GST adjudication order quashed for failing to examine Section 73 jurisdiction after Section 65 audit proceedings

The HC quashed the GST adjudication order dated 28.02.2025 and restored proceedings to the adjudicating authority for fresh consideration. The court held that the authority failed to examine its jurisdiction to initiate Section 73 adjudication proceedings after completing Section 65 audit proceedings. Additionally, the authority did not properly consider whether a building constructed for lease could qualify as "plant" under Section 17(5)(d) for ITC purposes, following SC precedent distinguishing "the plant or machinery" from "the plant and machinery." The petitioner was granted opportunity to file fresh replies, and the deposited 10% amount was ordered to be held pending reconsideration.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the first respondent, having completed audit proceedings under Section 65 of the GST Act, could assume jurisdiction to initiate adjudication proceedings under Section 73 of the GST Act;

(b) Whether adjudication proceedings under Section 73 can be initiated without examining the merits of audit observations;

(c) The interpretation of the expression "the plant or machinery" as used in Section 17(5)(d) of the GST Act, particularly in light of the Apex Court's ruling that it cannot be equated with the expression "the plant and machinery" as defined by the Explanation to Section 17;

(d) Whether a building constructed for letting on lease can be classified as a "plant" within the meaning of "the plant or machinery" under Section 17(5)(d) of the GST Act, which is a factual question dependent on the nature of the business and the role of the building therein;

(e) The petitioner's entitlement to Input Tax Credit (ITC) in relation to the building and the correctness of the demand raised under the Order of Adjudication dated 28.02.2025.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Jurisdiction to initiate adjudication proceedings post-audit

The legal framework involves Sections 65 and 73 of the GST Act. Section 65 empowers the tax authorities to conduct audit proceedings to verify the correctness of returns and compliance, while Section 73 deals with adjudication proceedings for recovery of tax not paid or short paid.

The Court noted that the first respondent conducted audit proceedings under Section 65 and subsequently assumed jurisdiction to adjudicate under Section 73. The petitioner contended that such assumption of jurisdiction was impermissible because adjudication necessarily involves examining the merits of audit observations, and the audit process itself is distinct from adjudication.

The Court observed that the first respondent had not considered this jurisdictional question adequately. It held that the adjudicating authority must address whether it is appropriate to initiate adjudication after audit proceedings and must consider the petitioner's objections on this ground. The Court emphasized the need for complete adjudication, including consideration of jurisdictional aspects, before passing orders demanding tax.

Issue (c) and (d): Interpretation of "plant or machinery" and classification of building

The Apex Court's decision in the cited case clarified that the expression "the plant or machinery" in Section 17(5)(d) cannot be construed in the same manner as "the plant and machinery" defined by the Explanation to Section 17. This distinction is crucial because it affects the eligibility for Input Tax Credit on capital goods.

The Court held that whether a building qualifies as "plant" under Section 17(5)(d) is a factual determination that depends on the nature of the registered person's business and the role played by the building therein. It is not a question of law alone but requires a detailed examination of the business context and usage of the building.

The petitioner argued that the first respondent failed to consider this crucial factual question and the Apex Court's guidance. The Court agreed, noting that the adjudicating authority must examine whether the building constructed for letting on lease can be classified as a "plant" for the purposes of ITC under the GST Act.

Issue (e): Entitlement to Input Tax Credit and validity of demand

The petitioner sought a declaration of entitlement to ITC for a certain value, which was denied by the first respondent's Order of Adjudication leading to a demand for tax. The petitioner submitted replies and objections to the audit and adjudication proceedings, which were not adequately considered by the first respondent.

The Court found that the first respondent's failure to consider the petitioner's replies and the factual question regarding classification of the building resulted in an incomplete adjudication. Consequently, the demand raised under the impugned order could not be sustained without reconsideration.

Treatment of competing arguments

The petitioner's arguments centered on procedural and substantive lapses in the adjudication process, particularly the failure to consider jurisdictional issues and the factual question of classification of the building as "plant." The respondents relied on the order passed under the GST Act and the audit findings.

The Court balanced these arguments by emphasizing adherence to the Apex Court's ruling, the necessity of factual determination, and the requirement for a thorough adjudication process. It thus allowed partial relief by quashing the impugned order and restoring the proceedings for reconsideration.

3. SIGNIFICANT HOLDINGS

The Court held:

"It becomes imperative with the decision of the Apex Court in Commissioner of Central Goods and Services Tax vs. Safari Retreats Private Limited supra, it will be incumbent upon the Assessing Officer to decide whether there is cause for proceedings under Section 73 regarding a Building constructed for letting on lease and whether such Building would be within the meaning of 'a plant' as is contemplated under Section 17(5)(d) of the GST Act."

Further, the Court emphasized the necessity of jurisdictional scrutiny: "The first respondent has not considered this question at all and therefore, there must be limited interference restoring the proceedings to the first respondent with opportunity to the petitioner to file a fresh reply directing the first respondent to reconsider all grounds including the grounds on its jurisdiction to conduct the adjudicatory proceedings under Section 73 of the GST Act after completing the audit proceedings."

The Court quashed the impugned Order of Adjudication dated 28.02.2025 and its summary, restoring the matter to the first respondent for fresh consideration in accordance with the Apex Court's ruling and after considering all relevant grounds and replies of the petitioner.

The Court also ordered that the petitioner appear before the first respondent on a specified date and be permitted to file additional replies and documents, ensuring a comprehensive adjudication process.

On the issue of interim relief, the Court noted the petitioner's deposit of 10% of the demanded amount and directed that the amount be held by the respondents subject to the outcome of the restored proceedings.

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