Demand for Ineligible ITC – Order Set Aside for Lack of Personal Hearing; Remanded for Fresh Adjudication.

I. Demand for Ineligible ITC – Order Set Aside for Lack of Personal Hearing; Remanded for Fresh Adjudication.

Issue:

Whether a demand order raised for availing ineligible Input Tax Credit (ITC) should be set aside if the assessee claims their reply to the show cause notice (SCN) was not furnished (due to an accountant’s error) and no opportunity for personal hearing was granted before the order was passed.

Facts:

For the period 2019-20, a demand order-in-original was passed against the assessee subsequent to the issuance of a show cause notice (SCN). The assessee argued that their reply to the SCN was handed over to their accountant, who, however, failed to furnish it. Crucially, the assessee also submitted that they were not afforded an opportunity to participate in a personal hearing. Furthermore, after becoming aware of the impugned order, the assessee filed an application for rectification of the order on August 13, 2024, which was also rejected.

Decision:

In favor of the assessee (Matter remanded): The court held that the assessee had not been afforded an opportunity to be heard. It was emphasized that an opportunity ought to be afforded to the assessee to contest the matter on merits. Accordingly, the assessee was granted 30 days’ time to file a reply to the SCN, and the matter was remanded for a fresh order to be passed.

Key Takeaways:

• Fundamental Right to Hearing (Natural Justice): The right to be heard is a cornerstone of natural justice. Even if there are issues with the assessee’s internal management (like the accountant’s failure to furnish a reply), if a personal hearing was genuinely not provided before an adverse demand order, it constitutes a procedural violation.
• Opportunity to Contest on Merits: Courts prioritize ensuring that assessees have a fair chance to present their case on the merits before a final demand is confirmed.
• Consequences of Lack of Hearing: An order passed without providing a personal hearing, especially when explicitly requested or when an adverse decision is contemplated, is often set aside and the matter remanded for fresh adjudication after providing the necessary opportunity.
• Rectification Application as Evidence of Seeking Redressal: The fact that the assessee filed a rectification application after learning of the order indicates their intent to seek redressal and willingness to engage, which may positively influence the court’s decision to grant a fresh opportunity.

II. Demand – Limitation Period – Extension of Time: Pending Supreme Court Decision.

Issue:

What is the current status and legal implication of the challenge to Notification Nos. 9/2023-Central Tax and 56/2023-Central Tax (and their corresponding State Tax counterparts) issued by the Central Board of Indirect Taxes and Customs, which extend the limitation period for issuing demand orders under Section 73 of the CGST Act.

Facts:

The assessee challenged the validity of Notification Nos. 9/2023-Central Tax, dated March 31, 2023, and 56/2023-Central Tax, dated December 28, 2023 (along with related State Tax notifications), which aim to extend the limitation period for proceedings under Section 73 of the CGST Act.

Decision:

Matter stayed: The court noted that a similar matter was pending consideration before the Supreme Court in HCC-SEW-MEIL-AAG JV v. Asstt. Commissioner of State Tax [S.L.P No. 4240 of 2025, dated February 21, 2025]. Therefore, the challenge made by the assessee to these notifications in the present proceedings would be subject to the outcome of the decision of the Supreme Court. The court did not rule on the validity of the notifications itself but acknowledged the pendency before the apex court.

Key Takeaways:

• Uncertainty on Limitation Period Extensions: The validity of notifications extending limitation periods under Section 168A of the CGST Act, particularly those issued during and after the COVID-19 pandemic, has been a contentious issue across various High Courts. There have been conflicting judgments.
• Supreme Court’s Definitive Ruling Awaited: The reference to the pending Supreme Court case signifies that the apex court will provide a definitive interpretation on the validity and scope of these extension notifications. This will resolve the widespread uncertainty surrounding the limitation periods for GST demands.
• Interim Approach by Lower Courts: Until the Supreme Court delivers its judgment, High Courts are likely to either stay proceedings or grant interim relief in cases where the primary challenge revolves around the validity of these extension notifications, linking their outcome to the Supreme Court’s decision.
• Implications for Taxpayers and Department: The Supreme Court’s decision will have massive implications for both taxpayers (determining whether past demands are time-barred) and the tax department (validating their ability to pursue older demands).