayer's right to be heard. Hence, the decision to bypass ASMT-10 is to be followed judiciously, with adequate reasons recorded. The judicial opinion remains divided on whether ASMT-10 is mandatory in all cases. Until the Supreme Court provides definitive clarity or the legislature amends the law, taxpayers and practitioners must navigate this uncertainty with prudence and awareness.