2025 (11) TMI 426 - HC - GST

Refusal to provide material and freezing input tax credit violated natural justice; respondents must disclose records and resolve recovery

HC held that refusal to furnish material used against the petitioner and freezing of the input tax credit ledger violated principles of natural justice. ... Freezing of the input tax credit ledger of the petitioner - refusal of the 1st respondent to furnish the material to the petitioner - Notice demanding payment of GST - amount claimed as input tax on goods obtained from respondents 3 to 5 - respondents are non-existent - HELD THAT:- The stand of the respondents cannot be accepted by this Court, on the simple ground that a person who is adversely affected by any order or proceedings of the Authority, is entitled to agitate against such an order and for that purpose, the affected person is entitled to be served with all the material which is used against him. In the absence of such service of material and opportunity of rebutting the contentions of the authorities, there would be a clear violation of principles of natural justice. In the circumstances, it would only be appropriate that the petitioner is furnished with the material on the basis of which the sum of Rs. 1,79,50,000/-, is sought to be recovered from him. The fact remains that severe allegations are being made in relation to the activities of respondents 3 to 5, on the basis of which the petitioner is said to be mulcted for recovery of large sum of money. In such circumstances, it would only be appropriate to direct an early closure of the entire issue - Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether a person adversely affected by a show-cause notice is entitled to be furnished with the material relied upon by the tax authority, when refusal is premised on confidentiality and information sourced from other States. 2. Whether non-disclosure of the material underlying a demand and freezing of an input tax credit ledger violates principles of natural justice and requires judicial intervention. 3. Whether the Court should quash or stay a show-cause notice that alleges recovery of a substantial sum pending opportunity to rebut and personal hearing. 4. Whether interim relief (lifting of attachment/frozen credit ledger or direction for expedited adjudication) is appropriate where the taxpayer asserts business disruption and inability to comply with statutory requirements. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to disclosure of material relied upon by the tax authority Legal framework: Administrative law principles and principles of natural justice require that an affected person be furnished with material used against him to enable effective response and to ensure fair hearing. Precedent Treatment: The Court treated established principles of natural justice as binding on tax authorities; no novel precedent was overruled or distinguished in the judgment. Interpretation and reasoning: The Court held that withholding of information on the ground that it is 'confidential' or obtained from other State tax authorities does not absolve the authority from furnishing the material to the person against whom adverse action is contemplated. The rationale is that an affected person must have access to the material so as to agitate and rebut the case; denial of such material would amount to a breach of natural justice. Ratio vs. Obiter: Ratio - Affected persons are entitled to be served with the material used against them even if the material originates from other agencies or is characterized as confidential; non-disclosure violates natural justice. Conclusion: The authority must furnish the material forming the basis of the demand to the affected person, subject to conditions of confidentiality imposed by the Court (see directions). Issue 2 - Freezing of input tax credit ledger and natural justice Legal framework: Tax administration powers to provisionally block credits are to be exercised consistent with fair procedure; any adverse administrative action requires opportunity to rebut and access to the material relied upon. Precedent Treatment: The Court followed general administrative law principles that procedural fairness binds tax authorities; no departure from prior law was indicated. Interpretation and reasoning: The Court found that freezing the input tax credit ledger pending recovery, without furnishing the underlying material, deprives the taxpayer of a fair opportunity to contest allegations. Given that the freeze has significant practical consequences, procedural steps must precede or promptly follow such restrictive measures to avoid violation of natural justice. Ratio vs. Obiter: Ratio - Administrative restraints affecting rights (use of tax credits) must be accompanied by disclosure of the material underlying the restraint and an opportunity to be heard. Conclusion: The authority's action in freezing the ledger required disclosure of the material and a hearing; the Court directed immediate furnishing of material and an expedited opportunity to respond and be heard. Issue 3 - Interference with show-cause notice and appropriate judicial response Legal framework: Courts will generally refrain from quashing interlocutory or pre-adjudicatory show-cause notices where the statutory machinery contemplates an opportunity to reply and be heard, unless there is patent illegality. Precedent Treatment: The Court adhered to the principle of non-interference with show-cause notices that are part of the statutory adjudicatory process, absent compelling grounds. Interpretation and reasoning: Although the petitioner challenged the show-cause notice, the Court declined to quash it because the notice is a pre-adjudicatory step and the petitioner is to be afforded the chance to rebut the allegations. The Court emphasized the need to complete the administrative process expeditiously, coupled with disclosure and hearing safeguards, rather than judicially nullifying the notice at this stage. Ratio vs. Obiter: Ratio - Courts should not ordinarily invalidate show-cause notices at the interlocutory stage if procedural safeguards (disclosure and hearing) can be secured and the authority is allowed to complete the adjudication within a swift timeline. Conclusion: The Court refused to quash the notice but ordered disclosure, a limited period for response, and an opportunity for personal hearing, with a fixed timetable for completion. Issue 4 - Relief where taxpayer alleges business disruption and inability to comply with statutory requirements Legal framework: Equity and administrative law permit courts to grant interim or protective relief when administrative action causes undue hardship, balanced against the public interest in tax recovery where serious allegations exist. Precedent Treatment: The Court balanced competing interests, recognizing the taxpayer's hardship but also the gravity of allegations against third parties; no precedent was overruled. Interpretation and reasoning: The Court acknowledged the petitioner's contention of business standstill and consequent inability to comply with statutory filing obligations, which can attract penalties. However, because substantial allegations implicating other entities underpin the demand, the Court prioritized closure of the issue through a time-bound administrative process rather than immediate relief such as lifting the freeze. The Court sought to protect the taxpayer by mandating prompt disclosure, a short response window, personal hearing, and an express direction that failure to complete the process would restore the taxpayer's access to the credit ledger. Ratio vs. Obiter: Ratio - Where the taxpayer alleges hardship but serious charges exist, the appropriate remedy is an expedited, substantive administrative process with interim safeguards rather than automatic judicial relief; the Court may condition disclosure on confidentiality to protect investigatory sources. Conclusion: The Court directed an expedited timeline (one week for disclosure, one week for response, three weeks total for completion), confidentiality safeguards on disclosed material, and automatic restoration of ledger access if the authority fails to complete proceedings within the stipulated period. Additional directions and safeguards (operative conclusions) 1) The authority must furnish the material forming the basis of the claimed recovery within one week. 2) The affected person shall have one week upon receipt to file a response to the show-cause notice. 3) The authority must afford a personal hearing, consider objections and materials placed by the affected person, and pass reasoned orders within three weeks from the date of the order. 4) Failure by the authority to complete the process within the stipulated period will automatically lift the attachment/freeze of the credit ledger, entitling the affected person to utilize the credit. 5) The material furnished shall be kept confidential; the affected person is prohibited from divulging or disclosing the disclosed material to any other person. These directions constitute the Court's operative relief and are integral to the ratio requiring disclosure, opportunity to be heard, confidentiality safeguards, and an accelerated adjudicatory timeline where substantial contested tax demands and alleged fraudulent supplier activity are involved.