Imposition of interest and penalty quashed as demand cannot travel beyond SCN scope

Imposition of interest and penalty quashed as demand cannot travel beyond SCN scope

Issue

Whether the adjudicating authority can legally impose interest and penalty in the final assessment order when the Show Cause Notice (SCN) issued for the relevant period proposed only the recovery of tax and contained no proposal or allegation regarding interest or penalty.

Facts

• Period Involved: Financial Year 2019-20.

• The SCN: The Department issued a Show Cause Notice proposing the recovery of tax only. The notice was silent regarding any liability for interest or penalty.

• The Order: Despite the limited scope of the SCN, the adjudicating authority passed an assessment order that levied interest and penalty in addition to the tax demand.

• The Challenge: The petitioner (Chaurasiya Zarda Bhandar) challenged the order, arguing that the demand traveled beyond the scope of the SCN, which is impermissible under the law.

Decision

• SCN is the Boundary: The Allahabad High Court held that the Show Cause Notice constitutes the foundation of any adjudication proceeding. The final order cannot expand the scope of liability beyond what was proposed in the SCN.

• Violation of Natural Justice: Levying interest and penalty without putting the assessee on notice violates the statutory mandate and the principles of natural justice. An assessee cannot be condemned to pay amounts they were never asked to explain.

• Arbitrary Action: The action of the authority was termed arbitrary and unsustainable.

• Ruling: The assessment order and the consequent attachment proceedings were quashed. The matter was remanded back to the adjudicating authority to pass a fresh order strictly in accordance with the law, ensuring the liability does not exceed the SCN proposals.

Key Takeaways

No Surprise Liability: The Revenue cannot ambush a taxpayer with new liabilities (like heavy penalties) in the final order if they were not specifically proposed in the SCN (Form DRC-01).

Check Your Notice: If your SCN mentions “Penalty: 0” or leaves the column blank, the final order (DRC-07) cannot legally impose a penalty. If it does, it is a valid ground for appeal or writ.