2025 (9) TMI 599 - HC - GST

FORM GST DRC-01 summary insufficient as formal show-cause notice under Section 73 and Rule 142(1)(a); proceedings invalid

The HC set aside the impugned order dated 28.04.2024, holding that issuance of a mere summary in FORM GST DRC-01 (or an attached tax determination ... Violation of principles of natural justice - Service of SCN - no proper SCN attached to the Summary of the SCN in the portal - attachment as well as the Summary of the Order uploaded in GST DRC-01 and GST DRC-07 were not authenticated by any signature of the Proper Officer - SCN were issued prior to passing the Impugned Order under Section 73 (9) of the State Act or not - determination of tax as well as the Order attached to the Summary of the Show Cause Notice in GST DCR-01 and Summary of the Order in GST DCR-07 can be said to be the Show Cause Notice and Order respectively or not - impugned orders under Section 73 (9) of the State Act is in conformity with Section 75(4) of the State Act and is in consonance with the principles of natural justice. HELD THAT:- The Proper Officer is mandated to issue a SCN only under specific circumstances as outlined in Section 73. Therefore, the SCN must clearly state the reasons and circumstances justifying its issuance under this section. Only then can the recipient effectively respond, particularly if they wish to challenge the applicability of Section 73. Section 73(9) requires the Proper Officer to determine the tax, interest, and penalty after considering the representation. Section 73(2) and 73(10) are interconnected, while Section 73(10) allows passing the order within three years from the due date of the annual return, Section 73(2) mandates that the SCN must be issued at least three months before the deadline. Furthermore, a combined reading of subsections (1) to (4) of Section 73 shows that the legislature has made a clear distinction between a Show Cause Notice and a Statement. Even if a Statement is issued under Section 73(3), a separate and proper SCN is still required. From a perusal of the Rule 142 of the Rules of 2017, it would show that in addition to the Show Cause Notice to be issued under Section 73 (1) and the Statement of determination of tax under Section 73 (3), there is an additional requirement of issuance of a Summary of the Show Cause Notice in GST DRC-01 and the Summary of the Statement in GST DRC-02. The natural corollary from the above analysis is that the issuance of the Show Cause Notice and the Statement of determination of tax by the Proper Officer are mandatory requirement in addition to the Summary of Show Cause Notice in GST DRC-01 and Summary of the Statement in GST DRC-02. The Division Bench of the Hon’ble Jharkhand High Court in Nkas Services Pvt. Ltd. [2022 (2) TMI 1157 - JHARKHAND HIGH COURT] held that a summary in GST DRC-01 cannot replace a proper SCN. Similarly, in LC Infra Projects Pvt. Ltd. [2019 (8) TMI 84 - KARNATAKA HIGH COURT], the Honble Karnataka High Court emphasized that issuing a proper SCN is essential before the recovery of interest or penalty under the Act. The Court holds that merely attaching a tax determination order to the summary in DRC-01 does not amount to valid initiation under Section 73. The summary is only supplementary to a full SCN. Thus, the impugned orders, having been passed without a proper SCN, are in violation of Section 73 and Rule 142(1)(a). The Summary of the SCN issued in FORM GST DRC-01 does not substitute the proper SCN required under Section 73(1) of both the Central and State GST Acts. A formal and duly authenticated SCN is mandatorily required to initiate proceedings under Section 73. The Statement of tax determination under Section 73(3), which is attached to the summary in the present case cannot be treated as a valid SCN. Therefore, initiating proceedings solely based on such a statement is not in conformity with law. The impugned order dated 28.04.2024 is interfered with and set aside. However, as it appears that the respondents have proceeded under the mistaken impression that attaching the determination of tax to the summary constitutes a valid Show Cause Notice, the Court grants them liberty to initiate de novo proceedings under Section 73, if considered appropriate - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a document attached to the electronic Summary of Show Cause Notice in FORM GST DRC-01, consisting of a determination of tax or statement, qualifies as a valid Show Cause Notice under Section 73(1) of the Act. 2. Whether the attachments to FORM GST DRC-01 and FORM GST DRC-07 that lack authentication by the Proper Officer satisfy the statutory/Rules-based requirement of authentication (Rule 26(3)) and thereby constitute valid notices/orders. 3. Whether orders passed under Section 73(9) without affording an opportunity of hearing as contemplated by Section 75(4) (when an adverse decision is contemplated) comply with principles of natural justice and the statutory mandate. 4. Whether Rule 142(1)(a) (requirement of issuing a summary in FORM GST DRC-01 alongside a SCN) displaces or supplants the requirement of issuing a full, authenticated SCN and/or statement under Section 73, and whether any procedural lacuna in authentication can be cured by other provisions (e.g., Sections 160/169) or portal practices. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of attachment/statement attached to FORM GST DRC-01 as a Show Cause Notice Legal framework: Section 73 (especially sub-sections (1), (2), (3), (9), (10)) prescribes circumstances for issuance of SCN, mandates reasons for issuance, provides for a Statement under s.73(3) and requires the Proper Officer to determine tax after considering representations; Rule 142(1)(a) requires issuance of an electronic summary in FORM GST DRC-01 along with notices under Section 73. Precedent treatment: Decisions have held that a summary in DRC-01 cannot substitute a full SCN (e.g., referenced High Court authorities). Those authorities emphasise that statements/summaries cannot replace SCN requirements. Interpretation and reasoning: A combined reading of Section 73(1)-(4) and (9) shows the legislature distinguishes between a Show Cause Notice and a Statement of determination; the SCN must articulate reasons and the grounds invoking s.73 so the recipient can meaningfully respond. Rule 142(1)(a) creates a supplementary summary obligation but does not eliminate the primary statutory duty to issue a proper SCN and/or a separately issued Statement under s.73(3). Consequently, attaching a tax determination/statement to FORM DRC-01 does not, by itself, meet the s.73(1) SCN requirement. Ratio vs. Obiter: Ratio - the summary in DRC-01 is supplementary and cannot replace the SCN required by Section 73(1); attachments comprising the determination/statement do not satisfy the statutory SCN requirement. (Supporting precedents cited are applied, not overruled.) Conclusion: The attachment/statement appended to FORM GST DRC-01 does not constitute a valid SCN under Section 73(1); initiation of proceedings based solely on such an attachment is contrary to law. Issue 2 - Requirement and effect of authentication (Rule 26(3)) on notices, statements and orders Legal framework: Rule 26(3) mandates issuance of notices, certificates and orders electronically by the Proper Officer or authorized officer with digital signature/e-signature or any Board-notified verification mode; Rule 142 (Chapter XVIII) prescribes summary obligations for demand and recovery; Section 2(91) defines Proper Officer. Precedent treatment: Several High Court decisions have held that unsigned notices/orders lose legal efficacy and that digital signatures are necessary for validity; those views are followed and relied upon in the reasoning. Interpretation and reasoning: Although Rule 26 is located under Chapter III (Registration), a regulatory gap exists in Chapter XVIII (Demand and Recovery) as to explicit authentication mode. Given the critical statutory requirement that SCN, Statement and final Order be issued by the Proper Officer, and the absence of contrary Board notification, the Court applies Rule 26(3) by default to require electronic authentication (digital/e-signature) for notices/statements/orders under Section 73. Portal-level authentication alone (i.e., technical upload) is not a substitute for statutory authentication by the Proper Officer; notation of 'Sd- Proper Officer' in an attachment without actual digital/e-signature does not satisfy Rule 26(3). Ratio vs. Obiter: Ratio - notices/statements/orders under Section 73 must be duly authenticated by the Proper Officer in compliance with Rule 26(3) (digital/e-signature or Board-notified mode); absence of such authentication renders them invalid and unenforceable. Observations regarding the regulatory gap and the necessity to apply Rule 26(3) by default are integral to the holding. Conclusion: Attachments to FORM GST DRC-01 and FORM GST DRC-07 lacking proper digital/e-signature/authentication by the Proper Officer do not meet statutory requirements and are invalid; portal authentication alone does not cure the defect. Issue 3 - Compliance with Section 75(4) and principles of natural justice (opportunity of hearing) Legal framework: Section 75(4) mandates hearing when a written request for hearing is made by the person chargeable with tax or penalty, or when any adverse decision is contemplated against such person; principles of natural justice require meaningful opportunity before adverse administrative action. Precedent treatment: High Court authorities have held that statutory hearing mandates are not to be treated as porous and must be honoured; such holdings are followed. Interpretation and reasoning: FORM GST DRC-01 contains fields for reply date and personal hearing particulars. A summary leaving hearing date/time blank or marking them 'NA' but specifying a reply date cannot be read to dispense with the second limb of s.75(4) when an adverse decision is contemplated. Passing an adverse order without affording a hearing in those circumstances renders the statutory safeguard nugatory and violates natural justice. The Proper Officer cannot presume that a personal hearing is unnecessary simply because a reply was invited; if an adverse decision is contemplated, a hearing must be granted even if no written request is filed. Ratio vs. Obiter: Ratio - failure to grant an opportunity of hearing where an adverse decision is contemplated (second limb of s.75(4)) vitiates any resulting adverse order; marking hearing fields as 'NA' without further hearing process is non-compliant. Conclusion: Impugned orders passed without complying with Section 75(4)'s hearing mandate and basic principles of natural justice are invalid; the absence of a specified personal hearing where an adverse order was contemplated vitiates the order. Issue 4 - Effect of procedural lacunae and remedial directions Legal framework & reasoning: Where impugned orders are rendered invalid by absence of a proper SCN, lack of authentication and/or failure to grant a hearing, the authority may be permitted to initiate fresh proceedings in conformity with statutory requirements; limitation implications under Section 73(10) require protection if fresh proceedings are allowed. Interpretation and reasoning: Because the authority appeared to have proceeded under a mistaken view that attachment to DRC-01 sufficed as SCN and that portal practices ensured authentication, judicial interference is warranted to set aside the flawed order but to allow de novo proceedings if appropriate. To prevent prejudice by limitation, the Court may exclude the period between issuance of the defective summary and service of certified judgment copy for computation under Section 73(10). Ratio vs. Obiter: Ratio - setting aside invalid orders is appropriate; permitting de novo initiation with exclusion of the interceding period for limitation is a remedial, operative direction consistent with statutory limitation safeguards. Conclusion: The impugned order is set aside for the reasons above; authorities have liberty to initiate fresh, properly authenticated proceedings with full compliance with Section 73 and Section 75(4), and the interregnum is to be excluded for limitation computation under Section 73(10).