23.04.2022- Assessment Order Without Issuance Of Notice Under Section 74(1) Is Not Sustainable – Madras High Court

The Hon’ble High Court of Madras vide its order dated 10th February 2022 in the matter of M/s. V.R.S. Traders Vs. Assistant Commissioner (State Taxes) in Writ Petition Nos.1607, 1609 and 1613 of 2022 and WMP.Nos.1744, 1747 and 1750 of 2022 held that the assessment order passed on the basis of proposal given in DRC -01A under Section 74(5) without the issuance of show cause notice under Section 74(1) of the CGST Act, 2017 is not maintainable and is liable to be quashed.

The petitioner has preferred the writ petition before the Hon’ble High Court praying for quashing impugned order dated 05.08.2021 passed by the respondents violating the principle of natural justice.

Facts:

  • The petitioner is sole proprietary concern engaged in the business of iron and steel scrap and duly registered under the GST and filing its GST returns on regular basis.
  • A communication in Form DRC-01A dated 15.10.2020 was issued to the petitioner by the department alleging that some of the iron and steel scrap suppliers of the petitioner were either non-existent or were not conducting any business. Thus, the Input Tax Credit amounting to Rs. 3,60,02,382/- availed by the petitioner is not admissible and has been wrongly availed.
  • The Petitioner duly replied to the aforesaid communication vide its reply dated 19.10.2020, whereby the proposal issued in Form DRC-01 under Section 74(5) was not accepted by the petitioner.
  • Thereafter, the respondents passed an assessment order dated 05.08.2021 asking for reversal of ITC under Section 74 with imposition of penalty under Section 74(5), with instructions that the said order specifying the ITC reversal, penalty and interest payable, has also been uploaded in the common portal. The petitioner assailing the said order dated 05.08.2021 moved the present writ petition.

Petitioner’s Stand:

  • It was submitted on the behalf of the petitioner that the procedure to be followed by the department should have been the issuance of show cause notice under Section 74(1) of the Act in FORM DRC-01 after the proposal in FORM DRC-01A under section 74(5) was not accepted by the petitioner in its reply dated 19.10.2020,
  • Further, the impugned assessment order should have been passed after providing a proper opportunity of hearing to the petitioner.
  • As the show cause notice in FORM DRC 01 under Section 74(1) of the Act has not been issued in the present matter, the proceedings under the impugned order are vitiated.

On the other hand, it was admitted on the behalf of the respondents that except DRC – 01A, no further notice in FORM DRC – 01 was issued under Section 74(1) of the Act.

Held:

  • The Hon’ble High Court after considering the submissions from the both sides as well as taking note of its own order dated 08.02.2022 in the matter and law stated in Section 74(1) & Section 74(5) observed that if the revenue wants to initiate the proceedings, they have to issue a notice under Section 74 (5) giving a proposal to the assessee for paying the tax as ascertained by them, along with interest and 15% penalty, and if the proposal is not accepted by the asseesee, the next course of action to be followed by revenue is to issue a notice under Section 74(1) of the Act.
  • The Hon’ble Court further held that the DRC- 01 notices under Section 74(1) which is mandatory in nature, has not been issued in the present matter while passing the impugned assessment order, thus the proceedings culminated in impugned order of assessment are vitiated.

The Hon’ble High Court with the above findings quashed the impugned order and remitted the matter back to the respondents to reconsider by further issuing a DRC-01 notice to the petitioner, and pass necessary order after providing fair opportunity of hearing to the petitioner.

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