2022 (11) TMI 552 - HC - GST

Audit Report Invalidated: Procedural Flaws Expose Critical Gaps in GST Compliance and Taxpayer Rights Under Rule 101(4)

HC set aside final audit report under Orissa GST Act due to procedural irregularities. The court found non-compliance with Rule 101(4) regarding ... Right to be heard - audit under Section 65 of the OGST Act - time limit for completion of audit - commencement of audit (Explanation to Section 65(4)) - proviso to Section 65(4) - extension of audit period - final audit report under Section 65(6) - opportunity to reply to draft audit report (Rule 101(4) of OGST Rules, 2017) - quashing of administrative action for procedural infirmityOpportunity to reply to draft audit report (Rule 101(4) of OGST Rules, 2017) - right to be heard - final audit report under Section 65(6) - quashing of administrative action for procedural infirmity - Whether the final audit report dated 30th June, 2022 could be sustained where the Petitioner was not afforded the opportunity to file a reply to the draft audit report and the final report was issued on the same day. - HELD THAT: - The Court held that Rule 101(4) requires that the proper officer inform the registered person of discrepancies observed in the audit and permit the person to file a reply, after which the proper officer shall finalise the findings. In the present case the draft audit report and the final audit report were both issued on 30th June, 2022 and the Petitioner was not given the opportunity to file a reply. That procedural requirement of affording the Petitioner 30 days to reply was not followed. For that short but decisive ground the final audit report dated 30th June, 2022 issued under Section 65(6) of the OGST Act was set aside. [Paras 7, 8, 9]Final audit report dated 30th June, 2022 set aside for failure to accord the statutory/procedural opportunity to reply to the draft audit report.Commencement of audit (Explanation to Section 65(4)) - time limit for completion of audit - proviso to Section 65(4) - extension of audit period - audit under Section 65 of the OGST Act - Whether the three-month period for completion of the audit began on 22nd March, 2022 and whether the final audit report issued on 30th June, 2022 complied with the statutory time limit. - HELD THAT: - Relying on the Explanation to Section 65(4), the Court held that the 'commencement of audit' is the later of the date on which records called for are made available or the actual institution of audit. In the present facts the three-month period commenced on 22nd March, 2022, and therefore the audit should have been completed with the submission of the final audit report on or before 22nd June, 2022. The issuance of the final audit report on 30th June, 2022 therefore breached the statutory time limit unless a reasons-recorded extension under the proviso to Section 65(4) had been granted by the Commissioner. [Paras 5, 6, 7, 8]Three-month period for completion of audit commenced on 22nd March, 2022; final audit report dated 30th June, 2022 exceeded the statutory period absent a recorded extension under the proviso to Section 65(4).Proviso to Section 65(4) - extension of audit period - audit under Section 65 of the OGST Act - opportunity to reply to draft audit report (Rule 101(4) of OGST Rules, 2017) - Remedial directions and conditional remand for completion of the audit consistent with statutory time-limits and procedural safeguards. - HELD THAT: - The Court set aside the final audit report and restored the matter to the stage of the draft audit report, but recognised that unless the Commissioner records reasons and grants the maximum permissible extension under the proviso to Section 65(4), the audit cannot be completed lawfully. Subject to the Commissioner granting the extension, the Court directed that the Petitioner file its reply to the draft audit report with supporting documents by 28th November, 2022 and that after considering the reply the Opposite Party shall issue the final audit report under Section 65(6) not later than 21st December, 2022. The Court made clear that if the statutory extension is not granted by reasoned order, the draft audit report would stand quashed. [Paras 10, 11, 12]Matter remitted with directions: Petitioner to file reply by 28th November, 2022 and final audit report to be issued by 21st December, 2022, contingent on the Commissioner granting a reasoned extension under the proviso to Section 65(4); absent such extension the draft audit report is quashed.Final Conclusion: The final audit report dated 30th June, 2022 is quashed for failure to afford the Petitioner the opportunity to reply to the draft audit report and for breach of the statutory time-limit; the matter is returned to the stage of the draft audit report with directions for the Petitioner to file a reply and for the Department to issue a final report within the specified timeline, subject to a reasoned extension by the Commissioner under the proviso to Section 65(4), failing which the draft audit report shall be quashed. Issues:1. Challenge to draft and final audit reports under the Orissa GST Act, 2017.2. Non-compliance with procedural requirements for filing a reply to the draft audit report.3. Deadline extension for completion of the audit exercise under Section 65(4) of the OGST Act.4. Directions for further proceedings in light of procedural lapses.Analysis:The High Court of Orissa addressed a writ petition challenging both a draft audit report and a final audit report issued under the Orissa GST Act, 2017. The petitioner, a Senior Advocate, highlighted the non-compliance with Rule 101(4) of the OGST Rules, 2017, which mandates the opportunity for the registered person to file a reply to discrepancies observed in the audit report. The court noted that in this case, the petitioner was not granted the chance to respond to the draft audit report before the final report was issued on the same day, raising procedural concerns.Furthermore, the court examined the timeline for completing the audit exercise under Section 65(4) of the OGST Act, emphasizing that the audit must be finalized within three months from the commencement date, with a provision for a six-month extension if necessary. The court clarified that the three-month period for the audit commenced when the petitioner submitted the requested documents, setting the deadline for the final audit report issuance. Noting the authority's issuance of both reports on the same day after the three-month deadline had passed, the court found procedural irregularities.In light of the procedural lapses, the court set aside the final audit report and directed the petitioner to file a reply to the draft audit report by a specified date. The court further instructed the department to issue the final audit report within a revised deadline, subject to the Commissioner's extension of time as per Section 65(4) of the OGST Act. The court's directions aimed to ensure compliance with procedural requirements and the timely completion of the audit exercise, preventing the futility of the entire process if deadlines were not met. The judgment provided a structured approach for further proceedings, emphasizing adherence to statutory provisions and procedural fairness.