Once an explanation is provided, it is incumbent upon GST authorities to examine it and come to a conclusion – Allahabad High Court quashed order u/s 74 of UPGST Act 2017
In a recent judgment, Hon’ble Allahabad High Court has set aside order passed u/s 74 of UPGST Act 2017 demanding tax and penalty on account of fake ITC claim without dealing with the explanation provided by the assessee.
ABCAUS Case Law Citation:
4322 (2024) (11) abcaus.in HC Allahabad
In the instant case, the Petitioner was aggrieved by the impugned order passed by the Deputy Commissioner, State Goods & Services Tax under Section 74 of the Goods and Services Tax Act, 2017 (‘the Act’).
The petitioner’s business premises were subjected to a search where it was found that the petitioner had wrongly availed the Input Tax Credit (ITC) and refund of the same on purchase of certain chemical claimed to have not been used by the Petitioner in manufacturing of fabrics. It was further found that the petitioner had also not produced proper evidence with regard to cancelling several e-way bills by during the financial year. Subsequently, a show cause notice was issued to the petitioner to refund the excess utilization of ITC along with penalty.
In response to the show cause notice, the petitioner filed its reply denying the allegations made against it mentioning that the show cause notice was not supported with any evidence or material. Subsequently, another show cause notice under Section 74 of the Act was issued to the petitioner by which the amount of Tax and penalty was revised upwards.
In response to the second SCN, the petitioner again filed its reply supported with an affidavit wherein it again denied the allegation that the chemicals of which bills were found were not used in its business and submitted that these materials are used as ‘raw material’ by the company in manufacturing process and the ITC with respect to these materials has been legally availed by the petitioner. Explanation in respect of e-way bills that were cancelled during the financial year was also furnished by the petitioner in his affidavit.
Notwithstanding reply submitted by the petitioner, the GST Authority passed the impugned order under Section 74 of the Act imposing a demand of Tax along with penalty and interest.
The Hon’ble High Court observed that the entire show cause notice and the order were speculative in nature and are based on one survey report only using which the authorities have come to a conclusion that the said items are not being used without carrying out any test for manufacture.
Further, the Hon’ble High Court noted that the explanation given by the petitioner in the affidavit annexing certificates of three experts had not been considered at all by the respondents and no reasons have been provided as to why the same are to be rejected. Once such an explanation had been provided, it was incumbent upon the respondents to have tested the fabrics to come to a conclusion that three raw materials were not used in the manufacture of fabrics. Without having done so and without granting an opportunity of fair hearing to the petitioner, fastening of such liability upon the petitioner is arbitrary and illegal and cannot be countenanced by the Court.
The Hon’ble High Court observed that one needs to examine the scope of natural justice as has been explained by a catena of judgements of the Supreme Court and the Bench. The Hon’ble High Court summarised the salient features that emerge from the examination of the judgements as under:
(a) audi alteram partem is a part of the doctrine of natural justice and requires a quasi judicial body to provide an opportunity of hearing to a person before fastening a liability upon him;
(b) the above principles of audi alteram partem act as a safeguard against arbitrary decision making and provide for a crucial foundation for just equitable, legal and administrative proceedings; c) decisions by a judicial authority should only be made after consideration and proper deliberation of all relevant contentions raised by the assessee and failure to do so would amount to decision making that is arbitrary and illegal in law;
(d) documents that are relied upon by the department are necessarily required to be provided to a person upon whom a liability is being fastened so that, the person can deny and/or dispute the said documents. Non production of these documents to the assessee would amount to violation of the principles of natural justice unless the authority can show that the documents were not necessary and did not form part of the order passed wherein the liability was fastened on the assessee.
(e) rules of natural justice, it is by now fairly well settled, are not rigid, immutable or embodied rules that may be capable of being put in straitjacket nor have the same been so evolved as to apply universally to all kind of domestic tribunals and enquiries.
(f) a court examining a complaint based on violation of rules of natural justice is entitled to see whether the aggrieved party had indeed suffered any prejudice on account of such violation.
In the instant case, the Hon’ble High Court observed that firstly, the impugned order merely copied the reply provided by the petitioner which leads to a conclusion that there was non application of mind by the respondent authority. Secondly, in the reply to the show cause notice, certain documents and reports were sought for by the assessee, which had been relied upon by the authorities. However, without providing the same to the assessee, the authorities proceeded to impose the tax liability and penalty. Thirdly, the explanation provided by the petitioner with regard to the use of the raw materials in the process of the manufacture by the petitioner supported with opinions of the experts were simply brushed aside by the respondent authority, who did not even examine whether the said raw materials had been used in manufacture of the final products which were fabrics. Without having done so and without granting an opportunity of fair hearing to the petitioner, the liability that has been imposed upon the petitioner appears to be patently illegal and without any authority in law.
The Hon’ble High Court held that non production of certain documents to the petitioner that were relied upon by the authorities, coupled with the manner in which no proper opportunity of hearing was granted to the petitioner, severe prejudice had been caused to the petitioner. Accordingly, the impugned order was quashed and set aside with a direction upon the respondent authorities to examine the fabrics, provide a copy of the report to the petitioner, grant an opportunity of hearing to the petitioner and thereafter pass a reasoned order in the same.
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