Order demanding tax and interest on wrong ITC set aside for lack of hearing under natural justice principles

The HC set aside the impugned order demanding tax and interest on wrongly availed ITC due to violation of natural justice, as no hearing was provided to the petitioner. The court refused to impose any deposit condition but noted the petitioner's voluntary payment of 25% of the disputed tax, which was accepted by the respondent. The matter was remanded to the respondent for fresh consideration after affording an opportunity of hearing. Petition disposed of.

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1. ISSUES PRESENTED and CONSIDERED

• Whether the impugned order demanding payment of disputed GST tax, interest, and penalty was passed in violation of the principles of natural justice by not affording an opportunity of hearing to the petitioner.
• Whether the attachment of the petitioner's bank account under Section 79 of the TN GST & CGST Act, 2017, consequent to the impugned order, is sustainable after quashing the order.
• Whether the petitioner's willingness to deposit 25% of the disputed tax can be considered in the context of quashing and remanding the matter for fresh adjudication.
• The procedural correctness and legality of the recovery proceedings initiated by the respondent based on discrepancies between GSTR-3B and GSTR-2B returns.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Violation of Principles of Natural Justice in Passing the Impugned Order

Relevant legal framework and precedents: The principles of natural justice require that a party affected by an adverse order must be given a reasonable opportunity to be heard before such order is passed. This includes issuance of a show cause notice, opportunity to file reply, and personal hearing.

Court's interpretation and reasoning: The Court observed that the impugned order dated 29.01.2025 was passed without affording the petitioner any opportunity to present its case. Although notices were issued, the petitioner neither replied nor appeared for personal hearing. The Court emphasized that passing an order without hearing violates fundamental principles of natural justice.

Key evidence and findings: The record showed issuance of show cause notice and reminders, but no response or appearance by the petitioner. The impugned order was passed directly demanding payment of tax, interest, and penalty.

Application of law to facts: The Court held that despite procedural steps taken by the respondent, the absence of any hearing or consideration of the petitioner's submissions rendered the order illegal.

Treatment of competing arguments: The petitioner argued violation of natural justice; the respondent did not dispute the lack of hearing but relied on statutory provisions for recovery. The Court prioritized adherence to natural justice over procedural expediency.

Conclusions: The impugned order was quashed on the ground of violation of natural justice principles.

Issue 2: Attachment of Bank Account under Section 79 of TN GST & CGST Act, 2017

Relevant legal framework: Section 79 empowers the tax authority to provisionally attach property, including bank accounts, to protect revenue during recovery proceedings.

Court's interpretation and reasoning: Since the impugned order underpinning the attachment was quashed, the attachment could not subsist. The Court directed the respondent to issue appropriate instructions to the bank to immediately de-freeze the petitioner's account.

Key evidence and findings: The petitioner's bank account was frozen leading to hardship, and this was directly linked to the impugned order.

Application of law to facts: Attachment being a consequential action flowing from the impugned order, its legality depended on the validity of that order.

Treatment of competing arguments: No substantive argument was advanced by the respondent to sustain the attachment post-quashing.

Conclusions: Attachment was ordered to be lifted forthwith as it lacked legal basis after quashing the order.

Issue 3: Consideration of Petitioner's Offer to Deposit 25% of Disputed Tax

Relevant legal framework: Courts may consider interim deposits in tax disputes as a condition for granting relief or remand for fresh adjudication.

Court's interpretation and reasoning: Although the Court noted that it cannot impose a deposit condition when quashing an order for violation of natural justice, the petitioner's voluntary offer to deposit 25% of the disputed tax was accepted with the respondent's concurrence.

Key evidence and findings: The petitioner expressed readiness to deposit 25% of the disputed amount; the respondent agreed to this proposal.

Application of law to facts: The Court granted liberty to the petitioner to make the deposit within two weeks, which would facilitate fresh consideration of the matter by the respondent.

Treatment of competing arguments: The respondent's consent to the deposit was a significant factor in the Court's directions.

Conclusions: The petitioner was permitted to deposit 25% of the disputed tax as a condition precedent to fresh adjudication.

Issue 4: Procedural and Legal Validity of Recovery Proceedings Based on Discrepancies in GSTR-3B and GSTR-2B

Relevant legal framework: The GST laws mandate reconciliation of returns filed (GSTR-3B and GSTR-2B) and allow recovery of wrongly availed Input Tax Credit (ITC) with interest and penalty under Sections 50(3) and related provisions of the TN GST Act 2017 and CGST Act 2017.

Court's interpretation and reasoning: The Court acknowledged the statutory basis for initiating recovery proceedings based on discrepancies detected during scrutiny of returns. However, such proceedings must comply with procedural safeguards, including notice and hearing.

Key evidence and findings: The respondent issued a show cause notice and demanded payment of tax, interest, and penalty on the difference in ITC availed.

Application of law to facts: The recovery action was valid in principle but flawed in execution due to non-compliance with natural justice.

Treatment of competing arguments: The petitioner did not dispute the existence of discrepancies but challenged the procedural irregularity in the order.

Conclusions: Recovery proceedings were lawful but required fresh consideration after affording the petitioner an opportunity to be heard.

Additional Directions and Procedural Orders

• The impugned order was quashed.
• The matter was remanded to the respondent for fresh consideration.
• The petitioner was granted liberty to deposit 25% of the disputed tax within two weeks of receiving the order.
• Upon deposit, the petitioner must file a reply with supporting documents within two weeks.
• The respondent must thereafter issue a clear 14-day notice for personal hearing before passing a fresh order in accordance with law.
• The respondent was directed to lift the attachment on the petitioner's bank account forthwith.

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