2025 (6) TMI 669 - HC - GST

Legal Notice Defects Invalidate Tax Recovery: Procedural Safeguards Must Protect Taxpayer Rights Under Section 73

HC ruled that Summary of Show Cause Notice under Section 73 of AGST Act cannot substitute formal Show Cause Notice. The court found procedural violations ... Violation of principles of natural justice - Challenge to summary of show cause notice - SCN issued without passing any order under Section 73(1) of the AGST Act, 2017 - opportunity of hearing was not provided - HELD THAT:- This writ petition is having similar issue, the determination made in said Construction Catalysers Pvt. Ltd [2024 (10) TMI 279 - GAUHATI HIGH COURT], shall cover the present case, where it was held that 'The issuance of the Summary of the Show Cause Notice, Summary of the Statement and Summary of the Order do not dispense with the requirement of issuance of a proper Show Cause Notice and Statement as well as Page passing of the Order as per the mandate of Section 73 by the Proper Officer. As initiation of a proceedings under Section 73 and passing of an order under the same provision have consequences. The Show Cause Notice, Statement as well as the Order are all required to be authenticated in the manner stipulated in Rule 26 (3) of the Rules of 2017.' The issue raised in Construction Catalysers Pvt. Ltd. and the present petition is similar and therefore, the determination made in Construction Catalysers Pvt. Ltd, shall accordingly cover the present petition and as agreed to by the learned counsel for the parties, the present writ petition stands disposed of by setting aside the summary of order dated 27.02.2025 and the summary of show cause notice dated 26.11.2024 in terms of the determination and conclusion arrived at para 29 of Construction Catalysers Pvt. Ltd. Conclusion - The period from issuance of Summary to service of certified copy of judgment is excluded for limitation computation under Section 73(10). Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether issuance of the 'Summary of Show Cause Notice' in form GST DRC-01 can substitute for a Show Cause Notice issued under Section 73(1) of the Act. 2. Whether the Statement of determination of tax attached to the Summary (purporting to be Section 73(3) statement) can replace the requirement of a Show Cause Notice under Section 73(1). 3. Whether the Show Cause Notice, the Statement under Section 73(3) and the order under Section 73(9) must be issued by the Proper Officer as defined in Section 2(91) and authenticated in the manner prescribed (Rule 26(3) of the Rules, 2017). 4. Whether initiation of proceedings or passing of orders under Section 73 without affording opportunity of hearing (including compliance with Section 75(4)) is permissible. 5. Effect of setting aside impugned orders on limitation periods under Section 73(10) and whether time should be excluded while computing prescribed period where earlier defective proceedings are annulled and de novo proceedings are permitted. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Substitutability of Summary of Show Cause Notice (GST DRC-01) for Show Cause Notice under Section 73(1) Legal framework: Section 73(1) (initiation of recovery proceedings) of the Act requires issuance of a Show Cause Notice by the Proper Officer; statutory forms and summary documents (GST DRC-01) exist for administrative communication but do not amend substantive requirements of Section 73. Precedent Treatment: The Court followed the determination in the earlier coordinate-bench judgment (para 29 of Construction Catalysers) which held that the Summary in GST DRC-01 is not a substitute for a Show Cause Notice under Section 73(1). Interpretation and reasoning: The Court reasoned that issuance of a summary document cannot 'put the provision of Section 73 into motion' because Section 73(1) contemplates a substantive show cause communication by the Proper Officer specifying grounds and requiring response; procedural summaries are administrative adjuncts and do not satisfy the statutory mandate. Ratio vs. Obiter: Ratio - A Summary of the Show Cause Notice in GST DRC-01 does not substitute for the Show Cause Notice required by Section 73(1); initiation under Section 73 without the statutory notice is vitiated. Conclusion: Summary issuance alone is legally insufficient; proper Show Cause Notice under Section 73(1) must be issued to initiate proceedings. Issue 2 - Status of the Statement of Determination (Section 73(3)) attached to the Summary Legal framework: Section 73(3) contemplates a Statement of determination of tax, distinct from the Show Cause Notice in Section 73(1). The statutory scheme differentiates initiation (notice) from determination (statement) and subsequent order under Section 73(9). Precedent Treatment: The Court (following the earlier determination) treated the Statement attached to the Summary as only a statement under Section 73(3) and held it cannot replace the statutory Show Cause Notice. Interpretation and reasoning: The Statement of determination is post-notice material and cannot be equated to or treated as a cause-in-law to dispense with issuance of the Show Cause Notice; equating the two would subvert the procedural safeguards embedded in the Act. Ratio vs. Obiter: Ratio - The Statement under Section 73(3), even if attached to the Summary, cannot operate as a substitute for the Show Cause Notice under Section 73(1). Conclusion: The attachment of a Section 73(3) Statement to a Summary does not cure absence of a Section 73(1) Show Cause Notice; such initiation is invalid. Issue 3 - Requirement of Proper Officer and authentication under Rule 26(3) Legal framework: Section 2(91) defines 'Proper Officer'; statutory scheme requires that notices, statements and orders under Section 73 be issued by the Proper Officer. Rule 26(3) prescribes authentication/formal requirements for communications. Precedent Treatment: The Court followed prior determination emphasizing that Show Cause Notice, Section 73(3) Statement and Section 73(9) Order must emanate from the Proper Officer and must be authenticated as per Rule 26(3). Interpretation and reasoning: The Court observed that summaries (GST DRC-01, DRC-02, DRC-07) are administrative summaries and do not dispense with the statutory requirement that substantive documents be issued and authenticated by the Proper Officer. Authentication and issuance by the Proper Officer are integral to legality and enforceability. Ratio vs. Obiter: Ratio - Substantive initiation and orders under Section 73 must be issued and authenticated by the Proper Officer; summaries do not satisfy these requirements. Conclusion: Failure to have the Proper Officer issue and authenticate the requisite documents renders proceedings/orders vulnerable to challenge and interference. Issue 4 - Requirement of opportunity of hearing (Section 75(4)) and consequences of non-compliance Legal framework: Section 75(4) and allied provisions ensure the taxpayer's right to be heard before adverse orders affecting tax liability are passed; principles of natural justice apply. Precedent Treatment: The Court upheld the finding in the earlier judgment that impugned orders violated Section 75(4) due to lack of hearing. Interpretation and reasoning: The Court noted that the impugned orders were passed without affording statutory opportunity and that such procedural omission vitiates the orders. The Court also recognized that the respondent authorities appeared to have proceeded on a mistaken view that attachment of a determination to the Summary equated to valid notice and therefore bypassed hearing requirements. Ratio vs. Obiter: Ratio - Orders passed without affording the opportunity of hearing as required by Section 75(4) are in violation of the statute and liable to be set aside. Conclusion: Non-compliance with hearing requirements invalidates the impugned orders; affected orders were set aside on this ground. Issue 5 - Effect of setting aside impugned orders and exclusion of time under Section 73(10) Legal framework: Section 73(10) prescribes a period for passing orders; interruption or annulment of earlier defective proceedings raises the question of fair computation of limitation when de novo proceedings are permitted. Precedent Treatment: The Court, while setting aside defective orders, granted liberty to authorities to initiate de novo proceedings and directed that the period from issuance of the Summary till service of certified copy of judgment be excluded while computing the period under Section 73(10). Interpretation and reasoning: The Court balanced invalidation of orders (on procedural defects) with administrative interest in allowing fresh compliant proceedings. Exclusion of the intervening period is justified to avoid penalizing the State for defective earlier proceedings and to ensure meaningful exercise of power within the statutory timeframe once defects are cured. Ratio vs. Obiter: Ratio - When impugned orders are set aside for procedural defects and de novo proceedings are permitted, the period from issuance of the defective summary till service of certified copy of the judgment shall be excluded in computing the time prescribed under Section 73(10). Conclusion: Orders were quashed but liberty granted to initiate de novo proceedings; prescribed period under Section 73(10) shall exclude the period stated to avoid prejudice from prior defective action. Interrelationship of Issues and Final Determination The Court treated the issues as interrelated: issuing summaries in forms GST DRC-01/02/07 does not obviate statutory requirements that the Proper Officer issue authenticated Show Cause Notices, Statements and Orders under Section 73; failure to afford hearing under Section 75(4) further vitiates orders. Consequently, the impugned summary of show cause and summary of order were set aside, with liberty to initiate de novo proceedings and an express exclusion of the intervening period for computation under Section 73(10). The determination in the earlier coordinate-bench decision (para 29) was applied to dispose of the petition.