Order under Section 74 of GST Act quashed for no personal hearing, violating Section 75(4) natural justice rules

The HC held that the impugned order issued under Section 74 of the Gujarat GST Act was without jurisdiction and violated principles of natural justice by not providing the petitioner a personal hearing before raising a demand. The court found failure to consider the petitioner's reply and no opportunity for hearing, breaching Section 75(4) of the GST Act. Relying on Delhi HC precedent, it ruled that telephonic conversations or representative visits do not constitute personal hearings. Consequently, the order was quashed and the matter remanded to the respondent for a fresh de novo order after affording the petitioner a proper personal hearing in compliance with statutory requirements. Petition allowed by way of remand.

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1. ISSUES PRESENTED and CONSIDERED

1. Whether the impugned order passed under Section 74 of the Gujarat Goods and Services Tax Act, 2017 (GST Act) in Form GST DRC-07 is legally valid in light of the alleged denial of personal hearing to the petitioner.

2. Whether the initiation of proceedings under Section 74 of the GST Act is without jurisdiction, considering prior proceedings under Section 73 and scrutiny of returns.

3. Whether the telephonic conversation held with the petitioner's representative can be considered as a valid personal hearing under Section 75(4) of the GST Act.

4. Whether the principles of natural justice, particularly audi alteram partem, have been complied with in the adjudication process under the GST Act.

5. Whether the petitioner was given sufficient opportunity to submit evidence and respond to allegations of wrongful claim of Input Tax Credit (ITC) from cancelled dealers.

6. Whether the provisions of Section 75(4) of the GST Act have been complied with, particularly regarding the requirement of granting personal hearing before passing an adverse order.

7. Whether the petitioner has an alternative remedy available under Section 107 of the GST Act, and the impact of this on the exercise of extraordinary jurisdiction under Article 227 of the Constitution.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the impugned order under Section 74 of the GST Act in light of alleged denial of personal hearing

Legal framework and precedents: Section 75(4) of the GST Act mandates that an opportunity of hearing must be granted before passing an order imposing tax or penalty. The principle of audi alteram partem is a fundamental rule of natural justice requiring that no person should be condemned unheard. The Hon'ble Delhi High Court in M/s. Jupiter Exports v. Commissioner of GST emphasized that telephonic conversations cannot substitute for personal hearings under Sections 75(4) and 75(5) of the GST Act. The Bombay High Court in BA Continuum India Pvt. Ltd. v. Union of India similarly held that telephonic conversations do not constitute personal hearings and that such hearings must be meaningful and recorded.

Court's interpretation and reasoning: The Court examined the order-sheet which revealed that the only interaction with the petitioner's representative prior to passing the impugned order was a telephonic conversation on 07.08.2024. The petitioner's representative had appeared physically on 31.07.2024 and submitted evidence, and the petitioner had requested a personal hearing in writing. However, no in-person hearing was granted; instead, the authority relied on a brief telephonic discussion.

The Court concurred with the Delhi High Court's reasoning that telephonic conversations cannot be treated as a substitute for personal hearings under the GST Act. The opportunity of hearing is not a mere formality but a substantive right to be heard in a meaningful manner before an adverse order is passed.

Key evidence and findings: The order-sheet and affidavit-in-reply confirmed the sequence of notices, replies, and submissions. The petitioner's repeated requests for personal hearing were not complied with. The telephonic conversation lasted briefly and was not recorded as a formal hearing. No opportunity was given to explain or clarify the evidence in a hearing setting.

Application of law to facts: The statutory requirement of personal hearing under Section 75(4) was not fulfilled. The telephonic conversation did not satisfy the mandate of a personal hearing or the principles of natural justice.

Treatment of competing arguments: The respondents argued that sufficient opportunity was provided through notices, replies, and the telephonic conversation, and that the petitioner's representative had appeared physically on one occasion. They further contended that the general provisions under Section 75(4) are satisfied by the procedural notices and replies. The Court rejected this, emphasizing that statutory personal hearing cannot be substituted by informal telephonic talks, and the physical appearance without formal hearing does not fulfill the requirement.

Conclusion: The impugned order is liable to be quashed for violation of Section 75(4) and principles of natural justice due to denial of personal hearing.

Issue 2: Jurisdiction of proceedings under Section 74 of the GST Act in light of prior proceedings under Section 73

Legal framework and precedents: Section 73 deals with tax not paid or short paid due to reasons other than fraud or willful misstatement, whereas Section 74 applies to cases involving fraud, willful misstatement, or suppression of facts. The jurisdiction for initiating proceedings under Section 74 is specific and requires fraud or suppression to be alleged.

Court's interpretation and reasoning: The Court noted that the petitioner's earlier proceedings under Section 73 were dropped after reconciliation of returns. The subsequent proceedings under Section 74 were initiated on different grounds, specifically alleging purchases from cancelled dealers and non-genuine taxpayers, which is a separate issue from the earlier scrutiny. Therefore, the initiation of Section 74 proceedings was not barred by the prior Section 73 proceedings.

Key evidence and findings: The respondents issued a show cause notice under Section 74 alleging ITC claimed on purchases from cancelled dealers, which was not part of the earlier Section 73 scrutiny. The petitioner's contention that the Section 74 proceedings are without jurisdiction was rejected on the basis that the subject matter differs.

Application of law to facts: Since the issues under Section 74 are distinct and involve allegations of fraud, the initiation of proceedings under Section 74 is valid and within jurisdiction.

Treatment of competing arguments: The petitioner argued that the same issue was under scrutiny and thus Section 74 proceedings were not maintainable. The Court found this argument unpersuasive given the different factual basis and legal provisions invoked.

Conclusion: The proceedings under Section 74 were validly initiated and not barred by prior proceedings under Section 73.

Issue 3: Whether telephonic conversation can be considered a valid personal hearing under Section 75(4) of the GST Act

Legal framework and precedents: Section 75(4) requires that an opportunity of hearing be granted before passing an order imposing tax or penalty. The Delhi High Court and Bombay High Court have held that telephonic conversations do not constitute personal hearings and cannot substitute the statutory requirement.

Court's interpretation and reasoning: The Court held that the telephonic conversation on 07.08.2024 was brief and informal, with no record maintained of the discussion. This cannot be regarded as a personal hearing within the meaning of Section 75(4). The statutory mandate requires a meaningful opportunity to be heard, which telephonic conversations do not satisfy.

Key evidence and findings: The order-sheet and affidavit-in-reply showed the telephonic conversation was limited to confirming submissions already made and did not allow for a detailed hearing or presentation of evidence.

Application of law to facts: The telephonic conversation did not meet the statutory requirement of personal hearing and was therefore insufficient.

Treatment of competing arguments: Respondents contended that the telephonic conversation was sufficient and that the petitioner had multiple opportunities to submit replies and appear physically. The Court rejected this, emphasizing the statutory requirement for a formal hearing.

Conclusion: Telephonic conversation cannot be treated as personal hearing under Section 75(4) of the GST Act.

Issue 4: Compliance with principles of natural justice, particularly audi alteram partem

Legal framework and precedents: The principle of audi alteram partem requires that no person should be condemned without being heard. This principle is incorporated in the GST Act through provisions mandating personal hearing before adverse orders.

Court's interpretation and reasoning: The Court found that the petitioner was denied a meaningful opportunity of hearing, as the only interaction was a telephonic conversation that did not allow for detailed submissions or clarifications. This violated the principle of audi alteram partem and statutory mandates.

Key evidence and findings: The petitioner's repeated requests for personal hearing were ignored. The telephonic conversation was brief and did not constitute a hearing. The order was passed without considering the petitioner's detailed submissions in a hearing.

Application of law to facts: The failure to grant personal hearing amounted to breach of natural justice and invalidated the impugned order.

Treatment of competing arguments: Respondents argued that notices and replies constituted sufficient opportunity. The Court held that such procedural steps do not replace the right to personal hearing before adverse orders.

Conclusion: Principles of natural justice were violated due to denial of personal hearing.

Issue 5: Sufficiency of opportunity provided to the petitioner to submit evidence and respond to ITC allegations

Legal framework and precedents: The GST Act requires that the assessee be given opportunity to submit evidence and explanations before passing an order under Sections 73 and 74.

Court's interpretation and reasoning: The petitioner submitted replies, additional documents, and appeared physically once. However, the Court found that the absence of a formal personal hearing deprived the petitioner of a fair chance to explain and clarify evidence, especially regarding ITC claimed from cancelled dealers.

Key evidence and findings: Petitioner's replies dated 06.06.2024 and 05.08.2024, physical appearance on 31.07.2024, and requests for personal hearing were on record. Respondents acknowledged receipt but did not grant formal hearing.

Application of law to facts: Mere submission of documents and physical presence without formal hearing does not satisfy the requirement of sufficient opportunity under the GST Act.

Treatment of competing arguments: Respondents argued that multiple notices and replies constituted sufficient opportunity. The Court disagreed, emphasizing that the statutory scheme requires a formal hearing.

Conclusion: Opportunity provided was insufficient as no formal personal hearing was granted.

Issue 6: Compliance with Section 75(4) of the GST Act regarding personal hearing before adverse order

Legal framework and precedents: Section 75(4) mandates that where a request for hearing is received in writing or an adverse order is contemplated, a personal hearing must be granted.

Court's interpretation and reasoning: The petitioner requested personal hearing in writing. The respondents did not grant such hearing but relied on telephonic conversation. The Court held this to be non-compliance with Section 75(4).

Key evidence and findings: Written requests for hearing and the order-sheet showing no formal hearing.

Application of law to facts: Non-grant of personal hearing despite written request violates Section 75(4).

Treatment of competing arguments: Respondents argued that notices and replies satisfy the hearing requirement. The Court rejected this, holding that statutory personal hearing is mandatory.

Conclusion: Section 75(4) was not complied with.

Issue 7: Availability of alternative remedy under Section 107 of the GST Act and its impact on exercise of extraordinary jurisdiction

Legal framework and precedents: Section 107 provides appellate remedy against orders passed under GST Act. Typically, availability of alternative remedy weighs against interference under Article 227.

Court's interpretation and reasoning: The Court noted that the petitioner has an alternative remedy of appeal. However, since the impugned order suffers from jurisdictional defect and violation of natural justice, interference under Article 227 is justified to prevent miscarriage of justice.

Key evidence and findings: Affidavit-in-reply and submissions acknowledging alternative remedy.

Application of law to facts: Availability of alternative remedy does not preclude exercise of extraordinary jurisdiction where fundamental procedural lapses are evident.

Treatment of competing arguments: Respondents urged dismissal on alternative remedy grounds. The Court allowed interference due to violation of statutory mandate and natural justice.

Conclusion: Interference under Article 227 is justified despite availability of alternative remedy.

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