A demand notice under Section 73 of the CGST Act is invalid if it’s not preceded by a scrutiny notice in Form GST ASMT-10, as required by Section 61 of the Act.

A demand notice under Section 73 of the CGST Act is invalid if it’s not preceded by a scrutiny notice in Form GST ASMT-10, as required by Section 61 of the Act.

Issue

Can the GST authorities legally initiate demand and recovery proceedings under Section 73 of the CGST Act, 2017, based on discrepancies they have found during the scrutiny of a taxpayer’s return, without first issuing a formal notice of those discrepancies in Form GST ASMT-10 as is mandatorily required by Section 61 of the Act?

Facts

• After scrutinizing the assessee’s GST return, the tax department directly issued a show-cause notice (SCN) under Section 73. This SCN proposed to raise a demand for tax due to alleged discrepancies, such as the wrongful availment of Input Tax Credit (ITC).
• The department’s critical procedural failure was that it completely skipped the mandatory first step required under Section 61. It did not issue a notice in Form GST ASMT-10 to the assessee. This form is specifically designed to inform the taxpayer about any discrepancies found during the scrutiny of their return and to give them a formal opportunity to explain or rectify them.
• The department tried to justify its direct action by claiming that the assessee had failed to provide certain information in its annual return. However, the court found that providing this specific information was actually optional for the financial year in question, as per government notifications.

Decision

The Gauhati High Court ruled decisively in favour of the assessee.

• It held that the procedure that is laid down in Section 61 of the Act is mandatory, not optional.
• This means that before the department can initiate demand proceedings under Section 73 for a discrepancy that has been found during the scrutiny of a return, it must first communicate those discrepancies to the taxpayer by issuing a notice in Form GST ASMT-10.
• The taxpayer must be given a chance to either accept the discrepancy and pay the tax or to offer a satisfactory explanation.
• Since this mandatory procedure was not followed, the court found that the initiation of proceedings directly under Section 73 was procedurally invalid and contrary to the entire scheme of the Act.

Key Takeways

1. You Must Follow the Prescribed Procedure: The GST Act has a clear, step-by-step process for raising demands. The scrutiny of a return (under Section 61) is a distinct preliminary step that must be properly completed before the department can move to the more serious stage of demanding tax (under Section 73).
2. The ASMT-10 Notice is a Jurisdictional Prerequisite: The issuance of a notice in Form GST ASMT-10 is a mandatory and jurisdictional requirement. It is not a mere formality that the department can choose to skip. Its non-issuance is a fatal flaw that renders the entire subsequent proceeding invalid.
3. The Law Guarantees a Right to an Explanation First: The GST law is designed to be taxpayer-friendly in this respect. It gives the taxpayer an opportunity to explain or rectify any discrepancies at an early, non-adversarial stage. Bypassing this step is a clear violation of the taxpayer’s statutory rights and the principles of natural justice.
4. No Jurisdiction Without a Proper Foundation: The failure to follow the mandatory procedure under Section 61 means that the department did not have a proper legal foundation to assume jurisdiction and issue a demand notice under Section 73. Without this proper foundation, the entire proceeding that is built upon it collapses.