Denial of Input Tax Credit and Demand Set Aside Due to Violation of Natural Justice

Denial of Input Tax Credit and Demand Set Aside Due to Violation of Natural Justice (Lack of Fair Hearing)

Issue:

Whether a demand for wrongful availment of Input Tax Credit (ITC) and non-payment of GST, along with an equivalent penalty, can be sustained when the assessee was not afforded a proper opportunity of being heard, specifically due to hearing notices being dispatched after the scheduled hearing dates.

Facts:

An investigation was initiated against several entities concerning the wrongful availment of ITC and non-payment of GST. The primary focus of the investigation was two companies, which were found to have created a network to generate fake ITC without any underlying supply of goods. As part of this broader investigation, the assessee in this case was also issued a notice, alleging that they were one of the companies that received invoices to illegally benefit from ITC. Based on these allegations, a tax demand of Rs. 2.8 crores and an equivalent penalty were imposed on the assessee. The assessee contended that they had submitted a detailed reply, which the Adjudicating Authority failed to consider. Furthermore, the assessee stated that personal hearing notices were either dispatched after the date of the personal hearing or received after the scheduled date, preventing them from attending the hearings. The assessee also informed the department that they had no connection with M/s Grimus Export Pvt., the entity against which the majority of the demand was raised.

Decision:

The court, upon reviewing the hearing notices and their dispatch dates, observed that the notices were indeed dispatched after the personal hearings had already been conducted by the Adjudicating Authority. The court emphasized that the assessee deserved to be heard before the Adjudicating Authority. Consequently, the demand for tax and the imposed penalty against the assessee were set aside. The matter was implicitly remanded for a fresh adjudication after providing a proper hearing.

Key Takeaways:

• Principle of Natural Justice: This case strongly affirms the fundamental principle of natural justice, specifically the right to a fair hearing (audi alteram partem). Any order passed without affording the affected party a reasonable opportunity to present their case is liable to be set aside.
• Validity of Hearing Notices: The dispatch date of hearing notices is crucial. If notices are sent after the hearing has already taken place, it constitutes a clear denial of the right to be heard.
• Duty of Adjudicating Authority: Adjudicating authorities have a duty to consider the replies filed by assessees and ensure that due process is followed, including providing adequate opportunities for personal hearings.
• Consequence of Procedural Lapses: Serious procedural lapses, such as the failure to provide a proper hearing, can lead to the quashing of demand orders and penalties, even if the underlying allegations are substantial.
• Remand for Fresh Adjudication: When an order is set aside due to a procedural infirmity, the matter is typically remanded back to the lower authority for a fresh adjudication, ensuring that the principles of natural justice are adhered to.