An order determining evaded sales without any reasoning is arbitrary and invalid.

An order determining evaded sales without any reasoning is arbitrary and invalid.

Issue

Is an appellate order sustainable in law if it determines the amount of “evaded sales” based on “evaded purchases” but provides no reasoning or basis for its calculation, making the determination appear arbitrary?

Facts

• Following a survey at the assessee’s business premises, the GST department initiated proceedings under Section 74 of the CGST Act for alleged tax evasion involving fraud.
• The assessee’s appeal against the initial order was partly allowed by the appellate authority.
• In its order, the appellate authority first quantified the value of “evaded purchases” to be ₹1.15 crore.
• Based on this finding, it then determined the “evaded sales” to be a much higher figure of ₹2.5 crore. The final tax, interest, and penalty were calculated on this sales figure.
• The critical flaw in the appellate order was that it provided absolutely no reasoning, calculation, or basis to explain how it made the leap from ₹1.15 crore in purchases to ₹2.5 crore in sales.

Decision

The High Court ruled in favour of the assessee.

• It held that the appellate authority’s action of fixing the evaded sales at a figure more than double the evaded purchases, without any supporting logic, was arbitrary.
• The court reiterated the fundamental legal principle that an order passed by a quasi-judicial authority must be a reasoned and speaking order. Since the impugned order failed this basic test, it was not sustainable in law.
• Accordingly, the court quashed the impugned orders and remanded the matter back to the authority with a clear direction to decide the issue afresh by passing a properly reasoned and speaking order.

Key Takeways

• Orders Must Contain Reasons: This is a cornerstone of natural justice and administrative law. Any order that has adverse consequences for a person, especially a tax demand, must contain clear reasons for its conclusions. The affected person must be able to understand how and why the decision was reached.
• No Arbitrary Estimations: While tax authorities sometimes have to make estimations, these must be based on some logical foundation, credible material on record, or an established industry standard. They cannot be arbitrary, based on pure guesswork, or without any disclosed methodology.
• A Clear Nexus Must Be Shown: If an authority is determining a figure (like evaded sales) by extrapolating from another figure (like suppressed purchases), there must be a clear and explained nexus between the two, such as the application of a reasonable gross profit margin.
• The Remedy for an Unreasoned Order is Remand: When a court finds that an order from a lower authority is not a “speaking order,” the standard procedure is to set that order aside and remand the case for a fresh decision, with the instruction that a reasoned order must be passed.