High Court Orders De Novo Adjudication via 10% Pre-Deposit to Rectify Natural Justice Violations and Verification Gaps

High Court Orders De Novo Adjudication via 10% Pre-Deposit to Rectify Natural Justice Violations and Verification Gaps

High Court Orders De Novo Adjudication via 10% Pre-Deposit to Rectify Natural Justice Violations and Verification Gaps

Issue

Whether final assessment orders passed under Section 74A can be sustained when they cross the demand caps proposed in the initial Form GST DRC-01 (in violation of Section 75(7)) and allege a lack of documentary evidence regarding the inward movement of goods, without providing the taxpayers a fair opportunity to contest findings arising from subsequent inspections.

Facts

• Tax Period: The dispute covers the tax period of Financial Year (FY) 2025-26.

• Initial Notice and Reply: The respondent tax authorities issued Show Cause Notices (SCNs) in Form GST DRC-01 under Section 74A. Each petitioner submitted their respective replies to these notices.

• Subsequent Inspection: After the replies were filed, the department conducted an independent field inspection of the petitioners’ business premises.

• The Assessment Orders: The department then passed final assessment orders. These orders contained major additions and invoked penal provisions under Sections 122(1)(ii) and 122(1)(vii), alleging that the petitioners failed to produce critical documents to prove the physical inward movement of goods for claiming and passing on Input Tax Credit (ITC).

• Statutory Cap Breach: The petitioners filed writ petitions challenging these orders, asserting that the final tax demands exceeded the figures originally proposed in the DRC-01 notices, violating the absolute statutory cap mandated under Section 75(7).

• Parallel Registration Dispute: Concurrently, the petitioners’ GST registrations were cancelled and subsequently revoked by the department, only for the authorities to issue fresh notices in Form GST REG-17 proposing cancellation all over again.

Decision

• Remand for De Novo Adjudication: The High Court determined that the breakdown in procedural fairness and the clash over the post-inspection documentation required a fresh evaluation. The Court set aside the impugned orders and remitted the cases back for de novo (fresh) adjudication.

• Conditional 10% Pre-Deposit: To balance the revenue’s interest, the remand was made strictly conditional upon each petitioner depositing 10% of the disputed tax demand within 30 days.

• Conversion into SCN Addenda: The petitioners were permitted a legal fiction to treat the invalid final assessment orders merely as addenda to the initial DRC-01 notices, allowing them a fresh opportunity to file comprehensive replies backed by robust proof of physical inward movement of goods and valid ITC pass-ons.

• Time-Bound Disposal & Asset Relief: Upon the petitioners complying with the deposit and reply timelines, the respondents were directed to pass fresh final orders within three months. Concurrently, the active bank attachments were ordered to be vacated, provided the 10% pre-deposit was cleared and no other tax arrears existed.

• Default Clause: If the petitioners fail to fulfill the pre-deposit condition, the department remains at complete liberty to initiate recovery actions after giving due notice. The matter was decided in favour of the assessee by way of remand.

Key Takeaways

1. Section 75(7) Cap is Sacrosanct

The tax department cannot travel beyond the boundaries of its own Show Cause Notice. Under Section 75(7), the final demand wrapped in an assessment order cannot exceed the tax, interest, or penalty amounts originally proposed in the Form GST DRC-01. Any excess demand is a jurisdictional nullity.

2. Post-Inspection Evidence Requires a Fresh Opportunity

If the department gathers adverse evidence or changes its stance through an inspection conducted after a taxpayer has filed their initial reply, it cannot directly use those findings to pass an adverse order. Doing so violates natural justice unless the taxpayer is served a supplementary notice to rebut the new inspection findings.

3. Order-to-Addendum Rewind Defangs Bank Attachments

When a High Court scales down a final order to the status of an “addendum to an SCN,” the absolute demand is legally erased for the time being. This allows courts to order the immediate lifting of aggressive recovery measures, like bank attachments, giving the business breathing room to litigate the merits.