2025 (8) TMI 1215 - HC - GST

Order set aside for breach of natural justice; rectification application to be reheard with opportunity of hearing

M/s. Mark Agencies Versus Department Of Trade And Taxes & Anr.

HC held that the impugned order dated 20 March 2025 violated principles of natural justice because the rectification application was rejected without ... Violation of principles of natural justice - Petitioner was not given a hearing in the rectification application which was filed by the Petitioner - seeking quashing of orders passed by the Sales Tax Officer Class II / AVATO - HELD THAT:- It is clear from a reading of the impugned order dated 20th March 2025, that no hearing has been afforded to the Petitioner. Under the third proviso to Section 161 of the CGST Act, principles of natural justice have to be followed especially if an adverse decision is being taken. This issue has also been considered by this Court in HVR Solar Private Limited v. Sales Tax Officer Class II AVATO Ward 67 & Anr. [2025 (4) TMI 730 - DELHI HIGH COURT] wherein it has been held that the rectification application has to be decided after hearing the party, if the decision is to go against the said party. In view of the fact that no hearing was given before rejecting the rectification application, the impugned order dated 20th March 2025, is set aside. The rectification application shall be adjudicated afresh by the Adjudicating Authority after giving a hearing to the Petitioner. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether a rectification application under Section 161 of the CGST Act, when resulting in an order adverse to the applicant, requires affording the applicant an opportunity of hearing in accordance with the principles of natural justice. 2. Whether an order rejecting a rectification application under Section 161 without hearing the applicant is sustainable where the impugned rectification adversely affects the rights of the applicant. 3. Whether established judicial precedents interpreting the third proviso to Section 161 require a fresh adjudication where the rectification order is passed without hearing and is adverse to the applicant. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of hearing under Section 161 where rectification adversely affects the applicant Legal framework: Section 161 (Rectification of errors apparent on the face of record) of the CGST Act permits an authority to rectify errors apparent on the face of record within specified time limits. The third proviso to Section 161 provides that where such rectification adversely affects any person, the principles of natural justice shall be followed by the authority carrying out such rectification. Precedent treatment: The Court followed prior High Court decisions (including a contemporaneous decision of this Court and an earlier Madras High Court decision) which interpreted the third proviso as mandating a hearing when a rectification will have adverse consequences for the applicant. Those authorities were applied, not distinguished or overruled. Interpretation and reasoning: The third proviso to Section 161 embeds principles of natural justice into the rectification process. When a rectification application is to be decided in a manner that adversely affects the applicant's rights (e.g., confirmation of demand, denial of claimed Input Tax Credit), the authority must afford an opportunity of hearing before passing the rectification order. The Court reasoned that the proviso contemplates an opportunity to be heard because rectification in such circumstances is not a mere clerical or arithmetical correction but a substantive adverse decision. The absence of a hearing cannot be justified by the fact that the rectification application was filed by the assessee; when the outcome is adverse, procedural fairness is required. Ratio vs. Obiter: Ratio - The third proviso to Section 161 mandates compliance with principles of natural justice (an opportunity of hearing) when a rectification will adversely affect any person; therefore, rectification orders having adverse consequences passed without hearing are unsustainable. Obiter - Observations about dispensing with hearing where rectification is allowed in favour of the applicant (i.e., that a hearing can be dispensed with where rectification benefits the applicant) are explanatory but follow directly from the statutory proviso. Conclusions: The Court concluded that where a rectification under Section 161 may adversely affect the applicant, a hearing must be afforded; failure to do so renders the rectification order invalid insofar as it adversely affects rights. Issue 2 - Validity of rejecting a rectification application without hearing when the decision is adverse Legal framework: Procedural fairness under administrative law and the specific statutory mandate in the third proviso to Section 161 requiring adherence to principles of natural justice when rectification adversely affects a person. Precedent treatment: The Court applied prior findings of this Court and the Madras High Court which set aside rectification orders that rejected rectification applications without giving the applicant an opportunity to be heard, particularly where the order does not demonstrate error apparent on the face of the record or reasoned consideration. Interpretation and reasoning: A rectification order that rejects an applicant's request without notice and without considered reasoning effectively imposes an adverse outcome without procedural safeguards. The Court found the impugned order did not show that an error was apparent on the face of the record nor that the applicant had been put on notice of adverse consequences. The statutory scheme distinguishes between purely clerical/arithmetic corrections (where the six-month period exception and no hearing may be permissible) and substantive rectifications affecting rights, which require hearing. Ratio vs. Obiter: Ratio - Rejection of a rectification application that adversely affects the applicant, without affording a hearing as required by the third proviso to Section 161, is vitiated by failure to follow principles of natural justice and must be set aside. Obiter - Emphasis on the need for reasoned orders and the practice of putting the assessee on notice when rejecting a rectification application is explanatory guidance reinforcing the ratio. Conclusions: The Court set aside the rectification order rejecting the application because no hearing was afforded and remitted the matter for fresh adjudication after hearing the applicant. Issue 3 - Consequence of failure to hear: requirement of fresh adjudication and scope of relief Legal framework: Relief appropriate where administrative action fails to comply with statutory procedural safeguards and principles of natural justice: setting aside impugned order and directing fresh decision after providing hearing. Precedent treatment: The Court followed established practice in comparable decisions directing fresh adjudication where procedural infirmity (no hearing) taints the rectification process. Prior decisions were applied to mandate fresh consideration rather than substituting the Court's view on merits. Interpretation and reasoning: Given the absence of a hearing and the statutory import of the proviso, the appropriate remedy is to set aside the rectification order insofar as it is adverse and remit the rectification application for fresh adjudication with notice to the applicant. The authority must communicate personal hearing notice (email and mobile identified) and, after hearing, pass a reasoned fresh order. The Court declined to go into merits of the underlying demand, leaving rights and remedies open. Ratio vs. Obiter: Ratio - The proper remedy for rectification orders passed without affording the statutory right to hearing where the decision is adverse is setting aside the impugned order and directing fresh adjudication after hearing. Obiter - Directions as to communication particulars (email/mobile) and the statement that rights and remedies remain open are administrative directions ancillary to the ratio. Conclusions: The impugned rectification order was set aside. The rectification application must be adjudicated afresh after affording a personal hearing to the applicant; subsequent orders, if any, will be open to challenge in accordance with law.