GST Demand Orders Must Not Exceed Show Cause Notice Amount: Allahabad High Court Reaffirms Section 75(7)
The Allahabad High Court has once again reinforced the principle that a GST demand order cannot exceed the amount proposed in the show cause notice (SCN). This landmark ruling, based on Section 75(7) of the CGST Act, 2017, has far-reaching implications for taxpayers and tax authorities alike. The court quashed several demand orders where the final demand was higher than the amount specified in the SCN, emphasizing the importance of procedural fairness and statutory compliance.
Section 75(7): The Legal Safeguard
Section 75(7) of the CGST Act, 2017, is a crucial provision designed to protect taxpayers from arbitrary or excessive demands. It explicitly states that the amount of tax, interest, and penalty confirmed in the final order shall not exceed the amount specified in the SCN. This provision ensures that taxpayers are aware of the exact liability they face and have a fair opportunity to respond to the proposed demand.
Key Judicial Interpretations
- The Allahabad High Court, in multiple recent judgments, has held that any demand order exceeding the SCN amount is unsustainable and violative of Section 75(7).
- In the case of R.T.S. Electricals and Civil India Pvt. Ltd., the final demand was increased from ₹2.10 crore (as per SCN) to ₹3.04 crore, with additional penalty and interest. The court quashed the order, stating that the increase without prior notice deprived the taxpayer of a fair hearing.
- Similarly, in another case, the final demand was nearly three times the SCN amount. The court quashed both the adjudication and appellate orders, reiterating that the SCN sets the ceiling for the final demand.
Procedural Fairness and Natural Justice
The principle of natural justice is at the heart of these rulings. The court has consistently held that taxpayers must be given a fair opportunity to respond to the proposed demand. Any increase in the demand without prior notice violates this principle and undermines the integrity of the adjudication process.
Implications for Taxpayers
- Taxpayers can challenge demand orders that exceed the SCN amount, citing Section 75(7) and the principles of natural justice.
- The court has granted liberty to taxpayers to file a fresh reply to the original SCN and directed the authorities to pass a new order after providing a proper hearing.
- This ensures that taxpayers are not subjected to arbitrary or excessive demands and have a fair chance to defend their case.
Best Practices for Tax Authorities
These rulings highlight the need for tax authorities to strictly adhere to the provisions of Section 75(7) and ensure procedural fairness in all GST proceedings.
Key Recommendations
- Ensure that the final demand order does not exceed the amount specified in the SCN.
- Provide taxpayers with a fair opportunity to respond to the proposed demand, including any changes or increases.
- Issue separate proceedings for each financial year to avoid jurisdictional overreach and procedural violations.
- Adhere to the principles of natural justice and statutory requirements to minimize litigation and ensure fair adjudication.
In conclusion, the Allahabad High Court’s recent rulings have reaffirmed the importance of Section 75(7) in protecting taxpayers from arbitrary or excessive GST demands. Taxpayers and tax authorities alike must adhere to these principles to ensure fair and just proceedings.