2022 (7) TMI 448 - HC - GST

GST proceedings quashed for issuing only summary notice without proper show cause notice under Section 74(1)

The Jharkhand HC quashed GST proceedings initiated against a company for irregular input tax credit claims. The court held that issuing only a summary ... Summary of show-cause notice in Form DRC-01 - show-cause notice under Section 74(1) - violation of principles of natural justice - no estoppel against statute - search under Section 67Summary of show-cause notice in Form DRC-01 - show-cause notice under Section 74(1) - violation of principles of natural justice - Whether issuance of the summary in Form DRC-01 can substitute for the show-cause notice required by Section 74(1) and whether proceedings founded on such summary are sustainable. - HELD THAT: - The Court held that Rule 142(1)(a) requires that the summary in Form DRC-01 be issued 'along with' the show-cause notice, and thus the statutory scheme contemplates issuance of both the detailed show-cause notice and its electronic summary. A Form DRC-01 summary cannot substitute for a proper show-cause notice under Section 74(1). Proceedings under Section 74, which allege fraud or willful misstatement or suppression of facts, impose serious consequences and must plead the specific ingredients and charges so that the noticee has a fair and informed opportunity to meet the allegations. The impugned summary lacked the foundational allegations required for a Section 74 notice and therefore amounted to a violation of principles of natural justice; consequently the challenge was maintainable in writ jurisdiction and the orders founded on such defective notice could not be sustained. The Court relied on its earlier reasoning in M/S NKAS Services Pvt. Ltd. and the principles that at the show-cause stage the noticee must be informed of specific charges to enable effective defence. [Paras 7, 8, 11]Form GST DRC-01 (summary) does not substitute for the mandatory show-cause notice under Section 74(1); proceedings and orders founded on the defective notice are quashed for violation of natural justice.No estoppel against statute - rectification under Section 161 - Whether the petitioner's filing of a concise reply or subsequent rectification and reduction of liability cures the jurisdictional defect arising from non-issuance of the statutory show-cause notice, or whether estoppel or consent can validate the proceedings. - HELD THAT: - The Court reaffirmed that jurisdiction must flow from statute and cannot be conferred by consent, estoppel, or a bona fide mistake of the assessee. The petitioner's furnishing of a concise reply to the Form DRC-01 and subsequent rectification orders do not cure the fundamental defect that a proper show-cause notice under Section 74(1) was not issued. Reliance on equitable doctrines such as estoppel cannot validate statutory non-compliance; the State cannot derive jurisdiction from the petitioner's reply. The Court noted precedent that statutory powers cannot be ousted by consent and applied that principle to sustain quashing of the impugned orders despite the reply and rectification proceedings. [Paras 9, 10, 11]The petitioner's reply and rectification cannot cure the jurisdictional defect; estoppel or consent does not validate proceedings where statutory preconditions (issuance of show-cause notice) are absent.Final Conclusion: Both writ petitions are allowed: the summary show-cause notices in Form GST DRC-01 dated 14.09.2018, the orders dated 25.02.2019 under Section 74(9), and the rectified orders dated 03.03.2021 are quashed and set aside; respondents are at liberty to initiate fresh proceedings in accordance with law. Issues Involved:1. Irregular claim of input tax credit (ITC) without payment.2. Non-transportation of goods in heavy vehicles.3. Purchases from a single supplier without proof of payment.4. Difference in stock upon physical verification.5. Issuance and service of mandatory show-cause notice under Section 74(1) of the JGST Act.6. Validity of proceedings initiated based on summary show-cause notices in Form DRC-01.Issue-wise Detailed Analysis:1. Irregular Claim of Input Tax Credit (ITC) Without Payment:The petitioner was accused of claiming ITC without making payment of value and tax of the inputs to the supplier within the stipulated six months, contravening the 2nd/3rd proviso to Section 16(2) of the JGST Act. The court noted that the search conducted under Section 67 of the JGST Act led to the issuance of summary show-cause notices in Form DRC-01, which the petitioner responded to, claiming that the ITC was legally claimed and the goods were physically received.2. Non-Transportation of Goods in Heavy Vehicles:The court observed that the petitioner was also accused of not transporting goods worth Rs. 27 lakh in heavy vehicles as per the vehicle numbers, constituting 1% of the total credit of Rs. 19.43 Cr. This was one of the grounds for the search and subsequent proceedings.3. Purchases from a Single Supplier Without Proof of Payment:In W.P. (T) No.1984/2021, the petitioner was accused of making purchases only from one supplier without proof of payment. Additionally, a physical verification revealed a discrepancy in the stock maintained in the books of accounts.4. Difference in Stock Upon Physical Verification:The court noted that during the physical verification, a difference in stock was found compared to the stock maintained in the books of accounts, which was another ground for the proceedings against the petitioner.5. Issuance and Service of Mandatory Show-Cause Notice Under Section 74(1) of the JGST Act:The petitioner contended that no show-cause notice under Section 74(1) was issued and served upon them, which is mandatory and imperative in character. The court emphasized that Form DRC-01 is not a substitute for a show-cause notice under Section 74(1) and that the entire proceedings were without jurisdiction due to the lack of a proper show-cause notice.6. Validity of Proceedings Initiated Based on Summary Show-Cause Notices in Form DRC-01:The court referred to Rule 142(1)(a) of the JGST Rules, which mandates that the summary of the show-cause notice in Form DRC-01 should be issued 'along with' the show-cause notice under Section 74(1). The court cited previous judgments, including the case of M/S NKAS Services Pvt. Ltd. vs. State of Jharkhand & Ors., which held that a summary of the show-cause notice cannot substitute a proper show-cause notice. The court concluded that the proceedings initiated based on Form DRC-01 were not sustainable as they did not fulfill the requirements of a proper show-cause notice, thereby violating principles of natural justice.Conclusion:The court quashed the summary of show-cause notices dated 14.09.2018, the orders dated 25.02.2019 issued under Section 74(9) of the JGST Act, and the final orders dated 3.3.2021 passed after rectification. The court allowed the writ applications, stating that the respondents are at liberty to initiate fresh proceedings from the same stage in accordance with the law.