2023 (12) TMI 1166 - HC - GST

Show cause notice quashed due to improper audit under Section 65(3) without statutory 15-day notice period

The AP HC set aside a show cause notice under Section 73 based on an improper audit report under Section 65(3) of AP GST Act, 2017. The court found that ... Right to statutory notice of not less than fifteen working days prior to conduct of audit - Obligation to consider the registered person's reply before finalising audit findings - Principles of natural justice in tax audit proceedings - Invalidity of show cause notice founded on an audit report prepared in breach of statutory notice requirements - Permissibility of issuing a show cause notice under assessment provisions independent of audit, subject to due noticeRight to statutory notice of not less than fifteen working days prior to conduct of audit - Obligation to consider the registered person's reply before finalising audit findings - Principles of natural justice in tax audit proceedings - Rule 101(4) requirement to finalise audit findings after due consideration of reply - Whether the audit notice and subsequent conduct of audit complied with Section 65(3) and Rule 101(4) of the Andhra Pradesh GST enactments and whether the registered person's reply was required to be considered before finalisation of the audit report. - HELD THAT: - The Court held that Section 65(3) mandates informing the registered person by notice not less than fifteen working days prior to conduct of audit, and Rule 101(4) requires that the proper officer finalise audit findings only after due consideration of any reply. Those provisions embody the principles of natural justice in audit proceedings. In the present case the revised notice was uploaded on 14.09.2023 and the audit report was finalised on 29.09.2023, such that there were not clearly fifteen working days available; the audit findings were finalised without waiting for completion of the statutory notice period and without due consideration of the reply which was sent on 28.09.2023 (and received on 03.10.2023). For these reasons the audit report was held to be inconsistent with the statutory scheme and the requirements of natural justice, and could not stand. [Paras 13, 14, 15, 16, 17]Audit report dated 29.09.2023 and the process of finalising the audit were set aside for failure to comply with Section 65(3) and Rule 101(4) and for breach of principles of natural justice; the registered person's reply must be taken into account before finalisation.Invalidity of show cause notice founded on an audit report prepared in breach of statutory notice requirements - Permissibility of issuing a show cause notice under assessment provisions independent of audit, subject to due notice - Whether the show cause notice issued under Section 73 could be sustained where it expressly relied upon the audit report which had been set aside for statutory infirmity. - HELD THAT: - Although the revenue may, in general, issue a show cause notice under Section 73 independent of an audit, the Court examined the impugned notice and found it referenced the audit report dated 29.09.2023. Because that audit report was held invalid for non-compliance with statutory notice requirements and natural justice, the show cause notice founded on it could not be sustained. The Court nevertheless clarified that the authorities remain free to proceed under Section 73 independent of any audit, provided they do so in accordance with law and give due notice to the petitioner. [Paras 16, 18]Impugned show cause notice under Section 73 (which was based on the invalid audit report) was set aside; authorities may still proceed under Section 73 independently but only in accordance with law and after giving due notice.Remand for fresh consideration after taking into account the reply - Direction to pass fresh audit order/report in accordance with law - Whether the matter should be remitted to the authorities for fresh action and what directions should be given for further proceedings. - HELD THAT: - In view of the invalidation of the audit report and the show cause notice that relied upon it, the Court directed the respondent authorities to pass a fresh audit order/report after taking into consideration the petitioner's reply dated 28.09.2023 (received 03.10.2023) and thereafter to proceed further in accordance with law. The Court explicitly permitted the authorities, if they wish to proceed under Section 73 independent of any audit, to do so but only after providing due notice to the petitioner. [Paras 17]The matter was remitted to the respondent authorities to pass a fresh audit order/report after considering the petitioner's reply and to proceed thereafter in accordance with law; liberty granted to proceed under Section 73 independently only with due notice.Final Conclusion: Writ petition allowed in part: the audit report dated 29.09.2023 and the consequential show cause notice under Section 73 (to the extent it was founded on that audit report) are set aside; authorities directed to reconsider the audit after taking the petitioner's reply into account and to proceed thereafter in accordance with law, subject to the requirement of due notice if proceeding under Section 73 independently. Issues involved:The issues involved in this judgment include the violation of principles of natural justice, the mandatory statutory provisions, and the legality of the audit and show cause notice under the Andhra Pradesh Goods and Service Tax Act, 2017.Violation of Principles of Natural Justice and Statutory Provisions:The petitioner filed a writ petition seeking relief against an order levying tax and interest without considering their response and in violation of Section 65 of the Andhra Pradesh Goods and Service Tax Act, 2017. The petitioner argued that the audit was conducted and a report was submitted without proper consideration of their response within the statutory period. The Court noted that the notice of audit did not provide the required 15 working days prior to the audit as mandated by Section 65(3) of the Act. The audit report was finalized before the statutory notice period, violating the principles of natural justice. The Court set aside the show cause notice and audit findings, directing authorities to reconsider after taking into account the petitioner's response.Validity of Show Cause Notice and Audit Report:The respondent argued that under Section 73 of the Act, a show cause notice can be issued independently of the audit report. However, the Court found that in this case, the show cause notice referred to the audit report dated 29.09.2023, indicating a reliance on the audit findings. The Court held that the audit report was not in accordance with statutory provisions and violated natural justice. Consequently, the Court set aside the show cause notice and audit findings, instructing authorities to issue a fresh order/report considering the petitioner's response.Conclusion:The High Court of Andhra Pradesh set aside the impugned show cause notice under Section 73 of the Act and the audit findings, directing authorities to reconsider the matter after taking into account the petitioner's response. The Court clarified that if authorities intend to proceed under Section 73 independently of any audit under Section 65, they must do so in accordance with the law and provide due notice to the petitioner. The writ petition was allowed in part, with no order as to costs, and any pending miscellaneous petitions were closed as a result of the judgment.