The Kerala High Court has quashed a GST show cause notice issued on the basis of audit observations that had not attained finality, holding that the tax authorities failed to give the taxpayer an opportunity to submit objections before finalising the audit findings.
The bench of Justice Ziyad Rahman A.A. directed the authorities to reconsider the audit proceedings after allowing the taxpayer to respond to the discrepancies communicated during the audit.
Buy Now: 160+ GST E-Magazine September 2026
The petitioner/assessee has challenged the proceedings under Section 65 of the Central Goods and Services Tax Act, 2017, read with Rule 101 of the CGST Rules.
The company received an audit notice in Form GST ADT-01 dated January 17, 2024, and submitted a reply along with the documents sought by the department.
The authorities subsequently issued draft audit observations on July 4, 2024. Since the observations were voluminous and covered information relating to several years, the company sought additional time to respond through communications dated July 11 and July 15, 2024.
However, an audit note was issued on July 16, 2024, followed by a show cause notice on July 31, 2024, and a corrigendum on August 1, 2024. During the pendency of the writ petition, the authorities issued a further audit report dated September 3, 2024, which they treated as the final audit observations.
The company argued that the audit had not been completed in accordance with the statutory procedure and that it had been denied a proper opportunity to respond to the alleged discrepancies.
The department opposed the petition, contending that the challenge was directed against a show cause notice and that the company could raise its objections before the competent adjudicating authority.
The Court examined Section 65(6), which requires the proper officer to communicate the audit findings, the taxpayer’s rights and obligations, and the reasons for the findings within 30 days of the conclusion of the audit.
It also referred to Rule 101(4), under which discrepancies noticed during the audit may be communicated to the registered person, who may submit a reply. The officer must finalise the audit findings after duly considering that reply.
On examining the July 16 audit note, the Court found that its contents were essentially an intimation of discrepancies calling for further information from the company. It could not be treated as final audit findings.
Nevertheless, the department relied on that note to issue the July 31 show cause notice, before giving the company an opportunity to respond and before issuing the September 3 final audit report.
The Court consequently held that the show cause notice was legally unsustainable because it rested on a report that had not attained finality.
The Court held that the September 3 report was also unsustainable because the company had not been allowed to submit objections as contemplated under Rule 101(4).
Although draft observations had earlier been communicated, the authorities proceeded without deciding the company’s requests for additional time. The July 16 audit note neither referred to those requests nor recorded a decision accepting or rejecting them.
The Court concluded that the statutory procedure for finalising the audit had not been followed.
The Court separately rejected the company’s contention that the audit was time-barred. It explained that, under Section 65(4), commencement of the audit is determined by the later of the date on which the required records are made available and the date on which the audit is actually instituted at the business premises.
The Court expressly quashed the July 31, 2024 show cause notice and the September 3, 2024 final audit report. It directed the competent authority to permit the company to submit objections to the July 16 audit note.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
Read More: Sale Of Tender Documents Not Taxable Service: CESTAT
