Facts of the Case

The petitioner, Dilip Kumar S., Proprietor of M/s Vijayaraj Dilipkumar, challenged the audit observations issued under Section 65(6) of the Karnataka Goods and Services Tax Act, 2017. The dispute arose after the GST audit authorities proposed recovery of interest under Section 50 at the rate of 24%, alleging excess transitional Input Tax Credit (ITC).

The petitioner contended that the excess transitional ITC reflected on the GST portal was not due to any fault on his part but occurred because of a technical glitch in the GST portal maintained by the department.

During the pendency of the writ petition, the department proceeded further by issuing an Audit Report in Form GST ADT-02 followed by a Show Cause Notice under Section 73(1) of the GST Act read with Rule 142 of the GST Rules, 2017, proposing demand of tax, interest and penalty.

Issues Involved

  1. Whether interest under Section 50 of the KGST Act could be proposed where excess transitional ITC was allegedly reflected due to a departmental GST portal technical glitch.
  2. Whether the High Court should interfere with audit observations and subsequent proceedings when a statutory show cause notice under Section 73(1) had already been issued.
  3. Whether coercive recovery proceedings could continue before adjudication of the show cause notice.

Petitioner's Arguments

  • The audit observations issued under Section 65(6) were without jurisdiction.
  • The proposed levy of 24% interest under Section 50 was illegal because the excess transitional ITC resulted from a technical error in the GST portal, which was entirely attributable to the department and not to the petitioner.
  • The petitioner sought quashing of:
    • Audit observations;
    • Audit Report in Form GST ADT-02;
    • Notice proposing assessment proceedings.
  • The petitioner also requested protection against recovery proceedings during the pendency of the dispute.

Respondent's Arguments

  • The State contended that the writ petition lacked merit.
  • The respondents submitted that statutory proceedings had already progressed, and a Show Cause Notice under Section 73(1) had been issued, providing the petitioner an adequate opportunity to submit objections, documents and explanations before any final decision was taken.

Court Order / Findings

The Karnataka High Court observed that the Show Cause Notice dated 26.08.2022 merely called upon the petitioner to explain why tax, interest and penalty proposed in the audit report should not be imposed.

The Court held that:

  • The petitioner should first participate in the statutory adjudication proceedings.
  • The petitioner was granted liberty to submit a detailed reply along with all supporting documents within one month.
  • The GST authorities were directed to provide the petitioner with a personal hearing before passing any final order.
  • The adjudicating authority must pass a reasoned and speaking order strictly in accordance with law.
  • Until such adjudication is completed, no coercive or precipitative recovery action shall be taken against the petitioner.

Accordingly, the writ petition was disposed of with the above directions without expressing any opinion on the merits of the dispute.

Important Clarification

  • Mere issuance of an audit observation or audit report does not automatically justify recovery proceedings.
  • Once a Show Cause Notice under Section 73 is issued, the taxpayer must ordinarily participate in the statutory adjudication process.
  • GST authorities must provide:
    • adequate opportunity to file objections,
    • personal hearing, and
    • a reasoned speaking order before recovery.
  • Courts may protect taxpayers against coercive recovery during pendency of adjudication where circumstances justify such protection.

Sections Involved

  • Section 50 – Interest on delayed payment of tax.
  • Section 65(6) – Audit by tax authorities.
  • Section 73(1) – Determination of tax not paid, short paid or wrongly availed without fraud or wilful misstatement.
  • Rule 142 of the GST Rules, 2017 – Notice and order for demand of tax, interest and penalty.
  • Articles 226 & 227 of the Constitution of India – Writ jurisdiction of the High Court.

Link to Download the Order

https://mytaxexpert.co.in/uploads/1785321760_2228compressed.pdf

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