The Madras High Court has ruled that Section 73(2) of the CGST/TNGST Act does not mandate a compulsory three-month interval between the issuance of a show cause notice (SCN) and the adjudication order, while simultaneously setting aside two GST assessment orders after finding that they contained mutually contradictory conclusions regarding the taxability of the same transactions.
The bench of Justice Senthilkumar Ramamoorthy remanded the matter to the tax authorities for fresh adjudication after observing that the two impugned orders adopted inconsistent positions on whether the supplies were exempt or taxable.
The appellant/assessee approached the High Court seeking to quash two assessment orders issued in Form GST DRC-07 under Section 73 of the CGST/TNGST Act. The petitioner contended that the assessments were legally unsustainable on multiple grounds, including violation of Section 73(2) and inconsistency in the findings recorded by the department.
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The petitioner argued that Section 73(2) requires a minimum period of three months between the issuance of the show cause notice and the passing of the adjudication order. Reliance was placed on a recent Bombay High Court decision in AM Market Places Private Limited v. Union of India, where a similar interpretation had been adopted.
Apart from this legal contention, the petitioner highlighted a more fundamental defect in the assessment proceedings. One assessment order proceeded on the premise that the petitioner had wrongly availed input tax credit (ITC) on exempt supplies, whereas the other order relating to the same assessment period treated those very supplies as taxable rather than exempt. According to the petitioner, both findings could not coexist.
The High Court undertook a detailed interpretation of Sections 73(2) and 73(10) of the GST law.
The Court observed that Section 73(10) prescribes the outer limitation for passing an adjudication order, while Section 73(2) merely requires the show cause notice to be issued at least three months before the expiry of that statutory limitation period.
According to the Court, the purpose of Section 73(2) is to ensure that tax authorities do not issue show cause notices at the last minute and rush through adjudication before the limitation period expires. However, the provision cannot be interpreted as requiring every adjudication order to be passed only after waiting for three months from the date of the show cause notice.
The Court emphasized that such an interpretation would amount to reading words into the statute that the legislature never intended.
While rejecting the petitioner’s interpretation of Section 73(2), the Court clarified that taxpayers must nevertheless be provided with a reasonable opportunity to respond to the show cause notice and defend themselves effectively.
The bench observed that principles of natural justice require sufficient time for taxpayers to submit replies and contest the proposed demand. However, this requirement does not automatically translate into a mandatory statutory waiting period of three months between the notice and the assessment order.
In an important departure from the Bombay High Court’s reasoning, the Madras High Court expressly stated that it was unable to endorse the interpretation adopted by the Bombay High Court in the AM Market Places decision.
Although the Court rejected the petitioner’s principal argument on statutory interpretation, it accepted the challenge based on contradictory factual findings.
The Court noted that one assessment order alleged wrongful availment of ITC because the supplies were exempt, while the second assessment order simultaneously proceeded on the footing that the same supplies were taxable and therefore not exempt.
Such inconsistent conclusions in respect of the same assessment period were found to have substantial merit, making the assessment orders unsustainable.
Considering the inconsistencies, the High Court set aside both assessment orders and remanded the matter to the proper officer for fresh consideration.
However, the remand was made subject to the petitioner depositing 25% of the disputed tax demand arising from one of the impugned assessment orders, after adjusting any recoveries already made. The payment is required to be made within 30 days from receipt of the Court’s order.
The Court further directed the tax authority to reconsider both matters afresh. Provide the petitioner with a reasonable opportunity of hearing. Pass fresh orders within three months from the date of deposit. Independently examine whether the supplies are in fact exempt.
Additionally, the Court directed that the bank attachment imposed on the petitioner shall be lifted upon compliance with the deposit condition.
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