Interest cannot be imposed in adjudication order, if not demanded/ quantified in Show Cause Notice

The Hon’ble Allahabad High Court in the case of M/s Sanjay Construction Thru. Authorized Representative Shivendra Kumar Versus State Of U.P. Thru. Prin. Secy. Finance Deptt. Lko. And Another - 2026 (2) TMI 1206 - ALLAHABAD HIGH COURTheld that interest liability cannot be imposed in the adjudication order when the show cause notice did not quantify or demand such interest, as it would violate Section 75(7) of the GST Act. The Court further held that Section 75(9) does not permit imposition of interest beyond what is specified in the show cause notice. Consequently, the impugned order and show cause notice were quashed with liberty to issue a fresh notice in accordance with law.

Facts:

M/s Sanjay Construction (“the Petitioner”) filed a writ petition challenging the order passed under Section 73(9) of the Goods and Services Tax Act, 2017 imposing tax, interest and penalty amounting to ₹1,02,58,921.42.

State of Uttar Pradesh through Principal Secretary, Finance Department and another (“the Respondent”) issued a show cause notice to the Petitioner and subsequently passed an adjudication order dated February 14, 2025 under Section 73(9) of the Act determining tax, interest and penalty liability.

The Petitioner contended that the show cause notice did not quantify any interest for the period April 2020 to March 2021. However, the adjudication order, imposed interest for that period. Relying on Section 75(7) of the Act, the Petitioner argued that unless tax, interest or penalty are demanded in the show cause notice, they cannot form part of the adjudication order.

The Respondent contended that even if interest is not mentioned in the show cause notice, it remains payable in view of Section 75(9) of the GST Act which provides that interest on tax short paid or not paid shall be payable whether or not specified in the order determining tax liability.

Aggrieved by the imposition of interest beyond the show cause notice, the Petitioner approached the High Court by filing a writ petition under Article 226 of the Constitution of India seeking quashing of the impugned show cause notice and adjudication order.

Issue:

Whether interest liability can be imposed in an adjudication order under Section 73(9) of the GST Act when such interest was not quantified or demanded in the show cause notice?

Held:

The Hon’ble Allahabad High Court in M/s Sanjay Construction Thru. Authorized Representative Shivendra Kumar Versus State Of U.P. Thru. Prin. Secy. Finance Deptt. Lko. And Another - 2026 (2) TMI 1206 - ALLAHABAD HIGH COURTheld as under:

• Observed that, the show cause notice issued on November 29, 2024 did not quantify the amount of interest even though the interest liability related to the period 2020-21 which was known to the authorities at the time of issuance of the notice.
• Noted that, Section 75(7) of the GST Act clearly provides that the amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on grounds other than those specified in the notice.
• Observed that, failure to quantify the interest amount in the show cause notice would definitely be in contravention of Section 75(7) of the Act.
• Noted that, the argument of the GST authorities relying upon Section 75(9) has no application in the present case because that provision applies to situations where interest liability is not quantified in the order determining tax liability and not where it is omitted in the show cause notice.
• Observed that, when the adjudication order imposes interest beyond what is specified in the show cause notice, such order cannot stand in law.
• Held that, the impugned order passed under Section 73(9) and the show cause notice are liable to be quashed and set aside.
• Directed that, the authorities are at liberty to issue a fresh show cause notice in accordance with law and proceed accordingly.

Our Comments:

The Court has applied a strict interpretation of Section 75(7) of the GST Act, emphasizing that adjudication cannot travel beyond the show cause notice. The decision of this Coordinate Bench in M/s Vrinda Automation Versus State of Uttar Pradesh and another - 2025 (5) TMI 1435 - ALLAHABAD HIGH COURT, wherein it was held that penalty and interest demanded beyond the show cause notice are contrary to Section 75(7). The reasoning in that case was that the taxpayer must have an opportunity to respond to the precise demand raised in the notice and any demand introduced later in the order violates principles of natural justice and statutory limitation under Section 75(7). The present case follows the same reasoning and aligns with that precedent.

Relevant Provisions:

Section 75(7) of the CGST Act, 2017

“75. General provisions relating to determination of tax.-

(7) The amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.”

(9) The interest on the tax short paid or not paid shall be payable whether or not specified in the order determining the tax liability.”

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