The Allahabad High Court has ruled that a GST adjudicating authority, after acknowledging that it failed to consider a taxpayer’s replies while passing an ex parte demand order, cannot use the rectification power under Section 161 of the Uttar Pradesh Goods and Services Tax Act, 2017 to pass another ex parte order on the merits.

The Bench of Justice Saumitra Dayal Singh and Justice Swarupama Chaturvedi held that the only lawful course available to the authority was to recall the original adjudication order and decide the matter afresh after issuing notice and granting the taxpayer an opportunity of personal hearing.

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The Court accordingly set aside the subsequent order dated February 5, 2025 and remitted the matter to the adjudicating authority for fresh consideration after affording an opportunity of hearing to the petitioner.

The writ petition was filed against the State of Uttar Pradesh and another respondent. Since the dispute raised a purely legal issue, the High Court dispensed with affidavits and decided the matter at the admission stage with the consent of the parties.

The proceedings originated from a show-cause notice issued to the petitioner on June 17, 2021 under Section 74 of the U.P. GST Act. Section 74 governs determination of tax that has allegedly not been paid, has been short-paid or erroneously refunded, or input tax credit that has allegedly been wrongly availed or utilised, in cases involving fraud, wilful misstatement or suppression of facts.

The petitioner submitted two replies to the notice, dated July 13, 2021 and July 18, 2021. Despite those replies being available on record, the adjudicating officer passed a wholly ex parte order on January 30, 2025.

On examining that order, the High Court found that it did not appear to contain any consideration of either reply filed by the petitioner.

Within a week, the adjudicating authority passed another order on February 5, 2025, purportedly under Section 161 of the U.P. GST Act. No notice was issued to the petitioner before the second order was passed.

In the rectification order, the authority itself acknowledged that the January 30 order contained an error because it had failed to consider the petitioner’s replies dated July 13 and July 18, 2021. This factual position was undisputed before the High Court.

The petitioner’s grievance concerned the course adopted after the error was identified. Instead of recalling the first order and fixing a fresh hearing, the authority considered the two replies on its own and passed a second ex parte order on February 5.

The principal question before the High Court was whether the adjudicating authority had jurisdiction to adopt that procedure under Section 161.

The Court examined Section 161, which permits an authority to rectify an error apparent on the face of any decision, order, notice, certificate or other document. The power may be exercised suo motu, at the instance of an officer or on an application by the affected person.

Ordinarily, rectification must be completed within six months from the date of the relevant document. That restriction does not apply where the correction is confined to a clerical or arithmetical error arising from an accidental slip or omission. The third proviso further requires observance of the principles of natural justice wherever the rectification adversely affects a person.

The High Court noted that the authority had acted suo motu and had passed the rectification order within one week. Therefore, neither the existence of suo motu jurisdiction nor limitation was in dispute. It was also unnecessary to decide whether the admitted failure to consider the replies was capable of rectification under Section 161, since the authority itself had treated it as such.

The decisive issue was the manner in which that power had been exercised.

The Bench observed that an adjudicating authority has no general statutory power to review its order on merits. It referred to the Supreme Court’s decision in Grindlays Bank Ltd. v. Central Government Industrial Tribunal, which distinguished a procedural review from a substantive review on merits.

Under that principle, a court or tribunal possesses an inherent or implied power to correct a palpably erroneous order caused by a procedural defect or inadvertent mistake, in order to prevent abuse of its process. A review on merits, however, is unavailable unless the governing statute specifically confers such a power.

Applying that distinction, the High Court held that the admitted non-consideration of the taxpayer’s replies left the January 30 order open to procedural review. Denial of an opportunity of hearing and failure to provide reasons after considering the taxpayer’s defence tainted the adjudication at its root.

The procedural power could have been used to recall the defective order. It could not be converted into a power to reconsider the defence on merits behind the taxpayer’s back and issue another demand order.

The Court rejected the State’s argument that the February 5 order was not prejudicial because it reduced a part of the demand created by the earlier order.

According to the Bench, a partial reduction did not make the second order non-prejudicial. A tax demand continued to be created and sustained despite the petitioner’s replies, and that determination had again been made without hearing the petitioner.

Once the authority found that the replies had not been considered at all, the defect went to the root of the adjudication. It was therefore required to recall the January 30 order, issue a fresh notice for personal hearing and thereafter pass a new order.

Permitting another ex parte adjudication, the Court said, would effectively confer upon the officer a power to review the earlier order on merits or to pass an order prejudicial to the taxpayer without complying with the natural-justice requirement embedded in the third proviso to Section 161.

The Court clarified that the position may be different where the authority merely discovers a computational error and suo motu corrects it so as to reduce the demand. Such a correction may not require notice. But where the earlier order must effectively be recalled because the taxpayer’s reply was completely ignored, the matter requires de novo consideration after a hearing; it is not a non-prejudicial rectification exempt from notice.

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