A demand order is invalid if a show-cause notice in Form DRC-01 was not issued first.

Issue

Is a summary demand order issued in Form DRC-07 legally valid if the tax department has failed to issue the mandatory, formal show-cause notice (SCN) in Form DRC-01 before passing the final order?

Facts

• The GST department initiated a proceeding by issuing a preliminary intimation of tax liability to the assessee in Form DRC-01A.
• Following this, the department failed to follow the next and most critical step in the adjudication process, which is the issuance of a formal show-cause notice (SCN) in Form DRC-01.
• Instead, the department went straight from the initial intimation (DRC-01A) to issuing a summary of the final order in Form DRC-07. This action created a final demand against the assessee without conducting a proper adjudication proceeding that must be initiated by an SCN.

Decision

The High Court ruled decisively in favour of the assessee.

• It held that the issuance of a show-cause notice in Form DRC-01 is a mandatory and non-negotiable step that must be completed before a final demand can be confirmed and summarized in Form DRC-07.
• A proceeding that bypasses this crucial step is not in accordance with the law.
• The court concluded that the summary order in Form DRC-07, having been issued without the jurisdictional prerequisite of a formal SCN, was legally invalid and was therefore set aside.

Key Takeways

1. The Show-Cause Notice is Jurisdictional: The SCN (in Form DRC-01) is the foundational legal document of any demand proceeding. It is what informs the taxpayer of the specific grounds for the proposed demand and gives them the formal opportunity to defend themselves. Without a valid SCN, the entire proceeding is without jurisdiction.
2. DRC-01A is Not a Substitute for DRC-01: The intimation in Form DRC-01A is a pre-notice communication, essentially an opportunity for the taxpayer to pay the tax voluntarily to avoid a formal proceeding. It does not and cannot replace the legal requirement of issuing a formal show-cause notice in Form DRC-01 if the taxpayer disputes the liability.
3. DRC-07 is Only a Summary: Form DRC-07 is not the detailed adjudication order itself; it is merely a summary of that order which is uploaded to the portal to create the demand in the electronic liability register. It can only be issued after a proper adjudication process has been completed, and that process must be initiated by a valid SCN.
4. Procedural Steps in Tax Law are Mandatory: The sequence of notices and procedures laid down in the GST law and the accompanying rules is not optional. A failure to follow these mandatory steps, especially a fundamental one like issuing a show-cause notice, is a fatal flaw that will vitiate the entire proceeding.