Section 174(2)(e) CGST saves pre-GST powers, but audits must follow Sections 65-66; challenge to notice dismissed

HC held that by virtue of Section 174(2)(e) of the CGST Act, 2017, the powers of authorities regarding inquiry, verification (including scrutiny and audit), assessment, adjudication and recovery for the pre-01.07.2017 period stand saved as if the Finance Act, 1994 had not been repealed. However, the procedural mechanism for audit under Section 72A of the 1994 Act is not saved; therefore, any post-GST audit for the saved period must be conducted in accordance with Chapter XIII (Sections 65 and 66) of the CGST Act, 2017. Finding no infirmity in the impugned audit and demand-cum-show cause notice for 2015-2017, HC dismissed the petition.

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Issues Involved:
1. Legality of the audit conducted by the Central Excise & Service Tax Audit Party.
2. Validity of the demand-cum-show cause notice dated 07.05.2019.
3. Applicability of Section 72A of the Finance Act, 1994 and Section 174 of the CGST Act, 2017.

Summary:

Issue 1: Legality of the Audit Conducted by the Central Excise & Service Tax Audit Party

The petitioner challenged the audit conducted by the Central Excise & Service Tax Audit Party, arguing that under Section 72A of the Finance Act, 1994, only the Principal Commissioner or Commissioner of Central Excise could direct a special audit based on specific reasons to believe certain conditions existed. The petitioner contended that since the Finance Act, 1994, was repealed by the CGST Act, 2017, the audit initiated on 17.08.2017 was invalid. The court, however, noted that Section 174(2)(e) of the CGST Act, 2017, saved the powers of inquiry, verification (including scrutiny and audit), and other proceedings related to periods before 01.07.2017, and thus, the audit was valid but should be conducted as per the CGST Act, 2017's procedures.

Issue 2: Validity of the Demand-cum-Show Cause Notice Dated 07.05.2019

The petitioner argued that the demand-cum-show cause notice was invalid because it was based on an audit conducted under a repealed act. The court held that the notice was valid as the audit powers were saved under Section 174(2)(e) of the CGST Act, 2017, and the audit for the period from April 2015 to March 2017 was conducted in accordance with the CGST Act, 2017. The court emphasized that the audit should follow the procedures outlined in Chapter XIII of the CGST Act, 2017, which includes Section 65 for audits by tax authorities and Section 66 for special audits.

Issue 3: Applicability of Section 72A of the Finance Act, 1994, and Section 174 of the CGST Act, 2017

The petitioner claimed that the audit should have been conducted under Section 72A of the Finance Act, 1994, which required specific conditions and reasons to believe for a special audit. The court clarified that although Section 72A was repealed, the powers to conduct audits for periods before 01.07.2017 were saved under Section 174(2)(e) of the CGST Act, 2017. The court concluded that the audit should be conducted as per the procedures in the CGST Act, 2017, making the audit and subsequent demand-cum-show cause notice valid.

Conclusion

The court dismissed the writ petition, upholding the validity of the audit and the demand-cum-show cause notice, stating that the audit powers for periods before 01.07.2017 were saved under the CGST Act, 2017, and should be conducted according to its procedures.

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