Delhi HC sets aside tax demand order for denying personal hearing, directs fresh proceedings with proper notice

Delhi HC set aside adjudication order dated 25th August, 2024 and notice dated 28th December, 2023 issued by Central Board of Indirect Taxes and Customs for violation of principles of natural justice. Court found petitioner was not given personal hearing before demand was made. HC directed that personal hearing notice be issued to petitioner and personal hearing be conducted before passing fresh order. Petition disposed of with directions for compliance with natural justice principles.

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The core legal questions considered in this judgment include: (1) the validity and legality of Notification No. 56/2023-Central Tax dated 28th December 2023 issued under Section 168A of the Central Goods and Services Tax Act, 2017 (CGST Act); (2) whether the proper procedural requirements, including prior recommendation by the GST Council, were complied with before issuance of the impugned notifications extending deadlines for adjudication under the GST Act; (3) the effect of the conflicting judicial pronouncements from various High Courts on the validity of these notifications; (4) the applicability of the Supreme Court's pending decision in S.L.P No. 4240/2025 concerning the vires of Section 168A and the impugned notifications; and (5) the procedural fairness in the adjudication process, specifically whether the petitioner was afforded an opportunity of personal hearing before the demand and penalty orders were passed under Section 73 of the GST Act.

Regarding the validity of the impugned notifications, the Court analyzed the statutory framework under Section 168A of the CGST Act, which mandates prior recommendation of the GST Council before extending time limits for adjudication of show cause notices and passing orders. The Court noted that while Notification No. 9/2023-Central Tax was issued following the GST Council's recommendation, Notification No. 56/2023-Central Tax was issued without such prior recommendation, with ratification occurring only after issuance. This procedural irregularity formed the basis of the challenge to Notification No. 56/2023.

The Court observed that various High Courts have taken divergent views on the validity of these notifications: the Allahabad and Patna High Courts upheld the notifications, whereas the Guwahati High Court quashed Notification No. 56/2023-Central Tax. The Telangana High Court also expressed reservations regarding the validity of Notification No. 56/2023 without deciding on its vires, and this issue is presently sub judice before the Supreme Court in S.L.P No. 4240/2025. The Supreme Court's order in this SLP highlighted the cleavage of judicial opinion and issued notice, indicating the matter's complexity and importance.

The Court emphasized judicial discipline and refrained from expressing any opinion on the validity of Section 168A and the impugned notifications, noting that the Punjab and Haryana High Court had similarly deferred to the Supreme Court's forthcoming decision. Consequently, the Court held that the challenge to Notification No. 56/2023 in the present petition would be subject to the Supreme Court's ruling.

On the procedural fairness issue, the petitioner contended that it was not granted a personal hearing before the adjudication order confirming a demand of approximately Rs. 9,96,765/- was passed. The impugned order arose from a show cause notice dated 9th May 2024, to which the petitioner filed a reply on 4th June 2024. However, the adjudication order noted that the petitioner did not avail the opportunity for personal hearing. The Court scrutinized the record and confirmed that no personal hearing was conducted prior to passing the order. The order specifically mentioned a mismatch in input tax credit claims and that the petitioner admitted to claiming ITC without proper accumulation, leading to the demand.

Applying principles of natural justice and procedural fairness, the Court set aside the impugned order and directed that a personal hearing be granted to the petitioner. The Court ordered issuance of a personal hearing notice to the petitioner's counsel's email address. It clarified that the validity of the impugned notification remains an open question and that any subsequent order passed by the adjudicating authority shall be subject to the Supreme Court's final decision in the pending SLP.

In balancing the competing arguments, the Court acknowledged the petitioner's inability to file replies and attend personal hearings due to various reasons, which resulted in ex-parte adjudication and imposition of heavy demands and penalties. The Court's approach was to protect the petitioner's right to be heard without prejudging the larger question of the notifications' validity, thereby preserving the petitioner's substantive and procedural rights pending the Supreme Court's authoritative pronouncement.

The Court also categorized the petitions before it into six broad categories and indicated that, depending on the category, appropriate orders could be passed affording parties an opportunity to present their case or pursue appellate remedies. This pragmatic approach sought to balance the need for procedural fairness with the ongoing litigation over the notifications' validity.

Significant holdings from the judgment include the following verbatim excerpt from the impugned adjudication order, which the Court analyzed to determine the absence of personal hearing:

"W.r.t. mismatch in Table 8A of GSTR-9 with GSTR-3B for the FY 2019-20 amounting to Rs. 8634/- SGST Rs. 8634/- CGST Rs. 92797 /- IGST, the taxpayer had not availed the opportunity of personal hearing afforded to him and accordingly the case has been decided on the basis on the reply filed by the taxpayer on 01-06-2024. As per the reply the taxpayer had stated that CGTMSE had not reported the ITC on their fees amount and in spite of their take up with them the same are still not reflecting. In other words it is admitted by the taxpayer that the input has been claimed without its accumulation irrespective of whatever is the reason and accordingly I raise the demand against the taxpayer."

The Court's core principles established include:

• The necessity of compliance with statutory procedural requirements under Section 168A of the CGST Act before issuance of notifications extending adjudication deadlines.
• The importance of judicial discipline and restraint in cases where the Supreme Court has taken cognizance of conflicting High Court decisions on the same issue.
• The fundamental right of a taxpayer to be afforded a personal hearing before passing an adverse adjudication order under Section 73 of the GST Act.
• The principle that procedural irregularities in adjudication orders, such as failure to grant personal hearing, warrant setting aside such orders and affording the opportunity to be heard.
• The interim nature of reliefs granted pending final adjudication by the Supreme Court on the validity of the impugned notifications.

In conclusion, the Court set aside the impugned order for lack of personal hearing and directed issuance of a personal hearing notice to the petitioner. The Court refrained from adjudicating on the validity of Notification No. 56/2023-Central Tax, leaving that issue open pending the Supreme Court's decision. The petition was disposed of accordingly, with pending applications also disposed of.

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