A tax demand is invalid if it’s based on evidence not provided to the taxpayer.
Issue
Is a tax demand legally sustainable if it is confirmed based on materials and evidence that were never shared with the taxpayer, thereby denying them a fair opportunity to rebut that evidence?
Facts
- The GST department issued a show-cause notice to the assessee, alleging tax evasion. Based on this, an adjudication order was passed, which was later rectified, fixing the final demand at ₹40 lakhs.
- The assessee’s appeal against this rectified order was dismissed by the appellate authority.
- The assessee’s core grievance, which was brought before the High Court, was that the materials and evidence that formed the entire basis for the allegation of tax evasion were never provided to them at any stage of the proceedings (neither at the adjudication stage nor at the appellate stage).
- This meant they were asked to defend themselves against allegations without ever seeing the evidence that supposedly supported those allegations.
Decision
The High Court ruled in favour of the assessee.
- It held that confirming a tax demand based on evidence that was kept hidden from the taxpayer is a clear and fundamental violation of the principles of natural justice.
- The court stated that a taxpayer must be given a full and fair opportunity to see, understand, and challenge all the evidence that is being used against them.
- Because of this basic procedural flaw, the court found that the orders of both the adjudicating and appellate authorities were bad in law and not sustainable.
- The order that had confirmed the demand was quashed, and the entire issue was sent back to the adjudicating authority for a fresh adjudication.
Key Takeways
- Right to Know the Evidence: A cornerstone of a fair hearing and natural justice is that an accused party has the right to know the evidence being used against them. The tax department cannot rely on secret or undisclosed information to confirm a demand.
- Meaningful Opportunity to Rebut: The purpose of sharing the evidence is to give the taxpayer a meaningful opportunity to explain or rebut it. Without seeing the evidence, no effective defense is possible.
- A Breach of Natural Justice is a Fatal Flaw: A violation of the principles of natural justice is not a minor technical error; it is a fundamental flaw that can render an entire proceeding and the resulting order legally void.
- Remand is the Remedy: When an order is quashed on grounds of a natural justice violation, the standard judicial remedy is to remand the case back to the original authority with a direction to conduct a fresh and fair hearing, which includes sharing all relevant materials.
HIGH COURT OF CALCUTTA
Khokan Motors Works (P.) Ltd.
v.
Senior Joint Commissioner of State Tax
Aniruddha Roy, J.
WPA No. 1783 of 2025
SEPTEMBER 3, 2025
Boudhayan Bhattacharyya, Ms. Stuti Bansal, Ms. Keya Kundu, Ms. Chayana Kumary, Ms. Aradhana Jha and Sujay Paul for the Petitioner. Momenur Rahaman, Pretom Das, Dilip Kumar Agarwal and Biswaraj Agarwal for the Respondent.
ORDER
1. Affidavit of service filed in Court today, is taken on record.
Facts:
2. Through this writ petition the petitioner has challenged the impugned order dated October 4, 2023 passed by the adjudicating authority annexure p-3 at page-46 to the writ petition and the order of the appellate authority dated February 17, 2025, annexure p-10 at page-78 to the writ petition and the consequential Demand dated February 17, 2025, Annexure p-11 at Page 83 to the writ petition.
3. The relevant facts are only negated.
4. On the alleged ground of evasion of tax a pre-show cause notice dated August 24, 2023 at annexure p-1 at page-33 to the writ petition was served upon the petitioner. Under the pre-show cause notice the total demand was for a total sum of Rs.1,10,95,60,265.58/- on several counts mentioned therein. The petitioner has not replied to the said preshow cause notice. Annexure to the said pre-show cause notice at page-35 to the writ petition shows that the period of scrutiny was between April 2018 and March 2019. Various description of discrepancies have been alleged therein but in a cryptic manner only with the alleged quantum of evasion of tax.
5. Then a show cause notice was issued dated August 31, 2023, annexure p-2 at page-42 to the writ petition. The total evasion alleged in the said show cause notice was Rs.1,18,60,34,164.25/- on various counts mentioned therein. Annexure to the said show cause notice at page 44 to the writ petition shows diverse alleged description of discrepancies noticed by the authority. The same are also cryptic and only the amount were mentioned on account of alleged evasion of tax. The petitioner did not reply to the said show cause notice since the notice did not disclose the detail of the alleged description of discrepancies. Following the said show cause an adjudication order was passed by the adjudicating authority on October 4, 2023, annexure p-3 at page-46 to the writ petition under Section 73 of the relevant CGST and WBGST Act (for short, the relevant Act). The said order of the adjudicating authority has fixed the liability of evasion of tax to the extent of Rs.1,15,60,12, 406.32/-.
6. The petitioner applied for rectification of the said order of the adjudicating authority. On October 16, 2023, the order was rectified and the rectification order was passed by the adjudicating authority, annexure p-6 at page-59 to the writ petition. After carrying out the rectification, the demand was fixed at a total sum of Rs.40,37,877/-.
7. Being aggrieved by the said order under rectification dated October 16, 2023, the petitioner preferred the statutory appeal under Section 107 of the relevant Act before the jurisdictional appellate authority. After granting an opportunity of hearing to the petitioner, the appellate authority has passed the impugned order dated February 17, 2025, annexure p-10 at page-78 to the writ petition. The appellate authority did not interfere with the finding of the order of the adjudicating authority on rectification.
8. The appellate authority directed the adjudicating authority to give due credit to the payments already made by the petitioner through DRC-03 after due verification.
Submissions:
9. Mr. Boudhayan Bhattacharyya, learned counsel appearing for the petitioner submits that, the instant writ petition has been filed to a limited extent challenging the finding of the appellate authority and the adjudicating authority being upheld by the appellate authority, to the extent to the quantum of demand confirmed in appeal appearing from the impugned demand notice dated February 17, 2025 issued pursuant to the direction of the appellate authority, annexure P-11 at page 83 to the writ petition.
10. Learned counsel for the petitioner submits that, the adjudication made by the appellate authority though after granting an opportunity of hearing to the petitioner upholding the finding of the adjudicating authority after rectification but since the show cause notice being the source whereupon the rectification ultimately took place has not disclosed the adequate materials on the basis of which charges of evasion of tax was levied against the petitioner at the adjudicating stage, the order of the adjudicating authority on rectification confirming the said demand for a sum of Rs.40,37,877/- was in clear violation of the basic principle of natural justice. Hence, the demand notice following the order of the adjudicating authority and the appellate authority should be set aside including the portion of the order of the adjudicating authority on the basis where of the said impugned demand notice has been issued.
11. Mr. Pretom Das, learned advocate led by Mr. Momenur Rahman, leaned advocate appearing for the State GST authority submits that, the rectification order was passed after granting an opportunity of hearing to the petitioner and then the order in appeal was also passed after granting an opportunity of hearing to the petitioner. The leaned State counsel submits opportunity of hearing was granted and the principle of natural justice was complied with. He further submits that, the finding of the appellate authority is just and lawful and therefore the demand notice should not be interfered with.
Decisions:
12. After considering the rival contentions of the parties and on perusal of the materials on record, this Court at the outset, reiterates the settled legal principle.
13. When an act of an authority would have a civil and evil consequences, compliance of the principle of natural justice is inevitable and mandatory in law. If on the record, it appears that, compliance of natural justice has not been followed at the first stage/instance where it is mandatorily required to be followed, such defect cannot be cured at any of the subsequent stages, even at the stage of appeal which is the continuation of the original proceeding.
14. After considering the show cause notice in the instant case and on perusal of the order of the adjudicating authority on rectification, this Court is of the firm view that on the basis of the materials on which the evasion of tax was alleged against the petitioner, such materials were never made available before the petitioner to deal with. Such an act is clearly in violation of the basic principle of natural justice and has rendered the finding of the adjudicating authority to the extent it was upheld by the appellate authority and the demand notice was issued for a sum of Rs.40,37,877/- is bad in law and not in sustainable in law.
15. Accordingly, the order of the adjudicating authority on rectification dated October 16, 2023 in so far as it has confirmed the demand for a sum of Rs.40,37,877/- stands set aside and quashed. Consequently, the portion of the order of the appellate authority dated February 17, 2025 to the extent it has upheld the above finding of the adjudicating authority also stands set aside and quashed. Resultantly, the impugned demand notice dated February 17, 2025, annexure P-11 at page 83 to the writ petition also stands set aside and quashed.
16. In view above, to a limited extent, this Court is of the firm view that, the issue should be sent back for a fresh adjudication before the adjudicating authority only to the following extent, as quoted from the impugned appellate order:-
“As per the Serial no.1 of the ‘ Description of discrepancies noticed’ the Tax short paid on outward supply has been mentioned as under:-
| Sl no. | Description | IGST | CGST | SGST | CESS |
| 1(A) | Liability on outward supply declared in GSTR-1 | 2,23,32,803 | 28,37,19,004 | 28,37,51,362 | 10,67,26,046 |
| 1(F) | Liability on outward supply declared IN GSTR-3B | 2,21,96,565 | 28,29,55,627 | 28.29,55,627 | 11,10,93,955 |
| 1(G) | Tax short paid | 1,36,237 | 7,63,376 | 7,95,735 |
But on examination of the order of AO, tax short paid on these heads were rectified on application of the appellant and was determined only as follows with interest and applicable penalty-
| IGST(Rs.) | CGST(Rs.) | (SGST(Rs.) | CESS(Rs.) | |
| Tax payable | 133146.00 | 156178.00 | 188537.00 | 144321.00 |
| Interest payable | 203343.00 | 521737.00 | 2087589.00 | 540807.00 |
| Penalty payable | 13315.00 | 15618.00 | 18854.0o | 14432.00 |
17. The entire exercise to consider afresh to the extent as indicated above, shall be completed by the respondent no. 1 after granting an opportunity of hearing to the petitioner with a sufficient advance notice of hearing and then by passing a reasoned order in accordance with law positively within a period of eight weeks from the date of communication of this order.
18. It is made clear that, this Court has not expressed any opinion on the merit of the claim raised by the revenue department and the defence taken by the petitioner. All points are kept open for adjudication before the adjudicating authority, who shall proceed independently in accordance with law.
19. Since affidavits are not called for, the allegations made in this writ petition are deemed not to have been admitted by the respondents.
20. With the above observations and directions, this writ petition W.P.A. 1783 of 2025 stands disposed of, without any order as to costs.
21. The parties shall act on the server copy of this order duly downloaded from the official website of this Court.