GST Audit cannot be conducted after winding up of business

[CA Bimal Jain]

The Hon’ble Madras High Court in TVL. RAJA STORES, REPRESENTED BY ITS PARTNER MR. PITCHAI NADAR VERSUS THE ASSISTANT COMMISSIONER (ST) - 2023 (8) TMI 1089 - MADRAS HIGH COURT  held that, that Section 65 (“Audit by tax authorities”) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) applies only to registered businesses and concluded that authorities cannot conduct audits for businesses that have closed and further clarified that there is no barring in initiating proceeding under Section 73 and 74 of the CGST Act.

Facts:

M/s. Tvl. Raja Stores (“the Petitioner”) is a partnership firm, a registered taxpayer under the CGST Act the Petitioner was filing monthly returns. The Petitioner intended to close the business and submitted a petition before the Revenue Department (“the Respondent”). The Respondent considered the same vide the order dated March 03, 2023, and allowed the Petitioner to close his business with effect from March 31, 2023. However, the Petitioner failed to pay the collected tax.

Subsequently, the Respondent issued the Show Cause Notice dated May 19, 2023 (“the Impugned SCN”) for conducting audit for the period from 2017-2018, to 2021-2022.

Aggrieved by the Impugned SCN the Petitioner filed a writ before the Madras High Court.  

The Petitioner contended that as per section 65 of the CGST Act, the Respondent are empowered to conduct audit if the concern is a registered unit but as on the date, the Petitioner’s registration is cancelled, i.e. the Petitioner is an unregistered concern. Therefore, the Respondent is not having any jurisdiction to conduct an audit.

Issue:

Whether the Revenue Department has right to conduct the audit under Section 65 of the CGST Act after closure of the business?

Held:

The Hon’ble Madras High Court in TVL. RAJA STORES, REPRESENTED BY ITS PARTNER MR. PITCHAI NADAR VERSUS THE ASSISTANT COMMISSIONER (ST) - 2023 (8) TMI 1089 - MADRAS HIGH COURT  held as under:

• Observed Section 65 of the CGST Act and opined that, Section 65 specifically states 'any registered person’ then it ought to be construed as existence concern and the unregistered person is exempted from the purview of the section 65 of the CGST Act.
• Held that, the Respondent can conduct an audit only while the business was operational, they could not do so after it had closed. However, this will not preclude the Respondent from initiating assessment proceedings for the said concern under Sections 73 and 74 of the CGST Act.
• Quashed the Impugned SCN, with liberty to the Respondent to initiate assessment proceedings under Sections 73 and 74 of the CGST Act.

Our comments:

The judgement of the Hon’ble Madras High Court highlights the crucial importance of respecting jurisdictional limits in tax audits. While it clarifies that closed businesses are exempt from GST audits, it also acknowledges the possibility of assessment proceedings under Sections 73 and 74 of the CGST Act. The judgment provides essential direction for both businesses and tax authorities, influencing their future strategies when dealing with GST audits and closed businesses.

Relevant Provision:

Section 65 of CGST Act

Audit by tax authorities

(1) The Commissioner or any officer authorized by him, by way of a general or a specific order, may undertake audit of any registered person for such period, at such frequency and in such manner as may be prescribed.

(2) The officers referred to in sub-section (1) may conduct audit at the place of business of the registered person or in their office.

(3) The registered person shall be informed by way of notice not less than fifteen working days prior to the conduct of audit in such manner as may be prescribed.

(4) The audit under sub-section (1) shall be completed within a period of three months from the date of commencement of the audit: Provided that where the Commissioner is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months.

Explanation - For the purposes of this sub-section, the expression "commencement of audit" shall mean the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later.

(5) During the course of audit, the authorized officer may require the registered person,-

(i) to afford him the necessary facility to verify the books of account or other documents as he may require;

(ii) to furnish such information as he may require and render assistance for timely completion of the audit.

(6) On conclusion of audit, the proper officer shall, within thirty days, inform the registered person, whose records are audited, about the findings, his rights and obligations and the reasons for such findings.

(7) Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the proper officer may initiate action under section 73 or section 74.

(Author can be reached at [email protected])