Refund claim rejection upheld as petitioner must pursue Section 107 appellate remedy instead of direct writ petition

Delhi HC disposed of writ petition challenging rejection of refund claim on time-barred grounds involving late fee and wrongful input tax availment. Court held that since the adjudication order contained detailed consideration of factual issues and petitioner's submissions, writ petition was not entertainable at this stage. Petitioner was directed to pursue appellate remedy under Section 107 of CGST Act instead of approaching HC directly through writ jurisdiction.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

(a) Whether the impugned order dated 7th January, 2025, passed under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) imposing demands and penalties on the Petitioner for alleged late fee and wrongful availment of input tax or short payment of tax is sustainable.

(b) Whether the rejection of the Petitioner's refund claim as time-barred under Section 54(1) of the CGST Act was correct, especially in light of the Supreme Court's order in the Suo Motu Writ Petition regarding extension of limitation periods.

(c) Whether the issuance of multiple audit memos and demand notices during the audit process under Section 65 of the CGST Act was legally valid and whether such memos could be treated as demand notices.

(d) Whether the Show Cause Notice (SCN) dated 1st August, 2024 issued under Section 74 of the CGST Act is liable to be quashed on grounds of procedural irregularities or otherwise.

(e) The availability and propriety of writ jurisdiction under Articles 226 and 227 of the Constitution of India to challenge the impugned order at this stage, or whether the Petitioner ought to avail appellate remedies under Section 107 of the CGST Act.

(f) Whether the Petitioner can seek waiver of pre-deposit required for filing an appeal before the Appellate Authority on grounds of financial incapacity.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity of the impugned order under Section 74 of the CGST Act imposing demands and penalties

The legal framework governing this issue is Section 74 of the CGST Act, which deals with determination of tax not paid or short paid or input tax wrongly availed or utilized by reason of fraud or willful misstatement or suppression of facts. The impugned order was passed after adjudication of the Show Cause Notice issued pursuant to audit findings.

The Court observed that the adjudication order dated 7th January, 2025 contains detailed consideration of the Petitioner's replies and submissions. The Court refrained from entertaining the writ petition against the impugned order at this stage, emphasizing that the Petitioner must avail the statutory appellate remedy under Section 107 of the CGST Act. The Court's reasoning reflects the principle that adjudicatory orders under the CGST Act are subject to statutory appeal mechanisms, and writ jurisdiction is not ordinarily exercised to bypass these remedies.

The Court's conclusion was that the writ petition challenging the impugned order is premature and not maintainable, directing the Petitioner to approach the Appellate Authority.

(b) Rejection of refund claim as time barred and effect of extension of limitation

The Petitioner had filed a refund claim in 2019 which was rejected as time barred under Section 54(1) of the CGST Act. The Petitioner earlier filed a writ petition which resulted in an order dated 6th February, 2023 directing processing of the refund claim in light of the Supreme Court's Suo Motu Writ Petition (Civil) No. 3 of 2020 relating to extension of limitation periods.

The Court noted that the said order explicitly recognized that the benefit of relaxation in limitation was not accorded to the Petitioner and directed the respondents to process the refund application in accordance with law. This established that the limitation period for filing refund claims was extended, and the Petitioner was entitled to benefit of such extension.

This issue was thus settled in favor of the Petitioner in the earlier proceedings, and the Court did not reopen it in the present petition.

(c) Legality of issuance of multiple audit memos during audit under Section 65 of the CGST Act

Section 65 of the CGST Act empowers the proper officer to conduct audit of registered persons and requires that the findings be communicated to the taxpayer along with reasons and rights. However, the Act does not contemplate issuance of multiple audit memos determining tax liability or demanding payment during the audit process.

The Petitioner challenged the issuance of multiple audit memos, contending that they were time barred and not authorized as demand notices. The Court observed that the audit memos issued not only indicated audit findings but also called upon the Petitioner to pay tax, interest, and penalties, effectively functioning as demand letters.

The Court noted that the respondents' counsel failed to point out any statutory provision authorizing issuance of such demand letters during audit. The Court held that issuance of multiple audit memos as demand notices was irregular and not supported by the CGST Act/DGST Act. However, the Court clarified that such irregularities in audit memos do not vitiate the validity of the subsequent Show Cause Notice or the adjudication proceedings.

This analysis distinguishes between procedural irregularities in audit communications and the substantive validity of the SCN and adjudication order.

(d) Validity of the Show Cause Notice dated 1st August, 2024

The SCN was issued under Section 74 of the CGST Act based on audit findings. The Petitioner contended that the SCN was liable to be quashed due to procedural irregularities including issuance of multiple audit memos and the audit being conducted beyond the stipulated period under Section 65(4).

The Court rejected the contention that the SCN was liable to be quashed at the threshold stage. It held that although the SCN was premised on audit findings, it was issued within the statutory framework and any irregularities in audit memos did not affect the SCN's validity. The Court emphasized that the Petitioner was entitled to raise all contentions and defenses during adjudication and appeal stages.

(e) Availability of writ jurisdiction versus statutory appellate remedy

The Petitioner invoked writ jurisdiction under Articles 226 and 227 of the Constitution challenging the impugned order. The Court held that writ jurisdiction is not ordinarily available to challenge adjudicatory orders under the CGST Act where an efficacious statutory remedy of appeal exists under Section 107.

The Court directed the Petitioner to avail the appellate remedy and noted that the Petitioner's challenge at this stage was premature. The Court also clarified that if the appeal is filed within 30 days, it shall not be dismissed on grounds of limitation.

(f) Waiver of pre-deposit on grounds of financial incapacity

The Petitioner sought waiver of pre-deposit required for filing appeal before the Appellate Authority on grounds of financial inability. The Court declined to grant such waiver but directed that the Petitioner may make the prayer before the Appellate Authority itself, which has jurisdiction to consider such requests.

3. SIGNIFICANT HOLDINGS

"The impugned SCN may be premised on the findings of the audit report, the same is within the statutory framework. Any irregularities in issuing the audit memos does not impinge the validity of the impugned SCN."

"The CGST Act / DGST Act does not provide for issuance of the multiple audit memos determining the liability of a tax payer."

"At this stage, a writ petition would not be entertainable. The Petitioner ought to avail of the appellate remedy under Section 107 of the CGST Act in accordance with law."

"If the appeal is filed within the next 30 days, the same shall not be dismissed on the ground of limitation."

Core principles established include:

• The statutory appellate remedy under the CGST Act is the appropriate forum to challenge adjudicatory orders, and writ jurisdiction is not to be exercised to circumvent this remedy.
• Audit memos issued under Section 65 are meant to communicate audit findings and are not demand notices; issuance of multiple such memos as demand letters is irregular and unauthorized.
• Procedural irregularities in audit processes do not invalidate subsequent Show Cause Notices or adjudication orders passed under the CGST Act.
• The extension of limitation periods as recognized by the Supreme Court applies to refund claims under the CGST Act.
• Financial incapacity to make pre-deposit is a matter to be considered by the Appellate Authority and not by the High Court at the writ stage.

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