Assessee entitled to fresh opportunity of hearing where adjudicating authority ignored reply filed to DRC-01A intimation

The Hon’ble Karnataka High Court in the case of M/s K.K. Steel Traders Versus The Assistant Commissioner Of Commercial Taxes, The Joint Commissioner Of Commercial Taxes (Appeals), Bank Of Baroda, Bengaluru - 2026 (7) TMI 63 - KARNATAKA HIGH COURT disposed of the writ petition filed against the ex parte adjudication order passed under Section 74 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and the appellate order dismissing the appeal on the ground of limitation, thereby deferring the enforcement of the demand and granting one more opportunity of being heard, holding that the adjudicating authority proceeded on the erroneous premise that no reply had been filed, when in fact, the Assessee had duly responded to the intimation issued in Form GST DRC-01A by producing invoices, e-way bills and bank statements substantiating the genuineness of the Input Tax Credit (“ITC”) claimed.

Facts:

M/s K.K. Steel Traders (“the Petitioner”) was issued an intimation in Form GST DRC-01A dated July 06, 2023 (“the Intimation”) by the Assistant Commissioner of Commercial Taxes (“the Respondent”), alleging that the Petitioner had availed ITC on the basis of fabricated documents such as invoices of inward and outward suppliers.

The Petitioner filed a reply to the Intimation on August 16, 2023, producing documents viz. copies of invoices, e-way bills and bank statements evidencing the payment transactions, to substantiate that the purchases effected and the ITC claimed were genuine and duly supported by valid documents.

However, after a substantial gap of almost two years, the Respondent issued a Show Cause Notice dated April 02, 2025 (“the Impugned SCN”), followed by reminders dated May 13, 2025 and May 19, 2025. Thereafter, the Respondent passed an ex parte adjudication order dated August 30, 2025 (“the Impugned Order”) under Section 74 of the CGST Act read with Rule 142(5) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), confirming the demand and issuing the summary of order in Form GST DRC-07, on the premise that no reply had been received from the Petitioner and therefore, it was to be presumed that the transactions were clandestine transactions undertaken with the sole intention of availing ITC.

The appeal filed by the Petitioner against the Impugned Order was dismissed by the Appellate Authority on the ground of limitation vide order dated January 14, 2026 (“the Impugned Appellate Order”).

Aggrieved by the Impugned Order and the Impugned Appellate Order, the Petitioner filed a writ petition before the Hon’ble Karnataka High Court, contending that the reply filed in response to the Intimation, along with the supporting documents, was neither referred to nor considered by the Respondent while passing the Impugned Order.

On the other hand, the Revenue contended that certain assessees, in order to avoid the consequences of proceedings justified under Section 74 of the CGST Act, deliberately do not respond to the Show Cause Notice or the reminders issued. However, the Revenue fairly suggested that, if the Court were persuaded to grant another opportunity to the Petitioner, it may consider deferring the enforcement of the demand consequent to the Impugned Order, extending an opportunity to the Petitioner to file a response and participate in the personal hearing, with the caveat that if the Petitioner does not avail such opportunity, the Revenue may act upon the Impugned Order without passing another reiteration order.

Issue:

Whether the ex parte adjudication order passed under Section 74 of the CGST Act, on the erroneous premise that no reply was filed, without referring to or considering the reply and documents furnished by the Assessee in response to the intimation issued in Form GST DRC-01A, is sustainable in law?

Held:

The Hon’ble Karnataka High Court in M/s K.K. Steel Traders Versus The Assistant Commissioner Of Commercial Taxes, The Joint Commissioner Of Commercial Taxes (Appeals), Bank Of Baroda, Bengaluru - 2026 (7) TMI 63 - KARNATAKA HIGH COURT held as under:

• Observed that, the Petitioner, on being issued the Intimation in Form GST DRC-01A, had filed a response producing copies of the invoices, e-way bills and bank statements. However, the Impugned SCN was issued one and a half years from the date of receipt of the said response.
• Noted that, the Respondent neither referred to nor considered the said response and concluded the proceedings on the ground that the Petitioner had filed no response, thereby presuming that there were clandestine transactions based on spurious documents with the sole intention of availing ITC.
• Opined that, in the peculiar facts of the case, for the demand to be enforced, it would be reasonable if the authorities are called upon to extend an opportunity of hearing to the Petitioner, with liberty to file copies of the invoices, e-way bills and bank statements already produced in response to the Intimation, and to dissolve the order if the transactions are found to be genuine, otherwise to proceed in terms of the Impugned Order.
• Held that, the enforcement of the demand consequent to the Impugned Order shall stand deferred, reserving liberty to the Petitioner to file the originals of the invoices, e-way bills and bank statements before the Assessing Authority on or before July 06, 2026, to justify the genuineness of the transactions.
• Directed that, if the Petitioner does not avail this opportunity and refuses to participate, it shall be open to the Revenue to act upon the impugned demand, subject to the Petitioner’s right to avail the appellate remedy.

Our Comments:

Section 74 of the CGST Act empowers the proper officer to determine tax not paid or short paid, or ITC wrongly availed or utilised, by reason of fraud, wilful misstatement or suppression of facts to evade tax. Further, Rule 142(1A) of the CGST Rules provides that the proper officer may, before service of the notice, communicate the details of any tax, interest and penalty as ascertained by him, in Part A of Form GST DRC-01A, and Rule 142(2A) of the CGST Rules enables the person concerned to file his submissions against the proposed liability in Part B of Form GST DRC-01A. The very object of this pre-notice intimation mechanism is to afford the taxpayer an opportunity to explain the alleged discrepancies at the threshold and thereby curtail avoidable litigation. Where the taxpayer duly responds to the intimation with supporting documents, and the adjudicating authority thereafter proceeds without even adverting to such response, the entire purpose of the mechanism stands defeated and the resultant order is rendered a non-speaking order passed in violation of the principles of natural justice.

Furthermore, Section 75(4) of the CGST Act mandates that an opportunity of hearing shall be granted where a request is received in writing from the person chargeable with tax or penalty, or where any adverse decision is contemplated against such person. InBharat Mint And Allied Chemicals Versus Commissioner Commercial Tax And 2 Others - 2022 (3) TMI 492 - ALLAHABAD HIGH COURT, the Hon’ble Allahabad High Court held that where an adverse decision is contemplated against the assessee, the grant of an opportunity of personal hearing is mandatory, irrespective of whether the assessee has opted for the same. Similarly, in Mahaveer Trading Company Versus Deputy Commissioner State Tax And Another - 2024 (3) TMI 334 - ALLAHABAD HIGH COURT, the Hon’ble Allahabad High Court set aside the adjudication order passed without affording an opportunity of personal hearing, observing that the requirement under Section 75(4) of the CGST Act admits of no exception where an adverse order is proposed to be passed.

It is also pertinent to note that, although the Petitioner’s appeal had been dismissed on the ground of limitation, the Hon’ble High Court exercised its extraordinary writ jurisdiction in view of the gross violation of the principles of natural justice. This is in consonance with the settled position laid down by the Hon’ble Supreme Court in Whirlpool Corporation Versus Registrar of Trade Marks, Mumbai & Ors. - 1998 (10) TMI 510 - Supreme Court, wherein it was held that the availability of an alternate remedy does not operate as a bar to the maintainability of a writ petition, inter alia, where the order has been passed in violation of the principles of natural justice.

The present ruling reiterates that adjudication under Section 74 of the CGST Act cannot be reduced to an empty formality, and that a reply filed at the DRC-01A stage forms an integral part of the record which the adjudicating authority is bound to consider before drawing any adverse presumption. Taxpayers would be well-advised to preserve the acknowledgments of replies filed at every stage of the proceedings and to specifically place such replies on record in response to the subsequent Show Cause Notice, so as to effectively demonstrate non-application of mind, should the authority choose to ignore the same.

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