Demand Order for Ineligible ITC Set Aside for Breach of Natural Justice, Despite Assessee’s Laxity.

Demand Order for Ineligible ITC Set Aside for Breach of Natural Justice, Despite Assessee’s Laxity.

Issue:

Whether a demand order for availing ineligible Input Tax Credit (ITC) should be set aside if the assessee claims non-receipt of personal hearing notices and the final order is passed without granting an adequate opportunity of hearing, even if there might have been some “laxity” on the part of the assessee.

Facts:

The assessee challenged a demand order raised against it for availing ineligible Input Tax Credit. A Show Cause Notice (SCN) was issued on May 17, 2024, to which a reply was filed on June 10, 2024. Subsequently, a personal hearing was scheduled for November 20, 2024, but the assessee claimed not to have received this hearing notice. The next hearing was fixed for December 5, 2024, for which the assessee sought an extension until December 19, 2024. However, another notice for a personal hearing on December 16, 2024, was served, and according to the assessee, this notice was received on the date of the hearing itself. Thereafter, the assessee visited the respondent’s office, but without granting any further hearing, the impugned order imposing a substantial demand, including recovery of ineligible ITC and penalty, was passed.

Decision:

In favor of the assessee: The court acknowledged that there had been some “laxity” on the part of the assessee. However, it held that the respondent (tax authority) could have put the assessee “to terms” (i.e., imposed conditions or given a final opportunity) instead of passing a detailed order raising a substantial demand without ensuring a proper hearing. Considering that the assessee had not been afforded a hearing, even though some attempts were made by the assessee to thereafter approach the respondent’s office, there was a clear “breach of natural justice.” Accordingly, the impugned order was set aside, subject to certain conditions (which are not specified in the provided text but are typical for such remands, often involving cooperation by the assessee).

Key Takeaways:

• Balancing Act in Natural Justice: Courts often balance the duty of the tax authority to decide cases expeditiously with the taxpayer’s fundamental right to a fair hearing (natural justice). Even if there is some negligence or “laxity” on the assessee’s part, a complete denial of a hearing, especially before a significant demand, can lead to the order being set aside.
• Effective Opportunity of Hearing: The mere issuance of hearing notices is not always sufficient if the assessee can demonstrate they did not receive them in time to effectively participate (e.g., notice received on the date of hearing). The intent is to provide a meaningful opportunity.
• “Putting to Terms”: The court’s observation that the respondent “could have put assessee to terms” suggests that instead of outright passing an ex-parte order, the authority could have given a final warning or set clear conditions for the assessee to comply by a certain date, thus ensuring fairness while preventing undue delays.
• Consequences of Breach of Natural Justice: Violation of natural justice principles is a strong ground for setting aside a demand order, leading to a remand back to the adjudicating authority for fresh consideration after providing a proper hearing.
• Substantial Demand and Penalty: When a demand order involves a substantial amount, including penalty for ineligible ITC, courts are more inclined to ensure that all procedural safeguards, especially the right to hearing, are strictly followed before such a heavy financial burden is imposed.