Delhi High Court Holds Premature Issuance of SCN Violates Natural Justice under CGST Act

The Hon’ble Delhi High Court in the case of Varian Medical Systems International India Pvt. Ltd. Versus Union Of India & Ors. - 2025 (10) TMI 1328 - DELHI HIGH COURT held that the issuance of a Show Cause Notice (SCN) before the expiry of the reply period for the Pre-SCN violates principles of natural justice, and that audit commencement date under Section 65 of the CGST Act is the date when the taxpayer provides required documents, with audit conclusion and communication of findings within prescribed timelines.

Facts:

Varian Medical Systems International India Pvt. Ltd. (“the Petitioner”) is a GST-registered entity undergoing audit for financial years 2017-18 to 2022-23. The Petitioner submitted documents and replies to audit queries and provided clarifications timely.

Union of India and others (“the Respondents”) conducted audit proceedings, issued a Pre-SCN dated November 25, 2024, allowing the Petitioner three days to file a reply. However, the Respondents issued the formal SCN on November 27, 2024, before the expiry of the reply period.

The Petitioner contended that the pre-mature issuance of the SCN violated natural justice and that the audit report was also challenged as time-barred beyond the limitation under Section 65 of the CGST Act.

The Respondent contended the audit report was issued within prescribed timelines inclusive of extension and that SCN issuance was proper.

The Petitioner prayed for quashing the SCN and audit report through writ petitions on grounds of violation of principles of natural justice and limitation.

Issues:

• Whether issuance of a Show Cause Notice before expiry of the reply period to the pre-SCN violates natural justice?
• Whether the audit report was time-barred under the CGST Act?

Held:

The Hon’ble Delhi High Court in Varian Medical Systems International India Pvt. Ltd. Versus Union Of India & Ors. - 2025 (10) TMI 1328 - DELHI HIGH COURTheld as under:

• Observed that, the pre-Show Cause Notice issued to the Petitioner on November 25, 2024, granted three days’ time to file submissions against tax, interest, and penalty determination based on audit findings, but the Show Cause Notice (SCN) was issued prematurely on November 27, 2024, one day before expiry of the reply period provided under the pre-SCN. This premature issuance was held to violate the principles of natural justice, which require granting the full opportunity of hearing before passing adjudicatory orders.
• Noted that, the audit under section 65 of the CGST Act must be completed within three months from the date of commencement, which is defined in the Explanation to Section 65 as the later of the date on which the registered person makes available the required records and documents or the actual institution of audit at the place of business. The Petitioner had made the final submission on October 11, 2024, which fixes the audit commencement date from October 12, 2024.
• Held that, the audit report dated February 11, 2025, and communicated on February 13, 2025, was within the permissible period prescribed under Section 65(4) and the proviso allowing extension by the Commissioner for reasons recorded. Hence, the audit report was not barred by limitation.
• Observed that, the issuance of SCN before the lapse of the submission period under pre-SCN deprived the petitioner of a meaningful opportunity to be heard, thus vitiating the proceeding.
• Directed to set aside the SCN dated November 27, 2024, and remanded the matter back to the stage of pre-SCN dated November 25, 2024. The petitioner was allowed to file its reply afresh by November 10, 2025.
• Ordered that, the departmental authority shall consider the petitioner’s reply to the pre-SCN and decide whether to issue SCN or not. Further action must be conducted strictly in accordance with law and principles of natural justice.
• Further held that, the time during which the writ petitions were pending before the Court shall not be counted for limitation purposes by either party.
• Emphasized that, audit proceedings and communication of audit findings should comply with statutory timelines, procedural fairness, and principles of natural justice, ensuring the taxpayer’s right to be heard is always protected before any demand or penalty order is passed.

Relevant Provisions:

Section 65 of the CGST Act, 2017

“65. Audit by tax authorities.-

(1) The Commissioner or any officer authorised by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.

(2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.

(3) The registered person shall be informed by way of a notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.

(4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit:

Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.

Explanation.- For the purposes of this sub-section, the expression 'commencement of audit' shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later.

(5) During the course of audit, the authorised officer may require the registered person, -

(i) to afford him the necessary facility to verify the books of account or other documents as he may require;

(ii) to furnish such information as he may require and render assistance for timely completion of the audit.

(6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.

(7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74 or section 74A.”

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