2025 (10) TMI 1328 - HC - GST

Audit starts when taxpayer makes records available under explanation to Section 65 CGST; premature SCN set aside

The HC held that the audit commencement is the date the registered person makes records available under the explanation to Section 65 CGST; since the ... Audit report was issued beyond the period of limitation prescribed under Section 65 of the Central Goods and Services Tax Act, 2017 - Issuance of SCN - SCN having been issued before the period for filing a reply to the pre-SCN having lapsed. Audit report was issued beyond the period of limitation prescribed under Section 65 of the Central Goods and Services Tax Act, 2017 - HELD THAT:- The scheme of Section 65 is that the registered person is to be informed by way of a notice period of at least 15 days prior to the conduct of the audit. The date from when the commencement of the audit takes place is the date from when the registered person makes available the records and other documents as called for by the authorities. Further, the audit has to be then concluded within three months and within a period of 30 days, the same has to be communicated to the registered person. In the present case, the final reply was filed by the Petitioner on 11th October, 2024. The audit report bears the date of 11th February, 2025 and the same has been communicated on 13th February, 2025. On this aspect, the Court has considered the matter. There can be no doubt that after the final submission is made by the Petitioner, the commencement date takes place in terms of the explanation to Section 65 of the CGST Act. The audit has to, therefore, commence from 12th October, 2024 and has to be concluded within a period of three months. In the overall circumstances when the audit report has been prepared on 11th February, 2025 and communicated to the Petitioner on 13th February, 2025, this Court is not inclined to hold that the same is beyond limitation. Issuance of SCN - SCN having been issued before the period for filing a reply to the pre-SCN having lapsed - HELD THAT:- The Petitioner was given time to file submissions till 28th November, 2024 in Part B of the form. However, surprisingly, the authority has decided to issue the SCN itself one day before the said day expires i.e. on 27th November, 2024 itself. Thus, this would be completely in violation of the principles of natural justice in terms of the pre-SCN itself - the SCN is set aside. The proceedings are relegated to the pre-SCN stage. The Petitioner is now free to file its reply to the pre-SCN dated 25th November, 2024 on or before 10th November, 2025. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the audit under Section 65 of the Central Goods and Services Tax Act, 2017 was completed and the audit report communicated within the time limits prescribed by the statute (three months for completion from commencement, subject to proviso extending up to six months, and thirty days for communication of findings after conclusion). 2. Whether issuance of a Show Cause Notice (SCN) on 27th November, 2024 was vitiated by violation of the procedural opportunity afforded under the pre-Show Cause Notice (pre-SCN) dated 25th November, 2024, which allowed submissions by 28th November, 2024. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of audit completion and communication within statutory time-limits under Section 65 CGST Act Legal framework: Section 65 mandates that audit shall be completed within three months from commencement, with the proviso permitting extension by the Commissioner for reasons recorded in writing up to an additional six months; 'commencement of audit' is defined as the later of the date records/documents are made available or actual institution of audit; upon conclusion the proper officer shall, within thirty days, inform the registered person of findings, rights, obligations and reasons. Precedent Treatment: No prior judicial precedent was relied upon or overruled in the judgment; the Court applied the statutory text and the Explanation to Section 65 to the facts. Interpretation and reasoning: The Court held that the final reply by the audited entity (dated 11th October, 2024) fixed the commencement of audit in terms of the statutory Explanation, so the three-month period began from 12th October, 2024. The audit report dated 11th February, 2025 and communicated on 13th February, 2025 were examined against the statutory timeline. The Department's contention that the audit was concluded and that the 30-day period for communication applied was accepted by the Court; the Court noted the proviso allowing extension for reasons to be recorded and declined to characterize the report/communication as time-barred on the given facts. Ratio vs. Obiter: Ratio - The statutory commencement date is the date on which records/documents are made available or the actual institution of audit, whichever is later, and the timelines of Section 65 must be computed from that date; the 30-day communication period post-conclusion is a distinct temporal requirement and may validate communication where the audit report is prepared within the extended timeline. Obiter - Observations on the exercise of the proviso permitting extension (no specific record of extension found/referenced) are explanatory rather than dispositive. Conclusions: The Court concluded that, on the facts, the audit report and its communication were not beyond limitation under Section 65. The petition alleging time-bar failed insofar as it challenged the final audit report dated 11th February, 2025/communication of 13th February, 2025. Issue 2: Violation of principles of natural justice by premature issuance of SCN despite time given to reply to pre-SCN Legal framework: Principles of natural justice require that where a pre-SCN invites submissions by a specified date, an opportunity to make submissions must be respected before issuing a SCN; statutory scheme (Section 74 triggers) contemplates issuance of SCN after appropriate antecedent steps such as pre-SCN and opportunity to reply. Precedent Treatment: No specific precedents were cited; the Court applied established procedural fairness principles to the document language and sequence of events. Interpretation and reasoning: The pre-SCN clearly provided that submissions might be furnished by 28th November, 2024. The SCN was issued on 27th November, 2024 - one day before the expiry of the period allowed for submissions. The Court found this conduct to be a 'complete violation of the principles of natural justice' embedded in the pre-SCN itself because the statutory or procedural opportunity to respond was curtailed by early issuance of the SCN. Ratio vs. Obiter: Ratio - Issuance of a SCN before the lapse of the period expressly afforded in a pre-SCN for filing submissions violates principles of natural justice and vitiates the SCN. Obiter - The Court's characterization of the provision in the pre-SCN as reserving future rights to examine contradictions is explanatory and not determinative of the remedy. Conclusions: The SCN dated 27th November, 2024 was set aside. Proceedings were relegated to the pre-SCN stage, and the audited entity was permitted to file a reply to the pre-SCN on or before a specified date. The authority was directed to consider the reply before deciding whether to issue a fresh SCN and, if issued, to proceed in accordance with law. Cross-reference and procedural consequence The Court clarified that time during which the writ petitions remained pending before it shall not be counted for limitation for either party; the remand to the pre-SCN stage requires fresh consideration by the authority consistent with the directions given (opportunity to file reply; decision thereafter whether to issue SCN and to proceed in accordance with law).