Tax authorities violated natural justice by issuing summary notices without proper show cause notice under section 73(1) and denying hearing opportunity

The Gauhati HC disposed of a writ petition challenging tax proceedings under CGST Act, 2017. The court found violation of natural justice principles where authorities issued summary of show cause notice without proper SCN under section 73(1) and passed summary order without providing hearing opportunity to petitioner. Following precedent in Construction Catalysers Pvt. Ltd. case, the HC set aside both the summary show cause notice dated 12.12.2023 and summary order dated 22.04.2024, disposing of the petition in favor of petitioner.

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The core legal questions considered in this judgment revolve around the procedural validity and compliance requirements under Section 73 of the Central Goods and Services Tax (CGST) Act, 2017, specifically:

1. Whether issuance of a summary of show cause notice without issuance of a formal show cause notice under Section 73(1) of the CGST Act is legally valid.

2. Whether passing a summary of order under Section 73(9) without passing a formal order under the same section complies with statutory mandates.

3. Whether the petitioner was entitled to an opportunity of hearing before passing the summary order, and if the failure to provide such an opportunity violates principles of natural justice and Section 75(4) of the CGST Act.

4. The legal effect and distinction between the summary documents (summary of show cause notice, summary of statement of determination of tax, and summary of order) and the formal notices and orders required under the CGST Act.

Issue-wise Detailed Analysis

1. Validity of Issuance of Summary of Show Cause Notice Without Formal Show Cause Notice under Section 73(1)

The legal framework mandates that proceedings for recovery of tax not paid or short paid must be initiated by issuance of a show cause notice under Section 73(1) of the CGST Act, 2017. This notice is a prerequisite to put the provisions of Section 73 into motion and must be issued by the Proper Officer as defined under Section 2(91) of the Act. The summary of show cause notice, often issued in Form GST DRC-01, is not a substitute for the formal show cause notice.

The Court referred extensively to the precedent set in a coordinate Bench decision in the case of Construction Catalysers Pvt. Ltd. The Court in that case held that the summary of show cause notice cannot replace the formal show cause notice required under Section 73(1). The formal notice must be issued to initiate proceedings validly. The attachment to the summary of show cause notice, which is the statement of determination of tax under Section 73(3), also cannot substitute the formal show cause notice.

The respondents admitted that no formal show cause notice under Section 73(1) was issued, only a summary was. The Court found this to be a procedural irregularity and held that initiation of proceedings without a formal show cause notice is bad in law.

2. Passing of Summary of Order Without Formal Order under Section 73(9)

Section 73(9) requires that the Proper Officer pass an order after considering the representations made by the person to whom the show cause notice is issued. The order must be authenticated as per Rule 26(3) of the CGST Rules, 2017.

The Court observed that the summary of order issued was not a formal order under Section 73(9) and was passed without giving the petitioner an opportunity of hearing. The summary of order, issued in Form GST DRC-07, does not dispense with the requirement of passing a formal order by the Proper Officer. The failure to pass a formal order and to provide an opportunity of hearing violates the statutory mandate and principles of natural justice.

3. Right to Opportunity of Hearing and Violation of Section 75(4)

Section 75(4) of the CGST Act mandates that before passing any order, the person concerned must be given a reasonable opportunity of being heard. The petitioner had requested such an opportunity, which was not granted.

The Court held that passing the summary of order without providing the opportunity of hearing violated Section 75(4) and the principles of natural justice. This procedural lapse rendered the impugned orders invalid.

4. Distinction Between Summary Documents and Formal Notices/Orders

The Court emphasized the clear distinction between summary documents (summary of show cause notice, summary of statement of determination, and summary of order) and the formal show cause notice, statement, and order required under the CGST Act. The summary documents are administrative tools for recording and communicating information but do not replace the formal statutory documents that trigger and conclude proceedings under Section 73.

The Court noted that the Proper Officer must issue the formal show cause notice, statement of determination, and order, all authenticated as per Rule 26(3). The issuance of summary documents alone does not satisfy the procedural requirements of the Act.

Application of Law to Facts and Treatment of Competing Arguments

The petitioner challenged the issuance of summary notices and orders without formal notices and orders, and without opportunity of hearing. The respondents contended that the summary documents sufficed. Both parties agreed that the issue was substantially covered by the earlier decision in Construction Catalysers Pvt. Ltd.

The Court adopted the reasoning in the earlier decision, rejecting the respondents' contention that summary documents could substitute formal notices and orders. The Court concluded that the impugned summary show cause notice and summary order were invalid and set them aside.

Conclusions

The Court held that:

• The summary of show cause notice is not a substitute for the formal show cause notice under Section 73(1).
• The formal show cause notice and order must be issued by the Proper Officer and authenticated as per statutory requirements.
• The petitioner must be given an opportunity of hearing before passing any order under Section 73(9), and failure to do so violates Section 75(4) and principles of natural justice.
• The impugned summary show cause notice dated 12.12.2023 and summary order dated 22.04.2024 are set aside.
• Liberty is granted to the authorities to initiate de novo proceedings under Section 73 if deemed fit.
• The period from issuance of the summary show cause notice till service of the certified copy of the judgment shall be excluded in computing the limitation period under Section 73(10).

Significant Holdings

The Court's key legal reasoning is preserved verbatim from the earlier decision as follows:

"(A) The Summary of the Show Cause Notice in GST DRC-01 is not a substitute to the Show Cause Notice to be issued in terms with Section 73(1) of the Central Act as well as the State Act. Irrespective of issuance of the Summary of the Show Cause Notice, the Proper Officer has to issue a Show Cause Notice to put the provision of Section 73 into motion."

"(B) The Show Cause Notice to be issued in terms with Section 73(1) of the Central Act or State Act cannot be confused with the Statement of the determination of tax to be issued in terms with Section 73(3) of the Central Act or the State Act."

"(C) It is also noticed that the Show Cause Notice and the Statement in terms with Section 73(1) and 73(3) of both the Central Act or the State Act respectively are required to be issued only by the Proper Officer as defined in Section 2(91). Additionally, the order under Section 73(9) is also required to be passed by the Proper officer."

"(D) The Impugned Orders challenged in the writ petitions are in violation of Section 75(4) as no opportunity of hearing was given as already discussed herein above."

"(F) This Court also cannot be unmindful of the fact that it is on account of certain technicalities and the manner in which the impugned orders were passed, this Court interfered with the impugned orders and hence set aside and quashed the same. It is also relevant to take note of that the respondent authorities were under the impression that issuance of attachment of the determination of tax which was attached to the Summary of the Show Cause Notice would constitute a valid Show Cause Notice. Under such circumstances, in the interest of justice, this Court while setting aside the impugned Orders-in-Original as detailed out in the Appendix, grants liberty to the respondent authorities to initiate de novo proceedings under Section 73, if deemed fit for the relevant financial year in question."

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