SUMMARY OF SHOW CAUSE NOTICE IN FORM DRC-01 CANNOT BE A SUBSTITUTE OF SHOW CAUSE NOTICE UNDER SECTION 74(1) OF CENTRAL GOODS AND SERVICES TAX ACT, 2017

[Mr. M. GOVINDARAJAN]

Show cause notice under Section 74(1)

Section 74(1) of the CGST Act/JGST Act provides that where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

DRC – 1

Rule 142 (1) of JGST Rules, 2017 provides that the proper officer shall serve, along with the notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in Form GST DRC-01.

With effect from 01.04.2019, DRC – 1 shall contain the following-

• Brief facts of the case;
• Grounds;
• Tax and other dues-

• Tax rate;
• Turnover;
• Tax period;
• Applicable Act;
• Place of supply;
• Tax;
• Interest;
• Penalty;
• Fee;
• Others;
• Total

Issue

The issue to be discussed in this article is whether the summary of show cause notice as contained in DRC – 01 is enough to proceed against the registered person under section 74 of the Act with reference to decided case laws. 

Case laws

In M/S. NKAS SERVICES PRIVATE LIMITED. VERSUS THE STATE OF JHARKHAND, THE COMMISSIONER OF STATE TAXES, RANCHI, DEPUTY COMMISSIONER OF STATE TAXES, GODDA -2021 (10) TMI 880 - JHARKHAND HIGH COURT the Show-cause notice under Section 74 of the JGST Act, 2017 dated 07.06.2021 for the tax period July 2020 - September 2020 issued by the Deputy Commissioner of State Taxes (respondent no.3) has been challenged by the petitioner along with the consequential challenge to summary of show-cause notice in Form DRC-01 dated 07.06.2021 issued in exercise of power under Rule 142(1)(a) of the Jharkhand Goods and Services Tax Rules, 2017.  

On hearing both the parties the High Court observed that a bare perusal of the impugned show-case notice creates a clear impression that it is a notice issued in a format without even striking out any irrelevant portions and without stating the contraventions committed by the petitioner i.e. whether its actuated by reason of fraud or any willful misstatement or suppression of facts in order to evade tax. Needless to say that the proceedings under Section 74 have a serious connotation as they allege punitive consequences on account of fraud or any willful misstatement or suppression of facts employed by the person chargeable with tax. In absence of clear charges which the person so alleged is required to answer, the noticee is bound to be denied proper opportunity to defend itself. This would entail violation of principles of natural justice which is a well-recognized exception for invocation of writ jurisdiction despite availability of alternative remedy.

The impugned notice completely lacks in fulfilling the ingredients of a proper show-cause notice under Section 74 of the Act. Proceedings under Section 74 of the Act have to be preceded by a proper show-cause notice. A summary of show-cause notice as issued in Form GST DRC-01 in terms of Rule 142(1) of the JGST Rules, 2017 cannot substitute the requirement of a proper show-cause notice. .Although it has been mentioned in DRC – 01 that there is mismatch between GSTR-3B and 2A, but that is not sufficient as the foundational allegation for issuance of notice under Section 74 is totally missing and the notice continues to be vague.

The High Court allowed the petition holding that the impugned show-cause notice does not fulfill the ingredients of a proper show-cause notice and thus amounts to violation of principles of natural justice, the challenge is entertainable in exercise of writ jurisdiction of the High Court.  The High Court allowed the petition.

In M/S. JUHI INDUSTRIES PVT. LTD VERSUS THE STATE OF JHARKHAND, THE COMMISSIONER OF STATE TAXES, RANCHI, JHARKHAND, JOINT COMMISSIONER OF STATE TAXES (ADMIN) , DEPUTY COMMISSIONER OF STATE TAXES - 2022 (7) TMI 448 - JHARKHAND HIGH COURT, a search was conducted in the premises of the petitioner under Section 67 of the JGST Act on 13.08.2018 for irregular claim of input tax credit mainly on the ground that the petitioner has claimed input tax credit without making payment of value and tax of the inputs to the supplier within six months which is in contravention of 2nd/3rd proviso to Section 16(2) of the JGST Act.  The credit of Rs.27 lakh (out of total Rs.19.43 Cr. constituting 1%) is not transported in heavy vehicle as per the vehicle numbers. Whereas, the ground for search in is concerned, the petitioner made purchases only from one supplier, and there exist no proof of payment and secondly, on physical verification, difference in stock was found from the stock maintained in books of accounts.

The proceeding in both the cases started with issuance of summary show-cause notices, both dated 14.9.2018 in Form DRC-01 under Section 74(1) of JGST Act, 2017.  The petitioner submitted its concise reply vide letter dated 11.10.2018 in Form DRC-06 explaining that the input tax credit  have been legally claimed by them and the goods have been physically received by them.  The Respondent No.4 passed two separate orders, both dated 25.02-.019 under Section 74(9) of the JGST Act and confirmed tax demand, interest and penalty and issued Summary of Order dated 28.02.2019.

The petitioner filed two separate applications for two separate orders, on  2.6.2019, before respondent No.2 under Section 161 of the JGST Act, 2017 for rectification of certain mistakes. The respondent No.2 passed rectification order for both the periods relating to the above two applications by two separate orders, both dated 3.3.2021 and rectified some errors and subsequent thereto; issued two separate demand notices for the above referred period in Form DRC-08, both dated 3.3.2020.

The petitioner submitted the following before the High Court-

• No show cause notice under Section 74(1) is issued and served upon the petitioner.
• Issuance of show cause notice U/s 74(1) of the JGST Act, 2017 is mandatory and imperative in character.
• Form DRC 01 is not a substitute of show cause notice u/s 74(1).
• Thus, the entire proceeding in both the cases is without jurisdiction.

The Department contended that-

• During the course of hearing before passing of the impugned order the entire record including the relied upon documents was supplied to the petitioner.
• After considering the reply/representation of the petitioner, the detailed order under Section 74(9) of the JGST Act was passed Form GST DRC-07 i.e. Demand Order was issued against the petitioner. 
• The petitioner had also filed an application for rectification of error against the impugned order in both the cases as well as Form GST DRC-07. 
• The respondent after reviewing the same has framed fresh order dated 03.03.2021 disposing off the rectification application and reducing the liability of the petitioner on 03.03.2021 and on the very same day.
• Therefore there is no violation of principles of Natural Justice.

The High Court considered the case of both the parties.  The High Court observed that Rule 142(1)(a) of the JGST Rules provides that the summary of show cause notice in Form DRC-01 should be issued “along with” the show cause notice under Section 74(1). The word ‘along with’ clearly indicates that in a given case show cause notice as well as summary thereof both have to be issued. As per Rule 142(1)(a) of the JGST Rules, the summary of show cause notice has to be issued electronically to keep track of the proceeding initiated against the registered persona whereas a show cause notice need not necessarily be issued electronically.

The High Court relied on the judgment in ‘NKAS Services Private Limited’ (Supra).  The High Court observed that the settled preposition of law, the foundation of the proceeding in both the cases suffers from material irregularity and hence not sustainable being contrary to Section 74(1) of the JGST Act; thus, the subsequent proceedings/impugned Orders cannot sanctify the same. Though, the petitioner submitted their concise reply vide letter dated 11-10-2018; the respondent State cannot take benefit of the said action as summary of show cause notice cannot be considered as a show cause notice as mandated under Section 74(1) of the Act.   A bona fide mistake or consent by the assessee cannot confer any jurisdiction upon the proper officer.  The jurisdiction must flow from the statute itself. The rule of estoppels is rule of equity which has no role in matters of taxation.

The High Court held that the impugned show cause notice in both the cases does not fulfill the ingredients of a proper show- cause notice and thus amounts to violation of principles of natural justice.  The summary of show-cause notices dated 14.09.2018 issued in Form GST DRC-01 at (in both cases), the orders dated 25.02.2019 issued under section 74(9) of JGST Act (in both cases) and also the final orders dated 3.3.2021 passed after rectification at (in both cases), are hereby quashed and set aside by the High Court.  However the High Court held that the respondents are at liberty to initiate fresh proceedings from the same stage in accordance with law.

Conclusion

The above two case laws clearly illustrate that the summary of show cause notice in DRC – 01 is not enough.  The DRC – 01, according to Rule 142 (1), shall be served on the petitioner electronically along with the show cause notice issued under section 74(1) of the Act (which cannot be issued electronically).  Therefore the issuance of show cause notice under section 74(1) of the Act is mandatory.  Non compliance amounts to violation of principles of Natural Justice.