Premature SCN and Time-Barred Audit Quashed; Case Remanded to Pre-SCN Stage.

Issue

Whether a Show Cause Notice (SCN) issued before the expiry of the deadline granted to file a reply is valid, and whether an audit report issued beyond the statutory three-month limit from the commencement of audit is legally sustainable.

Facts

• Audit Notice: The department issued an audit notice on 11 January 2024 covering FY 2017–18 to 2022–23.

• Submission of Documents: The petitioner (Varian Medical Systems) submitted various documents and replies, with the final reply to the draft audit report submitted on 11 October 2024.

• Pre-SCN & Premature Action: The department issued a pre-show cause notice consultation letter on 25 November 2024, granting the petitioner three days to reply. However, the final SCN was issued on 27 November 2024, before this three-day period had expired.

• Delayed Audit Report: The final audit report was dated 11 February 2025 and communicated on 13 February 2025.

• Petitioner’s Plea: The petitioner argued that the SCN was premature (violating natural justice) and the audit report was time-barred as it was issued more than three months after the final submission of documents (11 October 2024), violating Section 65(4) of the CGST Act.

Decision

• The Delhi High Court set aside the impugned Show Cause Notice (SCN).

• Violation of Natural Justice: The Court held that issuing the SCN on 27 November 2024, before the three-day reply period for the pre-SCN notice had expired, was a clear violation of the principles of natural justice. The opportunity to reply must be real, not illusory.

• Time-Barred Audit: The Court accepted that the audit was required to be completed within three months from the commencement (which, in this context, was linked to the final submission on 11 October 2024). Since the report was issued in February 2025, it exceeded the statutory timeline under Section 65(4) and was held to be time-barred.

• Remand: The proceedings were relegated to the pre-show-cause notice stage. The department was directed to follow the proper procedure and timelines in accordance with the law.

Key Takeaways

• Strict Audit Timelines: Section 65(4) mandates that an audit must be completed within 3 months from its commencement. Failure to adhere to this timeline can render the audit report invalid.

• Natural Justice is Paramount: Granting time to reply is meaningless if the authority proceeds to issue an order or notice before that time expires. Such premature action vitiates the proceedings.

• 15-Day Notice for Audit: The judgment reiterated the statutory requirement (Section 65(3)) that a registered person must be given at least 15 working days’ notice prior to the conduct of an audit to ensure fairness.

• Pre-SCN Stage: By remanding to the pre-SCN stage, the court ensured the taxpayer gets a fair opportunity to contest the audit findings before a formal demand is raised.