2025 (9) TMI 592 - HC - GST

Procedural unfairness: Section 74 assessment of evaded sales fixed arbitrarily above recorded purchases; orders quashed and remanded

HC found procedural unfairness and arbitrariness in proceedings under Section 74; petitioner was not given a hearing and the authority fixed evaded sales ... Determination of evaded purchases - proceedings u/s 74 of the UPGST/CGST Act were initiated against the petitioner and an ex-parte order was passed - no opportunity of hearing was given for determining the purchases made by the petitioner - violation of principles of natural justice - HELD THAT:- The record shows that the survey was conducted at the business premises of the petitioner and once in the said survey, certain discrepancies were found, the proceedings under Section 74 of the UPGST/CGST Act were initiated against the petitioner against which an appeal was filed, which was partly allowed vide order dated 10.09.2024, whereby determining the evaded sales for the said tax period at Rs. 2,50,00,000/- on the basis of purchases amounting to Rs. 1,15,60,493/- and fixed the tax liability at Rs. 45,00,000/-, interest at Rs. 56,70,000/- and penalty of Rs. 45,00,000/-, thereby totaling Rs. 1,46,70,000/-. But, in the said impugned order, no reasoning has been assigned for fixing the evaded sales more than evaded purchases. As such, the fixation of sale more than evaded purchases is arbitrary. The matter requires re-consideration - the impugned orders cannot be sustained in the eyes of law and the same are hereby quashed - Petition allowed by way of remand. ISSUES PRESENTED AND CONSIDERED 1. Whether the determination of evaded turnover (sales) exceeding determined evaded purchases, without assignment of reasons, is sustainable under the UPGST/CGST statutory scheme governing survey and assessment (Section 74 proceedings). 2. Whether fixation of turnover by tax authorities in a survey-derived proceeding is permissible if based on arbitrary estimation or without affording opportunity of hearing on the basis adopted for determining purchases and sales. 3. Whether a first-appeal order that increases determined sales beyond the recorded/established purchases, without reasoned findings, complies with the requirement of a speaking order and established judicial principle against arbitrary estimation of turnover. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of determining evaded sales in excess of evaded purchases without reasons Legal framework: Proceedings under Section 74 (survey-originated assessments) of the UPGST/CGST enactment permit determination of tax liabilities where discrepancies are found on survey; however, assessments must be founded on factual material and reasoned conclusions. Precedent treatment: The Court relied upon and applied the principle from the earlier decision emphasizing that estimation of evaded turnover should not be arbitrary (referred to as Moti Lal Dwarika Prasad). Interpretation and reasoning: The impugned appellate order fixed evaded sales at a figure higher than the evaded purchases already determined, but did not provide any reasoning or material basis for exceeding the purchases. The Court treated sale fixed in excess of purchases without explanation as arbitrary. The absence of articulated nexus between evidentiary findings and the higher sales figure undermines the validity of the determination. Ratio vs. Obiter: Ratio - an assessment increasing evaded sales beyond determined purchases requires reasoned basis; failing that, it is arbitrary and unsustainable. Conclusion: The fixation of evaded sales exceeding evaded purchases without assignment of reasons is arbitrary and cannot be sustained; the appellate order on this point is quashed and remitted for reconsideration. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Requirement of non-arbitrary estimation and opportunity of hearing Legal framework: Principles of reasonable administrative action and natural justice govern tax adjudication - estimations must be based on relevant material and parties must be heard before adverse findings are recorded or modified. Precedent treatment: The Court followed established authority rejecting arbitrary estimations of turnover and upholding the necessity of reasoned orders in tax assessments. Interpretation and reasoning: The record indicates that no opportunity was given to the taxpayer to be heard in respect of the determination of purchases (as emphasized by counsel). Moreover, the appellate order did not explain the methodology or evidentiary basis for the higher sales estimate. The combination of lack of hearing on critical factual determinations and absence of a speaking order renders the determination procedurally infirm. Ratio vs. Obiter: Ratio - administrative determinations of turnover made in survey/Section 74 proceedings must be preceded by appropriate opportunity to be heard on the specific factual bases and must be embodied in reasoned, speaking orders; otherwise they are procedurally invalid. Conclusion: The matter requires fresh consideration after affording hearing and issuing a reasoned order; remand is necessary for compliance with procedural and reasoned-decision requirements. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Validity of appellate modification when increasing liability and consequences Legal framework: An appellate authority must base any enhancement of liability on recorded material, clear reasoning, and adherence to principles of fairness. Orders enhancing tax, interest or penalty must state the basis for quantification. Precedent treatment: The Court applied the principle that evaded turnover estimation should not be arbitrary and that appellate orders must be speaking and reasoned. Interpretation and reasoning: The first-appeal order increased the assessed sales and quantified tax, interest and penalty accordingly, but did so without assigning reasons for the quantum adopted vis-à-vis purchases. The Court treated such unexplained enhancement as legally infirm and found that judicial scrutiny requires remittal for reasoned adjudication. Ratio vs. Obiter: Ratio - appellate enhancement of liability without explicated basis is unsustainable; such orders must be quashed and remitted for fresh decision. Conclusion: Appellate order increasing assessed sales and consequential liabilities without a reasoned basis is quashed; matter remanded for fresh decision after hearing and with a speaking order. ADDITIONAL COURT DIRECTIONS & CONSEQUENTIAL FINDINGS (Ratio) The Court ordered that the impugned orders be quashed and the matter remitted to the appellate authority for fresh decision by passing a reasoned and speaking order after hearing all stakeholders. A timeline for re-deciding (three months from production of certified copy) and procedural direction (production of certified copy within ten days) were imposed. Any amounts previously deposited shall remain subject to outcome of the fresh order. CONCLUDING LEGAL PRINCIPLES (Ratio) 1. Estimation of evaded turnover in survey-originated proceedings must be non-arbitrary, founded on material and articulated reasoning. 2. Parties must be afforded opportunity to be heard on contentious factual determinations (e.g., purchases) before adverse quantification is made. 3. Appellate authorities cannot enhance assessed turnover or liabilities without recording reasons and linking the enhancement to evidentiary findings; failure to do so vitiates the order and warrants remand for fresh adjudication.