Facts of the Case

The petitioner, Kumaran K.V., proprietor of Kumar Motor Driving School, approached the Kerala High Court challenging Ext.P10 show cause notice issued under Section 63 of the CGST/SGST Act.

The petitioner contended that the show cause notice was wholly without jurisdiction and illegal. According to the petitioner, on the basis of an authorisation issued by the Joint Commissioner, the first respondent conducted a search at the premises of “M/s. Kumar Motors,” a proprietary concern belonging to the petitioner’s wife. However, proceedings were subsequently initiated against “Kumar Driving School.”

The petitioner asserted that the authorisation was for searching the premises of “Kumar Driving School,” which, according to him, was situated at completely different premises.

It was further contended that “M/s. Kumar Motors” was engaged in the business of auto consultancy and assisted vehicle owners in matters such as payment of insurance, motor vehicle tax and obtaining other vehicle-related documents. According to the petitioner, the turnover of “M/s. Kumar Motors” could not include the amounts received from vehicle owners towards insurance and similar statutory or third-party payments. The petitioner maintained that only the service fee collected by “M/s. Kumar Motors” could be treated as the turnover of that concern.

The petitioner further argued that the impugned show cause notice proceeded on the assumption that “M/s. Kumar Motors” and “Kumar Driving School” were one and the same establishment. According to the petitioner, the two establishments were completely separate entities, engaged in completely different businesses, and their turnover could not be clubbed merely because the businesses belonged to the petitioner and his wife respectively.

The petitioner also relied upon the proviso to Section 63 of the CGST/SGST Act and contended that no assessment could be completed without affording him an opportunity of being heard.

Issues Involved

  1. Whether the show cause notice issued under Section 63 of the CGST/SGST Act was without jurisdiction and illegal.
  2. Whether “M/s. Kumar Motors” and “Kumar Driving School” were separate business entities carrying on distinct activities.
  3. Whether the turnover of “M/s. Kumar Motors” and “Kumar Driving School” could be clubbed together merely because the concerns belonged to the petitioner and his wife.
  4. Whether amounts handled by “M/s. Kumar Motors” towards insurance, motor vehicle tax and other vehicle-related payments could form part of its turnover, or whether only the service fee collected by it could be considered as turnover.
  5. Whether the petitioner was liable to obtain GST registration and discharge GST liability on the basis of the allegedly combined turnover.
  6. Whether the High Court should interfere at the stage of a show cause notice when no final assessment had yet been completed.
  7. Whether the petitioner was entitled to an opportunity of hearing before final adjudication under Section 63 of the CGST/SGST Act.

Petitioner’s Arguments

The petitioner argued that Ext.P10 show cause notice was totally without jurisdiction and illegal.

It was submitted that the search had been conducted at the premises of “M/s. Kumar Motors,” which was a proprietary concern of the petitioner’s wife, whereas the proceedings had been initiated against “Kumar Driving School.”

The petitioner contended that the search authorisation related to “Kumar Driving School,” which was situated in completely different premises, thereby raising a serious issue regarding the factual and jurisdictional basis of the proceedings.

It was further argued that “M/s. Kumar Motors” was engaged in auto consultancy activities. Its role included helping vehicle owners to pay insurance premiums, motor vehicle tax and to obtain other documents relating to their vehicles.

According to the petitioner, amounts received or handled for payment of insurance, motor vehicle tax and similar purposes could not automatically be included in the turnover of “M/s. Kumar Motors.” The petitioner’s specific case was that only the service fee collected by “M/s. Kumar Motors” could be regarded as the turnover of that concern.

The petitioner further submitted that the show cause notice incorrectly proceeded on the basis that “M/s. Kumar Motors” and “Kumar Driving School” were one and the same.

It was contended that both concerns were completely different establishments engaged in completely different businesses. Therefore, their turnover could not be clubbed together merely because one concern belonged to the petitioner and the other belonged to his wife.

The petitioner also submitted that the proviso to Section 63 of the CGST/SGST Act made it clear that no assessment could be completed without granting the petitioner an opportunity of being heard.

Respondents’ Arguments

The learned Senior Government Pleader, relying upon the pleadings in the counter affidavit of the first respondent, submitted that the proceedings had been initiated because the petitioner was allegedly carrying on business involving huge turnover without obtaining registration as mandated under the GST laws.

The respondents contended that the matter was still only at the stage of a show cause notice.

It was submitted that all the contentions raised by the petitioner before the High Court could be raised before the competent authority by filing a reply to the show cause notice.

The respondents further submitted that the petitioner would be afforded an opportunity of hearing before the show cause notice proceedings were finalised.

Court’s Findings

The Kerala High Court observed that the issues raised by the petitioner fell within the realm of facts that had to be adjudicated, at least in the first instance, by the jurisdictional authority.

The Court specifically noted that no assessment had been completed against the petitioner as on the date of the judgment and that the proceedings were still at the stage of a show cause notice.

The Court held that it would be open to the petitioner to raise all his contentions before the first respondent.

Importantly, the Court expressly recognised that the petitioner could raise the contention that “M/s. Kumar Motors” and “Kumar Driving School” were two separate entities having no connection with each other.

The Court also held that it was open to the petitioner to demonstrate that the turnover of “M/s. Kumar Motors” and “Kumar Driving School” could not be clubbed together for determining:

  • whether the petitioner was liable to obtain registration under the GST laws; and
  • whether the petitioner was liable to discharge GST liability.

The Court, therefore, did not finally determine the disputed factual questions regarding the separate identity of the businesses, the computation of turnover or the petitioner’s GST registration liability. Instead, it directed the jurisdictional authority to adjudicate these matters after considering the petitioner’s reply and after granting an opportunity of hearing.

Court Order

The Kerala High Court disposed of the writ petition with the following directions:

  1. The petitioner was permitted to file a suitable reply to Ext.P10 show cause notice issued under Section 63 of the CGST/SGST Act.
  2. Such reply was required to be filed within three weeks from the date of receipt of a certified copy of the judgment.
  3. Upon filing of the reply, the first respondent was directed to adjudicate the show cause notice by specifically adverting to all the contentions raised by the petitioner.
  4. The adjudicating authority was specifically required to consider the question whether “M/s. Kumar Motors” and “Kumar Driving School” were separate entities or not.
  5. The petitioner was directed to appear before the officer, either personally or through an authorised representative, at 11:00 A.M. on 22 November 2022.
  6. Thereafter, the matter was to be adjudicated by specifically considering all the contentions taken in the petitioner’s reply.
  7. The petitioner was required to be afforded an opportunity of being heard before adjudication.
  8. The High Court expressly clarified that it had not expressed any opinion on the merits of the matter.
  9. The first respondent was left free to decide the issues in accordance with law.

Important Clarification

The judgment should not be read as a final declaration that “M/s. Kumar Motors” and “Kumar Driving School” were legally separate entities for GST purposes. The Kerala High Court did not conclusively decide that factual issue.

Similarly, the Court did not finally hold that the turnover of the two concerns could never be clubbed.

The Court’s direction was that the jurisdictional authority must examine and adjudicate the petitioner’s contentions, including the specific question whether the two concerns were separate entities and whether their turnover could lawfully be clubbed for determining GST registration liability and GST payment obligations.

The judgment is also important because the Court declined to finally adjudicate disputed factual questions at the show cause notice stage when no assessment had yet been completed. The petitioner was instead permitted to place all factual and legal contentions before the competent authority.

Further, the Court ensured that adjudication would take place only after consideration of the petitioner’s reply and after providing an opportunity of hearing.

Section Involved

Section 63 of the CGST/SGST Act – Assessment of Unregistered Persons

Section 63 concerns assessment of taxable persons who fail to obtain registration despite being liable to registration, or whose registration has been cancelled but who remain liable to pay tax.

In the present case, proceedings under Section 63 arose from the allegation that the petitioner was carrying on business involving substantial turnover without obtaining registration as required under GST law.

The central factual controversy was whether the turnover attributed to the petitioner had been correctly determined and, in particular, whether the turnover of “M/s. Kumar Motors” and “Kumar Driving School” could be clubbed for deciding the requirement of GST registration and consequential GST liability.

The petitioner also relied upon the statutory requirement of providing an opportunity of hearing before completion of the assessment. The High Court’s directions ensured that the petitioner’s objections would be adjudicated after consideration of the reply and after affording an opportunity of hearing.

Link to download the order -https://mytaxexpert.co.in/uploads/1783415041_1359compressed.pdf

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