GST assessment order quashed for failing to issue mandatory Section 74(1) notice after rejected Section 74(5) proposal

The Madras HC held that a GST assessment order was invalid due to violation of natural justice principles. Revenue issued notice under Section 74(5) but failed to issue mandatory notice under Section 74(1) before passing the assessment order. The court ruled that after issuing DRC-01A under Section 74(5), if the assessee does not accept the proposal, revenue must issue independent notice under Section 74(1) in DRC-01 format before assessment. Since this mandatory procedural requirement was not followed, the assessment order was vitiated and could not withstand legal scrutiny.

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Issues:
1. Violation of principles of natural justice in passing an assessment order under GST Act.
2. Failure to issue mandatory notice under Section 74(1) of the CGST Act before passing the assessment order.

Issue 1: Violation of Principles of Natural Justice:
The petitioner, a sole proprietary concern engaged in the business of iron and steel scrap, filed returns under the GST Act regularly. However, a notice in Form No. DRC-01A was issued by the Department alleging that the petitioner wrongly availed Input Tax Credit (ITC) on purchases of iron and steel scrap. The petitioner replied to this notice on 19.10.2020, not accepting the proposal. Subsequently, an assessment order was passed under Section 75(1) of the Act, including ITC reversal and penalty. The petitioner challenged this order through a writ petition, claiming a violation of natural justice principles due to the absence of further notices under Section 74(1) of the Act before the final order was made.

Issue 2: Failure to Issue Mandatory Notice under Section 74(1) of the CGST Act:
During the hearing, the Court highlighted that before reversing an alleged wrong claim of ITC under Section 74(5) of the CGST Act, the petitioner should have been given an option to pay tax and penalty. This required the issuance of a notice in Form DRC-01A under Rule 142(1) of the CGST Rules, followed by a notice in DRC-01 under Section 74(1) of the Act. The absence of the latter notice rendered the proceedings leading to the impugned order vitiated. The respondent admitted that only the DRC-01A notice was issued, failing to comply with the mandatory requirement of issuing a DRC-01 notice under Section 74(1) before passing the assessment order.

In conclusion, the High Court held that the impugned order of assessment could not withstand legal scrutiny due to the failure to issue the mandatory notice under Section 74(1) of the Act. Consequently, the Court quashed the assessment orders and remitted the matters back to the respondent for reconsideration. The respondent was directed to issue the necessary DRC-01 notice to the petitioner and provide a fair opportunity for the petitioner to be heard before passing any assessment orders. The writ petitions were disposed of accordingly, with no costs awarded.

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