2025 (9) TMI 465 - HC - GST

Adjudicatory and appellate orders quashed for denying disclosure of show-cause materials, tax demand of Rs.40,37,877 set aside

Khokan Motors Works Private Limited Versus Senior Joint Commissioner of State Tax, Siliguri Circle, SGST & Ors.

Khokan Motors Works Private Limited Versus Senior Joint Commissioner of State Tax, Siliguri Circle, SGST & Ors. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the show cause notice and annexures disclosed adequate material of the alleged tax-evasion charges to the affected party so as to satisfy the requirements of the principles of natural justice. 2. Whether non-disclosure of the foundational materials at the adjudication stage can be cured at the appellate stage where the appeal is a continuation of the original proceeding. 3. Whether the rectification order and the appellate order (which upheld the rectified adjudication) complied with the requirements of fair hearing when the initial notice was cryptic and did not furnish the basis of the allegations. 4. Appropriate remedy where initial procedural failure in disclosure and hearing is found limited to certain heads of demand: validity of setting aside the demand partly and remanding for fresh adjudication with directions. ISSUE-WISE DETAILED ANALYSIS - Adequacy of show cause notice / disclosure (Issue 1) Legal framework: The principle that when an act of an authority carries civil or penal consequences, the authority must disclose the basis of allegations enabling a person to meet the case against them; requirement of adequate show cause notice and opportunity to be heard under the relevant GST adjudicatory scheme. Precedent Treatment: The Court reiterated the settled legal principle that compliance with natural justice is inevitable and mandatory where consequences are adverse; prior authorities to like effect were followed as governing principle (no contrary precedent was overruled or distinguished). Interpretation and reasoning: The show cause notice and its annexures in the present record were cryptic, stating amounts of alleged evasion and generalized descriptions without providing the materials or particulars on which the allegation rested. The Court found that the materials upon which the allegation of evasion was founded were never made available to the petitioner to enable meaningful response. Ratio vs. Obiter: Ratio - A notice that fails to disclose adequate particulars of the foundational materials for tax-evasion allegations violates natural justice and vitiates subsequent adjudicatory findings founded on that notice. (This is the operative principle applied to the facts.) Conclusions: The Court concluded that the show cause notice did not meet the statutory/natural justice disclosure requirement and thereby rendered the adjudication, insofar as it confirmed the impugned demand, illegal and unsustainable. ISSUE-WISE DETAILED ANALYSIS - Cure at appellate stage where initial notice defective (Issue 2) Legal framework: The continuity of proceedings principle - an appeal is ordinarily a continuation of the original proceeding; fundamental procedural defects at the first instance which are mandatorily required cannot be cured at subsequent stages. Precedent Treatment: The Court reaffirmed settled law that failure to observe natural justice at the stage where it is mandatorily required cannot be validated by subsequent hearing or appellate action; this precedent was applied rather than distinguished. Interpretation and reasoning: Although the appellate authority afforded an opportunity of hearing and the rectification order was passed after hearing, the Court held that such later stages cannot rectify the foundational defect of non-disclosure at the adjudication's inception where the opposite party was deprived of necessary materials to contest the allegation. Ratio vs. Obiter: Ratio - A subsequent hearing or appellate opportunity does not cure an initial failure to disclose the materials forming the basis of an adverse adjudication when natural justice mandated disclosure at the first instance. Conclusions: The Court held that the appellate affirmation could not validate the adjudication insofar as it was founded on an inadequately particularized notice and lack of initial disclosure; the offending portions were liable to be set aside. ISSUE-WISE DETAILED ANALYSIS - Compliance with fair hearing at rectification and appeal (Issue 3) Legal framework: Procedural fairness requires (i) adequate disclosure of allegations and supporting materials, and (ii) an opportunity to be heard with sufficient notice; rectification is permissible but must itself be consistent with natural justice where new findings or demands are crystallized. Precedent Treatment: The Court treated prior authority consistently: procedural steps post hoc (rectification/appeal) are insufficient to remedy earlier non-disclosure when the initial notice was the operative source of the charge. Interpretation and reasoning: The adjudicating authority issued a rectification reducing the demand drastically after application by the petitioner; the appellate authority upheld that rectified order after hearing. Nevertheless, because the initial show cause notice never furnished the underlying materials, the Court found the rectified demand (Rs. 40,37,877/-) and the appeal's endorsement thereof legally defective to the extent based on the original nondisclosure. Ratio vs. Obiter: Ratio - Even where rectification and appellate opportunities are afforded, if the initial notice fails to disclose the basis of allegations, resulting adjudicatory conclusions predicated on that notice are vitiated insofar as disclosure was required at the first stage. Conclusions: The Court set aside the rectified adjudication and the appellate endorsement insofar as they confirmed the demand that flowed from an inadequately particularized show cause notice, holding the hearing at later stages inadequate to cure the initial procedural infirmity. ISSUE-WISE DETAILED ANALYSIS - Remedy and scope of remand (Issue 4) Legal framework: Where procedural irregularity vitiates adjudication, the appropriate remedies include quashing the defective order and remanding for fresh adjudication with directions to comply with natural justice; courts may limit the scope of remand to specified heads where the record supports such tailoring. Precedent Treatment: The Court applied established remedial principles - set-aside and remand with directions for fresh hearing - and did not expand or restrict the doctrine beyond established practice. Interpretation and reasoning: The Court quashed the rectified adjudication and the appellate endorsement insofar as they confirmed the demand of Rs. 40,37,877/-. However, noting that some specifics of discrepancies were identified in the appellate order and rectified figures were provided, the Court limited the remand to a fresh adjudication on the specified heads (tax/interest/penalty figures set out in the appellate order extract). The respondent must grant sufficient advance notice, afford opportunity of hearing, and pass a reasoned order within eight weeks; all merits remain open for fresh consideration. Ratio vs. Obiter: Ratio - When a fundamental procedural breach is found, the correct course is to quash the defective demand and remit the matter for fresh adjudication with clear directions to afford disclosure and hearing; the court may confine the remand to precisely identified heads if the appellate record delineates them. Conclusions: The order of rectification and the appellate confirmation were quashed to the limited extent of the confirmed demand; the matter was remitted for fresh adjudication on specified heads, with directions to afford adequate disclosure and hearing and to decide within a stipulated period. The Court did not express any opinion on merits; all substantive points are left open for the adjudicating authority. ADDITIONAL OBSERVATIONS 1. The Court emphasized that it has not expressed any view on the substantive merits of the revenue's claim or the petitioner's defenses; all points remain open for the adjudicating authority. 2. Affidavits were not called for and pleadings are not assumed admitted by the respondents.