SCRUTINYOF RETURNS UNDER GST LAWS

[Mr. M. GOVINDARAJAN]

Scrutiny of returns

Section 61 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) and Rule 99 provide the procedure of scrutiny of returns by the proper officer.  Section 61 of the Act read with Rule 99 provides that the proper officer may scrutinize the return and related particulars furnished by the registered person to verify the correctness of the return.  In case of any discrepancy, he shall issue a notice to the said person in Form GST ASMT-10, informing him of such discrepancy and seeking his explanation thereto within such time, not exceeding thirty days from the date of service of the notice or such further period as may be permitted by him and also, where possible, quantifying the amount of tax, interest and any other amount payable in relation to such discrepancy.   The registered person may accept the discrepancy mentioned in the notice and pay the tax, interest and any other amount arising from such discrepancy and inform the same or furnish an explanation for the discrepancy in FORM GST ASMT- 11 to the proper officer within 30 days from the date of notice. 

If the explanation is found acceptable the proper officer shall inform the registered person in Form GST ASMT-12.  No further action shall be initiated against the registered person.  If the explanation given by the registered person is not satisfactory or the registered person fails to correct the discrepancies in the return as accepted by him, the proper officer may initiate appropriate action, including those-

• Under section 65 – Audit by tax authorities;
• Under section 66 – Special Audit;
• Under section 67 - Inspection, search and seizure

or proceed to determine the tax and other dues under section 73 or section 74 (before 01.04.2024) or section 74A (after 01.04.2024).

The Board has issued standard operating procedure for scrutiny of the returns by the proper officers for the financial years 2017 – 18 and 2018 – 19 vide instruction No. 02/2022, dated 22.03.2022.  The Board has also issued standard operating procedure for scrutiny of returns from the financial year 2019 – 20 onwards vide Instruction No. 2/2023, dated 26.05.2023. 

Obligation to issue notice

Whether issue of notice in Form ASMT – 10 is mandatory in case of scrutiny of return and any discrepancy is found in the return?  The High Court, Madras held that issue of notice in Form ASMT – 10 is mandator in MANDARINA APARTMENT OWNERS WELFARE ASSOCIATION (MAOWA) VERSUS COMMERCIAL TAX OFFICER/STATE TAX OFFICER AND M/S. GANI FASHION REPRESENTED BY ITS PROPRIETOR, MR. MOHAMED GANI VERSUS THE ASSISTANT COMMISSIONER (ST) NANDANAM ASSESSMENT CIRCLE, CHENNAI - 2024 (7) TMI 1158 - MADRAS HIGH COURT 

In the above said case, a show cause notice dated 28.12.2023 was uploaded in GST portal.  The petitioner was not aware of the said notice since it has not been served personally. Therefore, the petitioner did not file the reply.  The proper officer issued order confirming the demand in the show cause notice.  The registered person, therefore, filed the writ petition before the High Court.

The petitioner submitted the following before the High Court-

• Rule 99 prescribes that a notice in Form GST ASMT – 10 shall be issued to the registered person of discrepancies are noticed upon scrutiny of the returns of such person.
• Non issue of such notice vitiates the subsequent adjudication proceedings.
• For the assessment year 2019 – 20, the said notice was issued to the petitioner for the discrepancy noted in the said return.
• The nature of discrepancies specified in the show cause notice fall squarely within the scope of Paras 7 or 8 of the indicating list of parameters for scrutiny as provided in the Instruction No. 2/2022, dated 22.03.2022.
• The issuance of notice in Form GST ASMT – 10 is mandatory in all cases wherein scrutiny of returns is undertaken.
• Scrutiny by issuance of notice in Form GST ASMT – 10 in compliance with Section 61 read with Rule 99 is mandatory pre-requisite for adjudication under Section 73.
• Prejudice is caused to the tax payer, if notice in Form GST ASMT -10 is not issued because such tax payer loses the opportunity of remitting the tax dues and interest before issuance of show cause notice under Section 73 of the Act and thereby avoiding the payment of penalty under Section 73 (5) or 73 (6) of the Act. 
• Section 160 of the Act would not shield the GST authorities from the consequence of non-issuance of notice under Section 61 of the Act read with Rule 99.

The Revenue submitted the following before the High Court-

• The provisions of GST laws enable the proper officer to undertake scrutiny, audit, special audit or inspection.
• The above proceedings are not a condition precedent for the initiation of adjudication either under Section 73 of section 74 of the Act.
• The scrutiny audit, special audit or inspection on the one hand and adjudication on the other operate in silos and the former does not constitute a pre-requisite for the latter. 
• The object and purpose of section 61 is to gather information with regard to discrepancies and provide an opportunity to the tax payers to remedy such discrepancies wherever such discrepancies are remediable.
• The adjudication was initiated by issuing a show cause notice.  The tax payer has been given the opportunity to contest the tax proposal. 
• Non issuance of Form GST ASMT – 10 did not cause any prejudice to the petitioner.
• Any procedural defect in the assessment proceedings which does not prejudice to the tax payer, would be saved by Section 160 of the Act if such adjudication proceedings are in substance and effect in conformity with or according to the intents, purposes and requirements of applicable GST Statutes.

The High Court considered the submissions of the petitioner and the department.  The High Court analyzed the provisions of Section 61 of the Act, Rule 99 and Section 73 of the Act. 

The High Court observed that the purpose of scrutiny under Section 61 of the Act is to verify the correctness of the returns and inform the taxpayers of any discrepancy.  Such scrutiny is at the option of the proper officer and not applicable to every return filed by the registered persons by self-assessment basis.  Two conditions are satisfied for carrying out this exercise of issuance of notice in Form GST ASMT – 10-

• Selection of returns for scrutiny; and
• Discovery of discrepancies in such scrutiny. 

Rule 99(1) uses the language ‘and in case of any discrepancy, he shall issue a notice to the said person in Form GST ASMT – 10’, thereby raising the presumption that the obligation is mandatory. 

The High Court held that because the notice requirement is intended to enable the registered person to explain or accept the discrepancy and pay the tax and interest and thereby avoid a penalty, the notice in Form GST ASMT – 10 is mandatory.

The High Court considered the next question.  What are the consequences of non-compliance?  Does it vitiate the subsequent adjudication either under Section 73 or Section 74?  Whether the two conditions specified above were fulfilled in this case?

The determination of tax and other liabilities is not undertaken under Section 61.  Section 61 enables the proper officer to select and scrutinize returns and conclude that there are no discrepancies.  If there are discrepancies, the registered person is provided an opportunity to explain or accept the discrepancies.  The proper officer is required to set out the discrepancies and where possible, quantify the amount of tax, interest and other payables. 

The High Court observed that neither reassessment nor adjudication takes place under Section 61.  Therefore, the consequence of not issuing the Form GST ASMT -10 notice, in spite of noticing discrepancies, including the discrepancies noticed thereby and the quantification, if any done thereof. 

In this case the tax proposal was confirmed because the tax payer failed to reply to the show cause notice.  The petitioner asserted that such failure was on account of not being aware of the proceedings, the High Court observed that in the interest of justice an opportunity shall be provided to the petitioner to contest the tax demand on merits by putting the petitioner on terms.

The High Court held set aside the impugned order.  If the petitioner remits 10% of disputed tax amount within 15 days from the date of receipt of the order.  The petitioner, within this time should file the reply to the show cause notice.  On receipt of the 10% disputed tax, the Department should provide a reasonable opportunity to the petitioner and issue a fresh order within 3 months from the date of receipt of the petitioner’s reply.