2025 (3) TMI 836 - HC - GST

GST Show Cause Notice Under Section 74 Invalidated Due to Procedural Errors and Natural Justice Violations

The HC examined a GST-related show cause notice under Section 74, finding procedural irregularities. The court invalidated the notice due to ... Validity of common SCN issued u/s 74 of the CGST Act, 2017 - non-compliance with Rule 142 of the CGST Rules, 2017 - violation of principles of natural justice - HELD THAT:- It is reflected from record that before this court could hear the case on the question of admission and interim relief, Respondent No. 2 has passed common final order dated 21.01.2025 during the pendency of these petitions to which challenge has been made by the petitioners in their respective petitions by carrying out amendment in pursuance of order dated 23.01.2025 of this court, mainly on the ground that since the show cause notice was itself without jurisdiction and was issued without complying with mandatory provision of Rule 142 of CGST Rules, the subsequent order is non est in light of the principle that if initial action is not in consonance with law, all subsequent and consequential proceedings would fall through for the reason that illegality strikes at the root of the order. In such a fact-situation, the legal maxim 'sublato fundamento cadit opus' meaning thereby that foundation being removed, structure/work falls, comes into play and applies on all scores in the present case. Also, Once the basis of a proceeding is gone, all consequential acts, actions, orders would fall to the ground automatically and this principle is applicable to judicial, quasi-judicial and administrative proceedings equally. It is also a settled legal proposition that if an order is bad in its inception, it does not get sanctified at a later stage. A subsequent action/development cannot validate an action which was not lawful at its inception, for the reason that the illegality strikes at the root of the order. Another ground for challenge of common final order dated 21.01.2025 which has been raised is that the petitioners herein specifically sought right to cross examine witnesses whose testimony are being relied upon by the Respondents but admittedly such right was not afforded to the petitioner despite making multiple request and failure to grant opportunity of cross examination is violative of principles of natural justice and on this ground common final order dated 21.01.2025 is bad in law and liable to be set aside. This court is of the considered opinion that prima facie case exists in favour of the petitioners and if the common impugned final order dated 21.01.2025 is not stayed during the pendency of the present petitions then the petitioners would suffer irreparably - these petitions are admitted for final hearing and it is directed that effect and operation of common impugned final order dated 21.01.2025 shall remain stayed, pending adjudication of these petitions. Conclusion - i) The non-compliance with Rule 142 of the CGST Rules potentially invalidates the show cause notice, echoing the consistent judicial view that such procedural lapses are fatal to the validity of notices. ii) The invocation of Section 74 without allegations of tax evasion is inappropriate. These petitions are admitted for final hearing and it is directed that effect and operation of common impugned final order dated 21.01.2025 shall remain stayed, pending adjudication of these petitions. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:1. Whether the common show cause notice dated 29.09.2023 issued under Section 74 of the CGST Act, 2017, was valid given the alleged non-compliance with Rule 142 of the CGST Rules, 2017.2. Whether the issuance of the show cause notice under Section 74 was appropriate in the absence of allegations of tax evasion, specifically in cases of 'circular trading' where GST was paid at each step.3. Whether the common final order dated 21.01.2025, issued during the pendency of the petitions, was valid given the alleged jurisdictional issues and non-compliance with natural justice principles, particularly the right to cross-examine witnesses.ISSUE-WISE DETAILED ANALYSIS1. Validity of the Show Cause Notice under Rule 142 of CGST Rules, 2017The petitioners challenged the show cause notice on the grounds of non-compliance with Rule 142, which mandates the electronic uploading of the notice and its summary. The Court considered past judgments, including New Hanumat Marbles Vs. State of Punjab and others, which consistently held that non-compliance with Rule 142 renders a show cause notice invalid. The Court found that the failure to upload the notice electronically constituted a violation of the mandatory provisions, potentially invalidating the notice.2. Jurisdictional Appropriateness under Section 74 of CGST Act, 2017The petitioners argued that Section 74 notices are only applicable in cases of tax evasion, which was not alleged in the notice. Instead, the issue pertained to 'circular trading' with GST duly paid. The Court referenced the Apex Court's decision in CC, CE & ST Bangalore Vs. Northern Operating Systems Private Limited, which clarified that Section 74 should only be invoked when there is evidence of fraud or misstatement intended to evade tax. The absence of such allegations in the notice suggested a jurisdictional overreach.3. Validity of the Final Order and Principles of Natural JusticeThe final order was challenged on the basis that it was issued without jurisdiction and violated principles of natural justice. The petitioners were denied the right to cross-examine witnesses, a fundamental aspect of a fair hearing. The Court considered precedents like Andaman Timber Industries Vs. Commissioner of Central Excise, which emphasized the necessity of cross-examination for ensuring justice. The failure to provide this right was seen as a significant procedural lapse.The Court also applied the legal maxim 'sublato fundamento cadit opus,' meaning that if the foundation (the show cause notice) is removed, the structure (the final order) falls. This principle was supported by cases such as State of Punjab Vs. Debender Pal Singh, which held that subsequent actions cannot validate an initially unlawful action.SIGNIFICANT HOLDINGSThe Court held that:- The non-compliance with Rule 142 of the CGST Rules potentially invalidates the show cause notice, echoing the consistent judicial view that such procedural lapses are fatal to the validity of notices.- The invocation of Section 74 without allegations of tax evasion was inappropriate, aligning with the Apex Court's interpretation that such provisions are reserved for cases involving fraud or misstatement.- The denial of the right to cross-examine witnesses constituted a breach of natural justice principles, rendering the final order procedurally flawed.- The principle 'sublato fundamento cadit opus' applies, indicating that the invalidity of the initial show cause notice undermines all subsequent proceedings.In conclusion, the Court found a prima facie case in favor of the petitioners, warranting the stay of the final order dated 21.01.2025 pending the resolution of the petitions. The respondents were granted the opportunity to file a reply, with the matters listed for final hearing in due course.