No recovery of tax, if assessment order is passed without issuing show cause notice

Facts: –

• The Petitioner were engaged in trading of textiles, garments and have their showrooms in Kumbakonam and Thanjavur. Further, the Partnership firms were dissolved and the Petitioner Company was formed in 2019, which carried on the same trading activities from the three showrooms of the separate partnership firms in Ramanathapuram, Kumbakonam and Thanjavur.
• Then inspection under Section 67, was conducted in three showrooms from 14.09.2021 to 16.09.2021 and the inspection team found certain irregularities in the transactions of the dealers, and based on the inspection report, a revision of assessment was made, as a result an intimation in DRC-01A was issued.

Petitioner’s Submissions: –

• It was submitted on the behalf of the Petitioner that the respondent issued communications all dated 06.12.2021 in Form DRC – 01A, for the years 2019 – 20, 2020-21 and 2021-22, pointing out defects involving tax liabilities and non-maintenance of accounts. Thereafter, on request being made by the petitioner for granting time to file the reply, the petitioner was directed by the respondent to appear for personal hearing through letter dated 28.12.2021.   However, the Petitioner duly filed the reply vide letter dated 03.01.2022 in Part B of the form DRC – 01A and the tax liability as stated in the intimation was disputed by the Petitioner.
• It was submitted that the inspection carried out was completely perverse and information and statements were collected with intimation, inducement of dropping of proceedings. Thus, completely in violation of principles of natural justice and the demand raised in the Form DRC – 01A has to be rejected.
• That all three showrooms of the Petitioners were inspected by the Officers of the State Tax Department under the orders issued by Joint Commissioner of State Taxes (Intelligence) in form GST INS – 01 and statements were recorded from the Manager and Directors of the Petitioner Company. Subsequently, an intimation in Form GST DRC- 01A was issued, in which it was mentioned that if the petitioner had any objection to the notice, reply in Writing to be filed before the ‘Proper Officer’ within 15 days from the date of receipt of notice, failing which, orders will be passed accordingly, confirming the tax, penalty and interest as proposed in the notice.
• Further the respondent without considering the serious objections made in the reply dated 03.01.2022, granted final opportunity personal hearing and directed the Petitioner to appear on 24.01.2022. The authorized representative on the behalf of the Petitioner appeared before the respondent office on 24.01.2022 and submitted that personal hearing cannot be initiated at this stage and reiterate the stand of the petitioner in respect of the liability raised.
• It was also informed that it was the observation of the respondent that the petitioner did not raise any objection and agreed to the defects raised during investigation and paid Rs. 89,52,450/-. Thus, the objections at this stage are not acceptable being afterthought.
• The impugned order is against the principles of natural justice as no show cause notice, as envisaged under Section 73 & 74, has been issued in the present proceedings and the act of the respondent is unfair, unreasonable.
• That filing of appeal against said order as provided under Section 107(1) of TNGST/CGST Act, would amount to acceptance of legality of order and participating in the proceedings.
• That the impugned order has been received on 13.02.2022 and the time for filing appeal, was available up to 12.05.2022. Further taking reference of order dated 10.01.2022, passed by the Hon’ble Supreme Court taking Suo moto cognizance of extension limitation due to COVID-19, provided 90 days from 01.03.2022, it was submitted that the petitions have been filed before the due date of filing the appeal.
• It has been pointed out on the behalf of the Petitioner that in Form DRC – 01A, it mentioned that ”You are hereby advised to pay the amount of tax as ascertained above along with the amount of applicable interest and penalty under Section 74(5) by ……………, failing which show cause notice will be issued under Section 74(1)”. However, in the present matter the department has issued a recovery notice in Form GST DRC – 09 and directed the Branch Manager, Axis Bank, Ramanathapuram (Petitioner’s Bank), to recover the amount due from the Petitioner.  Thus, the impugned order is not sustainable as passed without following the procedure contemplated under GST Law and in gross violation of principles of natural justice.
• To support the submissions, the petitioner relied on: – (i) Circular No.10/2019, Commercial Taxes Department, dated 31.05.2019, (ii) Circular No.72/2019-TNGST, Commercial Taxes Department, dated 31.05.2019, (iii) Mahindra and Mahindra Ltd., vs. The Joint Commissioner (CT) Appeals, The Deputy Commissioner (CT) – II, Large Tax Payers Unit, Chennai – 8 [2021 (3) TMI 82 – Madras High Court], (iv) Mahindra and Mahindra Ltd., vs. The Deputy Commissioner (CT) – II, Standard Chartered Bank, Chennai – 1 [2021 (4) TMI 187 – Madras High Court], (v) M/s.NKAS Services Private Limited, Kolkata vs. The State of Jharkhand and others [2022 (02) LCX 0147 – Jharkhand High Court, W.P.(T)No.2659 of 2021, decided on 09.02.2022], (vi) M/s.V.R.S. Traders vs. Assistant Commissioner (State Taxes) Poonamallee Assessment Circle, Varadharajapuram, Chennai [2022 (3) TMI 490 – Madras High Court], (vii) Agrometal Vendibles Pvt. Ltd., vs. State of Gujarat [2022- TIOL-517-HC-AHM-GST].

Respondent Submissions: –

• It was submitted on the behalf of the respondent that the burden of proof lies on the petitioner to prove that there is no evasion of tax. Further, the Petitioner was provided the opportunity of personal hearing and after considering the objections raised, the impugned order has been passed, in accordance with law.
• The objections raised on the behalf of the petitioner were not convincing and acceptable, there was no other option, but to pass the impugned order dated 31.01.2022¸confirming the proposal of tax, penalty and interest made in the notice dated 06.12.2021.
• That against the said order the Petitioner can file an appeal before the Deputy Commissioner (GST-Appeal) under Section 107(1) of the TNGST Act. Thus, prayed for dismissing the Writ Petition.

Held: –

• The Hon’ble Cout after considering the submissions, facts of the case and the law applicable observed that the merit of the case is that ‘the petitioner show rooms, office and Godown were inspected. The Petitioner duly filed objections and its Authorized Representative appeared before the respondent, however they were unable to give proper explanation with supporting documents.
• It was found that after the issuance of GST Form DRC – 01A, if the petition had objections and did not pay the tax as ascertained, a show cause notice has to be issued under Section 74(1) of the TNGST Act and after considering objections and granting hearing, the impugned assessment order ought to have been passed. Thus, procedure has not followed in the present case.
• Further following the impugned order, the respondent has issued a recovery notice in Form GST DRC – 09 under Section 79 of the TNST Act, to the Petitioner’s Bank, is not proper.

The Hon’ble Court with the above findings allowed the Writ Petitions and quashed the impugned assessment orders dated 31.01.2022 as well as the recovery notice dated 10.06.2022 with the directions to the respondents to issue fresh notice after following the procedures under TNGST Act and decide the matter on merits, after providing opportunity for filing objections, and pass an order in accordance with law.

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