Jurisdictional Invalidity of Composite Show Cause Notices (SCNs)

Jurisdictional Invalidity of Composite Show Cause Notices (SCNs)

1. The Core Dispute: Consolidation vs. Independent Tax Periods

The Revenue department has frequently adopted a practice of “bunching” or clubbing multiple financial years into a single Show Cause Notice (SCN) or a composite assessment order. This is often done for administrative convenience or to extend the limitation period for earlier years.

• Revenue’s Stand: They rely on the phrase “any period” used in Sections 73(1) and 74(1), arguing it empowers them to issue a consolidated notice for a block of years.

• Assessee’s Stand: The GST law is return-centric. Every financial year has a distinct “tax period,” a separate annual return, and, most importantly, a unique statutory limitation period. Clubbing them is a “colorable exercise of power” that bypasses these limits.

2. Legal Analysis: Why “Clubbing” is Impermissible

High Courts across India (Madras, Bombay, Karnataka, and Kerala) have recently solidified the stance that composite notices are void ab initio (invalid from the beginning) due to the following reasons:

I. Separate Limitation Clocks

Under Sections 73(10) and 74(10), the time limit for passing an order is strictly tied to the due date for furnishing the annual return for each specific financial year.

• Example: FY 2022-23 has a different “last date” for adjudication than FY 2025-26.

• The Flaw: By clubbing them, the department often tries to bring a later year’s adjudication forward or, more dangerously, revive a time-barred year by tethering it to a current one.

II. Definition of “Tax Period”

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

• Since there is no provision for a “multi-year return,” there can be no “multi-year notice.”

III. Prejudice to Year-Specific Defenses

Each financial year is an independent unit. Reconciliations (GSTR-1 vs. 3B), Input Tax Credit (ITC) eligibility under Section 16(4), and even tax rates can change year-to-year.

• Amnesty & Compounding: A composite order prevents a taxpayer from settling one year under an Amnesty Scheme while litigating another. It also blocks year-wise compounding of offenses under Section 138.

3. Final Ruling: Quashed with Liberty

The courts have consistently ruled that administrative convenience cannot override statutory safeguards.

• Verdict: The composite Show Cause Notice and the resulting Assessment Order are quashed for lack of jurisdiction.

• Directives: The Revenue is granted the liberty to initiate fresh, separate proceedings for each financial year, provided they stay within the individual limitation periods for those years.

Key Takeaways for Taxpayers

• Threshold Challenge: If you receive a DRC-01 (SCN) that covers more than one financial year, you can challenge it immediately via a Writ Petition without waiting for the final order.

• Check “Time-Barred” Years: Often, the oldest year in a composite notice is already time-barred. Quashing the composite notice effectively saves you from those “expired” demands.

• Financial Impact: Separate orders mean you can choose to pay and close smaller demands while appealing only the larger, disputed ones, rather than being forced to pay a massive composite pre-deposit.