Invalidation of Composite Show Cause Notices for Multiple Tax Periods

Invalidation of Composite Show Cause Notices for Multiple Tax Periods

1. The Core Dispute: Consolidation of Tax Periods

The revenue authorities issued a single, consolidated Show Cause Notice (SCN) covering multiple financial years (typically ranging from FY 2019-20 to 2021-22 or beyond). The petitioner challenged this “bunching” of years, arguing that it violated the fundamental architecture of the GST law.

• Petitioner’s Stand: The GST framework is inherently financial-year specific. Registration, filing of returns, and specifically the limitation periods under Sections 73 and 74 are tied to the due date of the annual return for each specific year. Clubbing them into one notice is a jurisdictional error.

• Revenue’s Stand: The department argued that the phrase “for any period” in Sections 73 and 74 permits the issuance of a composite notice for administrative convenience, and there is no express statutory bar against it.

2. Legal Analysis: Why “Bunching” is Illegal

The High Court conducted an exhaustive analysis of the GST statutory scheme and identified several reasons why composite notices are invalid:

I. Independent Limitation Periods

Under Sections 73(10) and 74(10), the limitation for passing an order is 3 years (non-fraud) or 5 years (fraud) from the due date of the annual return for the relevant financial year.

• The Ruling: By clubbing years, the department effectively resets or ignores these distinct timelines, potentially bringing time-barred periods back into the assessment window.

II. Prejudice to Natural Justice

Each financial year involves different turnovers, ITC positions, and factual reconciliations.

• The Ruling: A single notice deprives taxpayers of the right to provide year-wise explanations and defenses. It also complicates the right to compounding of offenses or availing of amnesty schemes, which are usually year-specific.

III. Interpretation of “Any Period”

The court held that “any period” must be read in conjunction with Section 2(106), which defines “tax period” as the period for which a return is required to be filed (monthly, quarterly, or annually).

• The Finding: “Any period” cannot be stretched to mean a “block of years” unless specifically authorized by the statute.

3. The Ruling: Quashing with Liberty

The Court quashed the composite show cause notice and all subsequent proceedings (orders, notices, etc.) initiated based on that notice.

• Outcome: The action was declared void ab initio and without jurisdiction.

• Reserved Liberty: The Court granted the revenue authorities the liberty to initiate fresh, independent proceedings by issuing separate show cause notices for each financial year, provided they are within the prescribed limitation periods.

Key Takeaways for Taxpayers

• Jurisdictional Defense: If you receive a notice covering multiple financial years, you have a strong legal ground to challenge its very jurisdiction.

• Check the Section: Issuing one notice often allows the department to wrongly invoke Section 74 (longer limitation) for all years, even where Section 73 should apply.

• Consistent View: While the Delhi High Court has expressed a contrary view in certain fraud-specific cases (Ambika Traders), the Karnataka, Madras, and Bombay High Courts have consistently ruled that bunching is impermissible.