In any adjudication including under GST proceedings, a Show Cause Notice (“the Notice”) plays a fundamental role as it is the first step in initiating proceedings. The Notice sets a formal stage for communication and defines the scope of dispute i.e., allegations and proposed actions, enabling the other party to respond and put forth their contentions. Thus, the Notice serves as the cornerstone of any dispute concerning tax liability or punitive action, ensuring procedural fairness and transparency necessary to ensure natural justice.
However, despite its critical function, there have been numerous reported instances wherein cryptic and unreasoned Notices have been issued without clearly specifying the alleged contraventions committed by the taxpayer. The Notices, issued without detail, defeat the purpose of issuing the Notice and are considered illegal and unsustainable in law and violative of principles of natural justice.
Role of Judiciary in Safeguarding Natural Justice
The Judiciary has consistently played a crucial role in upholding fairness in tax adjudication. Courts have consistently quashed and set aside the Notices with directions to the department to adhere to the principles of natural justice. Courts while deciding the cases examine whether the Notice has been issued, Notice is adequate, detailed and served in a manner that affords the taxpayer a reasonable opportunity to be heard and provide response.
There are several landmark rulings wherein the Courts have reinforced the necessity of issuing the Notice in tax adjudication, thus emphasizing role of the Judiciary in upholding the principles of natural justice and procedural fairness:
- Supreme Court in the case of M/s Golak Patel Volkart Limited Vs. CCE observed that issuing the Notice is a condition precedent to raising an enforceable demand. The judgement reaffirmed that any order passed without a Notice and without affording the taxpayer an opportunity for a hearing constitutes the violation of the principles of natural justice.
- The Allahabad High Court in the case of M/s Associated Switch Gears and Projects Ltd. State of UP reinforced that the Notice is not just a procedural formality but a mandatory requirement to ensure fairness and prevent arbitrary actions. Similarly, the Kerala High Court in the case of M/s Diya Agencies Vs. State Tax Officer held that a properly issued Notice is essential before taking any adverse action against a taxpayer, reinforcing the taxpayer's right to due process.
- Further, in the case of M/s Tvl. Sri Manikandan Plywoods Vs. Assistant Commissioner (ST), the petitioner challenged the validity of a GST notice due to its improper placement on the GST portal before the Madras High Court. While acknowledging the procedural error, the High court did not declare the notice void but directed a fresh hearing to uphold fairness, ensuring the petitioner had a fair opportunity to contest the proceedings.
Thus, the importance of Notice is repeatedly upheld by various Courts in India. These judicial pronouncements collectively reinforce that a fair legal process demands proper issuance of the Notice before any adverse action against a taxpayer. However, there have been judgements where Courts have established that procedural irregularities do not render the Notice invalid.
Recently, in the case of M/s Saluja Motors Pvt. Ltd. v. State of H.P and Others, the Himachal Pradesh High Court examined whether an audit report could substitute for a formal Notice in adjudication. In the case, GST department issued final audit report and a summary Notice demanding tax on the excess ITC availed based on the final audit report. However, a detailed Notice was not provided. The Court held that procedural lapses alone do not constitute a violation of natural justice, provided that the taxpayer is fully informed and given a fair opportunity to respond.
Substance Over Form
The principle of substance over form also emphasizes that the actual impact and fairness of a punitive action should take precedence over compliance with technical requirements. In the context of tax adjudication, particularly under GST, this principle ensures that the focus remains on whether justice has been served and not merely whether procedures were flawlessly followed.
Now, ‘Substance Over Form' in the context of the Notice is understood as under:
- Form refers to the technical aspects of how the Notice is issued (e.g., exact format, portal placement, or language used).
- Substance refers to whether the taxpayer was adequately informed of the allegations and given a fair opportunity to respond.
While GST law mandates a proper Notice be issued before confirming any tax demand, courts have recognised that not every procedural lapse is fatal. The key judicial test is whether the taxpayer has suffered actual prejudice as a result of the irregularity.
This pragmatic approach was clearly demonstrated in the case of Saluja Motors (supra), where the High Court held that even though a detailed SCN was not issued, the taxpayer was made aware of the allegations through a final audit report and a summary notice. Since the taxpayer had a fair opportunity to respond, the Court upheld the proceedings, thereby prioritizing substantive fairness over procedural formality.
This approach is consistent with earlier decisions, including that of the Supreme Court in M/s Ramnath Exports Pvt. Ltd., which held that procedural defects may be treated as curable irregularities if no real prejudice is caused.
Conclusion
The Notice is not merely a procedural step; it is a critical component of the adjudication framework under GST law. While courts have stressed upon the importance of issuing a proper Notice, they also uphold the principle of substance over form, holding that lapses do not technically invalidate proceedings unless they cause actual prejudice.
This balanced judicial approach safeguards the taxpayer's right to a fair hearing without letting procedural formalities override justice. As GST law continues to evolve, both tax authorities and taxpayers must remain vigilant in upholding the integrity of adjudication procedures and the broader principles of natural justice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
