Indian GST litigation series, part one: proceedings for assessment

In Indian goods and services tax (GST), an assessment order must be passed within the period fixed under the relevant statute. This poses a challenge to officers as they seek to complete the adjudication of demand notices promptly. In any case, the adjudication process cannot bypass principles such as fair play that are ingrained in India’s legal system. Therefore, disputes between the Indian Revenue Service and taxpayers regarding adjudication will remain an eternal issue.

Distinctively in GST law, the proceedings prior to the issuance of show cause notices are completely codified. The authors are of the opinion that the principles applicable to an adjudication process can be extended to proceedings leading up to the issuance of show cause notices/demand notices.

Why is this discussion relevant? Because inflated demands are being raised on a fast-track basis. Therefore, there is a need to focus on the narrative leading up to adjudication to tackle such inflated notices.

This article will highlight the key legal provisions with respect to pre-assessment proceedings, rights conferred to taxpayers, and legal remedies. In any article examining the legal position, there is a disclaimer that such views must be examined in light of the facts of each case. However, an attempt is made to outline the broad principles.

An audit initiated by the proper officer regarding GST usually involves the examination of records maintained under law and cross-verification with returns. Scrutiny proceedings also entail the verification of returns filed under GST regulations. Unlike proceedings such as inspection, search, and seizure, there is no strict burden on proof cast on the department to initiate such audit/scrutiny. Hence, such proceedings are resorted to regularly, to check evasion of tax or irregular availment of input tax credit or an exemption, etc.

The method and manner of audits and scrutiny under the Central Goods and Services Tax Act, 2017 is summarised below.

Particulars	Scrutiny under Section 61	Audit under Section 65
Pre-notice	-	The taxpayer must be informed about a proposal to conduct an audit in not less than 15 working days (Section 65(3)).
Time limit	-	It must be completed within three months from the date of commencement of the audit*. In specific cases, the commissioner can extend the audit to a period of not more than six months (Section 65(4)).
Notice	In the case of a discrepancy in returns, a notice can be issued (Section 61 read with Rule 99).	The proper officer may inform the taxpayer of the discrepancies noticed (Rule 101(4)).
Reply	The taxpayer can file a reply explaining the difference (Rule 99(2)).	The taxpayer can file a reply regarding the discrepancies noticed (Rule 101(4)).
Closure/final report	In the event that the explanation is found acceptable, the registered person shall be informed and no further action shall be taken (Section 61(2) read with Rule 99(3)).	The findings of the audit must be finalised after due consideration of the reply furnished (Rule 101(4)).
Show Cause Notice	If the explanation is not satisfactory, a show cause notice can be issued (Section 61(3)).	When an audit results in the detection of non-payment of tax, an erroneous refund, or an input tax credit wrongly availed, a show cause notice can be issued (Section 65(7)).

* The commencement of an audit shall mean the date on which documents called for by the tax authorities are made available or the actual institution of an audit at the place of business, whichever is later.

It is a settled principle in law that “if the manner of doing a particular act is prescribed under any statute, the act must be done in that manner or not at all” (Saral Wire Craft Private Limited v Commissioner Customs, Central Excise & Service Tax, Supreme Court of India, 2017). On the basis of the table above, the law ensures that the officer can raise all the issues even before issuing a demand notice and that the taxpayers are given an opportunity to respond to the issues in writing. The officer is under a strict obligation to consider the response given before issuing a show cause notice/demand notice under Section 73 or 74 based on the scrutiny or audit proceedings.

If there is any deviation by the authorities from the procedure discussed above, the entire proceedings must be vitiated in law.

It can be inferred from the discussion above that the principle of fair play has been extended to scrutiny and audit proceedings. During such proceedings, authorities are expected to consider and act judicially. Faulty pre-assessment proceedings will have a direct bearing on the legality of any show cause notice and consequent order.

To examine an evasion of tax due to suppression or contravention of GST provisions, an officer can inspect the place of business of the taxpayer. However, the officer can exercise this power only if there are reasons to believe that the taxpayer has suppressed or indulged in a contravention of GST law.

The term ‘reasons to believe’ is not defined, nor is any straitjacket formula prescribed in the relevant statute for the formulation of such a belief. However, the expression has been interpreted by the Supreme Court in the context of income tax law (The Income Tax Officer, Calcutta v Lakhmani Mewal Das, 1976). According to the Supreme Court, ‘reason to believe’ cannot be the subjective satisfaction of the officer. There must be a nexus/live link between the material coming to the notice of the officer and the formation of the belief.

To simplify, the proper officer cannot initiate inspection proceedings merely based upon a hunch or pretence that the taxpayer has evaded tax. There must be material examined and an opinion must be formulated, based upon the material, that the taxpayer has evaded the payment of tax.

The authorities cannot merely state that there is a contravention of the GST provisions and conduct audit/scrutiny proceedings with powers of inspection at the taxpayer’s premises. Inspection cannot be a ‘fishing expedition’. In contrast, before inspection, while examining records that indicate evasion of tax, the examination must logically lead to the formulation of a belief that inspection proceedings should be initiated.

An action of an officer under Section 67 can be subject to judicial scrutiny as it is a jurisdictional issue. Courts can examine whether the reasons formulated are not extraneous or irrelevant. This will have a direct impact on demand notices issued pursuant to inspection proceedings.

Precursory proceedings cannot be utilised only to raise a demand. First, there must be a legal justification for conducting such proceedings. Second, it must be conveyed in a manner that provides a fair opportunity to taxpayers to meet the doubts/discrepancies or allegations made.

It is very important for taxpayers to be alert during such proceedings, as pre-emptive action can be taken to mitigate demand notices proposing inflated tax demands. The simple practice of keeping track of records and ensuring that detailed responses with evidence are submitted in advance can build a strong foundation in GST litigation. Furthermore, in the case of arbitrary action during such proceedings, parties can contemplate approaching the High Courts for relief.

The views expressed in this article are entirely personal.

Read the second article in the Indian GST litigation series here.