Facts of the Case

Diamond Beverages Private Limited and another, the writ petitioners/appellants, preferred an intra-court appeal (M.A.T. 1948 of 2023) before the Division Bench of the High Court of Judicature at Calcutta against a Single Bench order dated 25th September 2023 in W.P.A. 22295 of 2023, which had disposed of their challenge to a show cause notice dated 16th August 2023 issued under Section 73(1) of the CGST Act, 2017 by the Assistant Commissioner of CGST & CX, Taltala Division II, Kolkata South Commissionerate, by merely directing a reply. The dispute traced back to a discrepancy notice dated 30th December 2022 alleging that the appellants had availed and utilised input tax credit during FY 2018-19 on supplies from suppliers whose registration had been retrospectively cancelled, and on debit notes from suppliers who had not filed GSTR-3B returns for that year. The appellants filed detailed replies on 10th February 2023 and, after a further notice dated 1st March 2023, again on 13th March 2023 and to a pre-show cause notice in Form GST DRC-01A dated 31st March 2023 on 11th April 2023, specifically requesting the authority to investigate at the suppliers' end and seeking a personal hearing.

Issues Involved

  1. Whether a show cause notice under Section 73(1) of the CGST Act can be interfered with by a writ court at the show-cause stage.
  2. Whether the impugned SCN dated 16th August 2023 was issued without due application of mind and without the necessary inquiry into facts at the suppliers' end.
  3. Whether the Single Bench order, which merely required a reply without addressing this defect, was correct.

Petitioner's Arguments

  • The authority never investigated the allegations at the suppliers' end despite being specifically requested to do so in the detailed reply to the pre-show cause notice, so the true facts regarding retrospective cancellation and non-filing of GSTR-3B never emerged.
  • The impugned SCN merely extracted the appellants' reply without engaging with its contentions, demonstrating non-application of mind.
  • Relied on Suncraft Energy Private Limited vs. The Assistant Commissioner, State Tax, Ballygunge Charge (2023 SCC OnLine Cal 2226), an identical-facts case where the Calcutta High Court set aside similar orders, noting the Special Leave Petition against that decision was dismissed by the Supreme Court on 14th December 2023.

Respondent's Arguments

  • The impugned SCN did take into account the appellants' reply to the pre-show cause notice and was a detailed notice issued strictly under Section 73(1) after due process.
  • Courts should not ordinarily interfere at the show cause notice stage in the absence of a jurisdictional defect, perversity, or vagueness rendering an effective reply impossible.

Court Order/Findings

  • While reiterating that courts seldom interfere at the SCN stage, the Court found this an exceptional case because, though the SCN extracted the appellants' reply, the authority never actually dealt with its contentions or investigated the suppliers' end as specifically requested, amounting to issuance of the SCN without due application of mind.
  • The appeal and the writ petition were allowed; the SCN dated 16th August 2023 was set aside and the matter remanded to the stage of the pre-show cause notice dated 31st March 2023.
  • The adjudicating authority was directed to first inquire/investigate at the suppliers' end, share the material with the appellants, afford a personal hearing, and only thereafter decide whether a fresh Section 73(1) SCN is warranted. No costs were awarded.

Important Clarification

A Section 73(1) SCN alleging denial of ITC on account of a supplier's retrospective registration cancellation or non-filing of GSTR-3B cannot be sustained where the department has not actually investigated the supplier-end facts specifically raised by the taxpayer in its reply to the pre-show cause notice. Merely reproducing the taxpayer's reply without engaging with it amounts to non-application of mind and is a recognised ground on which a writ court will interdict a show cause notice.

Sections Involved

  • Section 73(1) of the CGST Act, 2017 — demand of tax not paid/short paid or ITC wrongly availed/utilised, for reasons other than fraud or wilful misstatement.
  • Form GST DRC-01A — pre-show cause intimation of tax ascertained as payable, preceding a formal SCN under Section 73.

Decision – In Favour of

The decision is in favour of the Assessee. The show cause notice was set aside for want of due application of mind and lack of inquiry at the suppliers' end, and the matter was remanded for a proper investigation and hearing before any fresh SCN issues, though the final outcome on merits remains to be determined afresh.

Related Case Laws

No directly on-point case notes are currently published on this site.

Case Details

  • Court: High Court of Judicature at Calcutta
  • Case No.: M.A.T. 1948 of 2023 (with I.A. No. CAN 1 of 2023)
  • CNR: Not available
  • Coram: Chief Justice T.S. Sivagnanam and Mr. Justice Hiranmay Bhattacharyya
  • Decision Date: 15 December 2023
  • Disposal Nature: Appeal allowed; show cause notice set aside and remanded

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