The Gauhati High Court has held that scrutiny of returns under Section 61 of the Central Goods and Services Tax Act, 2017, is not a mandatory preliminary step in every GST investigation, particularly when the proposed tax demand is based on evidence gathered during a search conducted under Section 67 of the Act.
The Court dismissed a writ petition challenging a demand-cum-show-cause notice alleging suppression of taxable supplies worth more than Rs. 3.42 crore and proposing a GST demand of approximately Rs. 61.67 lakh. However, it granted the taxpayer 45 days to submit a detailed response to the notice and raise all factual and legal objections before the adjudicating authority.
The petitioner/assessee is a partnership firm carrying on business under the name “Detailing Bull.” It challenged the demand-cum-show-cause notice dated August 14, 2025, issued by the Assistant Director, Directorate General of GST Intelligence, Guwahati Zonal Unit.
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The notice covered the financial years 2021-22 to 2024-25. The petitioner also questioned the legality of the search conducted at its premises on February 1, 2024, the consequential seizure order issued in Form GST INS-02 and all subsequent proceedings.
According to the Department, the investigation revealed misdeclaration or suppression of taxable supplies valued at Rs. 3,42,61,665 for the financial years 2021-22 to 2023-24. The corresponding GST liability was quantified at Rs. 61,67,100.
The demand for these years was proposed under Section 74(1) of the CGST Act. For the financial year 2024-25, the Department invoked Section 74A(1). Interest and penalties, including penalties under Section 122, were also proposed.
The notice took into account Rs. 3 lakh already deposited by the petitioner through Form GST DRC-03 on February 22, 2024.
One of the principal arguments raised by the petitioner was that the search had been conducted without valid authorisation and without the formation of the “reasons to believe” required under Section 67 of the CGST Act.
The High Court rejected the contention that there was no search authorisation, noting that the writ petition itself acknowledged the existence of Form GST INS-01 dated February 1, 2024.
The Court, however, distinguished between the existence of a written search authorisation and the statutory requirement that the competent officer must have reasons to believe that the circumstances specified in Section 67 existed.
It observed that the mere existence of Form GST INS-01 would not, by itself, conclusively establish that the statutory precondition for ordering the search had been satisfied. At the same time, the failure to furnish the recorded reasons to the taxpayer could not automatically be equated with the absence of reasons.
The Court explained that the CGST Act does not contemplate prior disclosure of the reasons for a search to the person whose premises are proposed to be searched. Such prior disclosure could defeat the purpose of the search itself.
What is essential, according to the Court, is that the competent officer must have actually formed the requisite belief on the basis of material available before issuing the search authorisation.
If contemporaneous reasons existed, the failure to supply those reasons to the taxpayer would not necessarily invalidate the search. However, if no reasons existed at the relevant time and the authorities subsequently attempted to justify the action, the validity of the search would have to be examined differently.
The High Court directed the adjudicating authority to examine the original Form GST INS-01 and the contemporaneous departmental records and record a finding on whether the competent officer had formed the necessary reasons to believe before authorising the search.
It clarified that the validity of the subsequent proceedings would depend upon the finding recorded on this issue.
The petitioner also alleged that the search proceedings were invalid because the search authorisation did not bear a Document Identification Number, or DIN.
The Court referred to CBIC Circular No. 122/41/2019-GST dated November 5, 2019, which prescribed mandatory generation and quoting of DIN for specified departmental communications, including search authorisations. It also noted the subsequent circular prescribing the consequences of non-compliance, subject to permitted exceptions and regularisation.
The High Court observed that the presence of a DIN on the final show-cause notice did not answer the taxpayer’s objection concerning the alleged absence of a DIN on the earlier search authorisation.
However, whether the communications requiring DIN actually carried such a number, whether the matter fell within any recognised exception and whether the documents were subsequently regularised in accordance with the prescribed procedure were factual questions requiring examination by the adjudicating authority.
The alleged DIN defect, without examination of the relevant records and the applicable exceptions, could not by itself justify quashing the entire show-cause notice in the exercise of writ jurisdiction under Article 226 of the Constitution, the Court held.
Another important challenge concerned the Department’s failure to undertake scrutiny of returns under Section 61 and issue Form GST ASMT-10 before initiating demand proceedings under Sections 74 and 74A.
The High Court explained that Section 61 of the CGST Act, read with Rule 99 of the CGST Rules, provides a procedure for dealing with discrepancies detected during scrutiny of returns.
Where a tax demand is founded upon a discrepancy detected through scrutiny under Section 61, the statutory procedure prescribed for that scrutiny cannot be bypassed.
However, Section 61 cannot be treated as a compulsory preliminary stage in every investigation merely because the Department ultimately compares evidence discovered during the investigation with the returns filed by the taxpayer.
In the present case, the show-cause notice was founded upon the search conducted under Section 67 and the investigation that followed. The Department relied on records maintained in the “Garage Plug” software, slip pads, sales records, statements recorded during the investigation and information obtained from persons connected with the business.
Since the proposed demand was based on the search and the materials allegedly recovered during the investigation, the absence of proceedings under Section 61 did not invalidate the notice.
The Court nevertheless cautioned that if any specific component of the proposed demand was based solely upon a discrepancy detected through scrutiny of returns, the Department would have to comply with the statutory requirements applicable to Section 61 proceedings.
This question was left open for examination during adjudication.
The petitioner also challenged the issuance of a single consolidated show-cause notice covering the financial years 2021-22 to 2024-25.
Rejecting this objection, the High Court held that there is no statutory prohibition against issuing a consolidated show-cause notice covering more than one financial year.
The Court relied on the decision of a coordinate Bench in M/s Tata Projects Ltd. v. Union of India and Others, which held that a consolidated notice covering different financial years could not be regarded as being without jurisdiction.
However, the Court directed the Department to determine the taxpayer’s liability separately for every financial year.
It noted that Section 74 had been invoked for the financial years 2021-22 to 2023-24, while Section 74A was invoked for 2024-25. The adjudicating authority would therefore have to apply the provision relevant to each year separately and independently examine limitation as well as the statutory ingredients required for invoking the respective provisions.
The petitioner further argued that the proposal to impose penalties under Sections 74 or 74A as well as Section 122 was contrary to Section 75(13) of the CGST Act.
The High Court held that Section 75(13) does not prohibit the Department from referring to Sections 74 or 74A and Section 122 in the same show-cause notice.
The provision operates at the stage of imposing a penalty and prevents more than one penalty from being imposed on the same person for the same act or omission.
Therefore, the mere proposal of penalties under more than one statutory provision at the show-cause notice stage was not sufficient to invalidate the proceedings.
The Court nevertheless emphasised that the authorities were statutorily obligated to give full effect to Section 75(13) and ensure that the same act or omission was not subjected to a double penalty.
The petitioner contended that the show-cause notice did not properly disclose the alleged suppression, fraud or wilful misstatement necessary for invoking the extended demand provisions.
The Court observed that the notice proceeded on the allegation that certain taxable supplies had deliberately not been disclosed in the GST returns. The Department relied upon business records, entries in the Garage Plug software, slip pads, statements recorded during the investigation and information obtained from other persons.
Whether this material actually established suppression, fraud or wilful misstatement and whether the alleged suppressed turnover had been correctly quantified were factual matters that had to be decided during adjudication.
The petitioner would be entitled to explain the entries relied upon by the Department, contest the statements and other evidence, reconcile the figures and establish the correctness of its returns and tax liability.
The High Court held that it could not undertake such a detailed factual exercise while examining a challenge to a show-cause notice under Article 226.
It reiterated that where the dispute involves factual determination concerning suppression, fraud or wilful misstatement, the statutory adjudication process should ordinarily be permitted to continue unless the notice is shown to be entirely without jurisdiction or affected by a patent legal infirmity.
Finding no ground to interfere at the show-cause notice stage, the High Court dismissed the writ petition and declined to quash the search, seizure and consequential proceedings.
Nevertheless, in the interest of justice, it restored the taxpayer’s opportunity to respond by effectively putting the clock back to the date on which the demand-cum-show-cause notice was issued.
The petitioner was permitted to submit all factual and legal objections before the adjudicating authority within 45 days from the date of the judgment. The authority was directed to decide those objections in accordance with law.
The Court clarified that its observations were confined to the question of interference with the show-cause notice and should not be treated as findings on the merits of the tax allegations.
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