2025 (11) TMI 484 - HC - GST

Challenge to Section 74 show-cause notice held premature; statutory remedies under Section 107 must be availed, Sections 67-69 noted

HC dismissed the writ petition challenging issuance of a show-cause notice under Section 74 of the MPGST Act, holding the challenge premature and ... Maintainability of petiiton - availability of remedy under Section 107 of the MPGST Act to file an appeal - Evasion of tax by way of fraud or willful misstatement - reasons to believe of suppression of facts - HELD THAT:- As per the language of Section 67 of the GST Act, where the proper officer, not below the rank of Joint Commissioner, has a reasons to believe that a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand and indulged in contravention of any of the provisions of this Act to evade tax under this Act may, in writing, inspect any place of business of the taxable person or the person engaged in the business. Where the proper officer has reasons to believe that any person said to have evaded or is attempting to evade the payment of any tax, he may, for reasons to be recorded in writing, seize the accounts, registers or documents of such person. The power of arrest has been given under Section 69. After completing such inspection, search and seizure, the proper officer either may issue notice under Section 73 or under Section 74 to the assessee. The difference between both the sections is regarding period of limitation, which is 3 years and 5 years respectively. Therefore, at this stage, once the show cause notice has been issued under Section 74, it cannot be examined by the writ court that the proper officer has erroneously issued the notice under Section 74 without there being any reason of fraud or willful misstatement of fact to evade the tax. At present no prejudice is being caused to the petitioner to participate in the show cause notice proceedings. Learned counsel for the petitioner submits that even if the petitioner participates and proper officer may pass order under Section 73, but the period of limitation under Section 73 is 3 years, whereas the limitation under Section 74 is 5 years, therefore, this SCN proceeding would be time barred. This issue will also be decided by the authority after considering the material against the petitioner. The Apex Court in the case of State of Maharashtra & Others v/s Greatship (India) Limited [2022 (9) TMI 896 - SUPREME COURT] has held that the High Court has seriously erred in entertaining the writ petition under Article 226 of the Constitution of India against the assessment order and ought to have relegated the writ petitioner to avail the statutory remedy of appeal. The proper officer shall not be influenced by any observations made - Petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a writ petition under Article 226 is maintainable to challenge a show-cause notice issued under the special provision for fraud/willful misstatement/suppression (triggering extended limitation) where the issuance is contested as vague and unsupported by particulars. 2. Whether a show-cause notice under the provision permitting proceedings for fraud/willful misstatement/suppression (with longer limitation) is amenable to judicial scrutiny at the threshold to test the existence of material supporting allegations of fraud, or whether such factual determinations must await adjudication by the statutory authority. 3. Whether failure to supply an earlier draft notice or particular documents relied upon by the tax authority vitiates the proceedings or causes undue prejudice justifying quashing of the show-cause notice. 4. Whether participation in departmental proceedings would prejudice the petitioner's rights where the assessing officer may ultimately proceed under the lesser-limitation provision if fraud is not established. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of writ under Article 226 to challenge SCN under fraud/willful-misstatement/suppression provision Legal framework: Constitutional writ jurisdiction is discretionary; ordinarily where an efficacious statutory remedy of appeal exists, writ jurisdiction should not be used to bypass such remedy. The tax statute provides original adjudication and appellate remedies post-order. Precedent treatment: The Court relied on higher-court authority holding that where alternate statutory remedies exist, judicial prudence requires relegation to those remedies; entertaining challenges to assessment/orders by writ is ordinarily inappropriate. Interpretation and reasoning: The Court observed the existence of remedy under the statute (reply to SCN, order-in-original, appeal under statutory provisions) and held that the writ is not an appropriate vehicle to pre-empt the statutory adjudicatory process. The presence of disputed factual material and the requirement for the authority to examine incriminating material militates against threshold judicial intervention by writ. Ratio vs. Obiter: Ratio - where a statutory appeal mechanism exists and the challenge involves disputed facts or assessment of evidence, the writ court should generally decline to entertain pre-adjudication challenges to assessment proceedings and direct recourse to statutory remedies. Obiter - remarks on conduct during departmental proceedings. Conclusion: The writ petition is not maintainable to the extent it seeks to quash the SCN on the merits; the petitioner should pursue available statutory remedies after adjudication. Issue 2 - Threshold review of sufficiency of material in SCN alleging fraud/willful misstatement/suppression Legal framework: The statute permits issuance of a notice under the special provision when the proper officer has reason to believe there was suppression/fraud; post-inspection/search/seizure, the officer may issue a notice under the fraud provision or under the general provision (with shorter limitation). The statute contemplates recording reasons and serving statements of tax not paid. Precedent treatment: The Court noted authority emphasizing that when a notice invokes fraud/willful misstatement, particulars sufficient to inform the assessee of the case against it are required so that the assessee can effectively meet the allegations; however, such threshold scrutiny is limited and not a substitute for full adjudication by the appropriate forum. Interpretation and reasoning: The Court examined the materials before the officer (including a search report running to many pages) and found that the draft notice and the report contained specific allegations of fraud and suppression. Given that the statutory officer had recorded reasons and produced substantive material, the Court held that it was not appropriate at this stage to substitute its view for that of the officer or to quash the notice for want of particulars. The Court observed that if the authority ultimately fails to establish fraud, the matter may appropriately be dealt with under the general provision with shorter limitation during adjudication. Ratio vs. Obiter: Ratio - where the officer has recorded reasons and there exists material from search/inspection pointing to suppression/fraud, the writ court should not quash the SCN at threshold for lack of particulars; such issues are to be examined in the adjudicatory proceedings. Obiter - discussion that failure to establish fraud may result in application of the general provision. Conclusion: Threshold judicial interference to quash the fraud-based SCN was not warranted on the record; the petitioner is not prejudiced from contesting particulars and raising defenses during adjudication. Issue 3 - Effect of delay/failure to supply draft notice and documents on validity of proceedings Legal framework: Principles of fair procedure require that an assessee be apprised of the case to be met and be supplied relevant documents so as to avoid prejudice; procedural lapses can warrant relief if substantial prejudice is demonstrated. Precedent treatment: Courts recognize that withholding of materials essential to framing the case may vitiate a proceeding; however, where documents are later furnished and the assessee has opportunity to respond, prejudice must be shown. Interpretation and reasoning: The Court noted that the draft notice was provided to the petitioner during the exchange of communications and that the petitioner furnished detailed objections thereafter. The Court found no shown prejudice from the timing of supply sufficient to quash the proceedings; the petitioner had an opportunity to contest the material before issuance of the SCN and may further contest in adjudication. Ratio vs. Obiter: Ratio - failure to supply a draft or documents does not automatically vitiate proceedings where the assessee is ultimately supplied the material and has opportunity to respond; prejudice must be established. Obiter - emphasis on safeguarding right to be heard. Conclusion: The timing of supply of the draft notice did not render the SCN invalid in the absence of demonstrated prejudice; the petitioner may raise procedural objections before the adjudicating authority. Issue 4 - Risk of prejudice by participation in proceedings and possibility of reassessment under general provision Legal framework: The statute contemplates that where fraud is not established, the authority may, notwithstanding initiation under the fraud provision, pass an order under the general provision; limitation periods differ between provisions. Precedent treatment: Courts have recognized petitioner concerns that participation might expose them to longer limitation periods, but have also recognized that adjudicatory processes provide safeguards and that such strategic abstention is not generally a ground for pre-emptive judicial relief absent compelling circumstances. Interpretation and reasoning: The Court accepted the theoretical concern that participation could expose the petitioner to proceedings under the longer limitation if fraud is found, but observed that if the authority fails to establish fraud, it may pass an order under the general provision. The Court therefore saw no bar to participation and no cause for pre-emptive quashing; limitation and applicability issues remain open for the proper officer to decide on material. Ratio vs. Obiter: Ratio - potential prejudice from participation does not justify pre-emptive quashing where the authority possesses and has recorded reasons and the statute contemplates alternate outcomes; substantive limitation questions are for the authority to determine. Obiter - normative guidance that adjudicatory safeguards can address limitation concerns. Conclusion: Participation in departmental proceedings is not precluded; concerns about limitation can be addressed in adjudication and appeals, not by pre-emptive writ relief. Overall Disposition and Guidance Conclusion: The writ petition seeking quashment of the show-cause notice was dismissed. The Court refrained from interfering at the threshold because the record showed recorded reasons and voluminous material from inspection/search supporting invocation of the fraud/suppression provision, and because statutory remedies post-adjudication are available. The adjudicating authority was directed to decide on merits uninfluenced by the Court's observations, and the petitioner was relegated to statutory remedies.