[Taxation] Passing Order Without Providing Opportunity Of Hearing, Providing Documents Violates Natural Justice: Allahabad HC Reiterates

The Division Bench comprising Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit held that as per the doctrine of audi alteram partem (let the other side be heard as well), such orders cannot be passed without providing the assessee a proper opportunity to make present their case. It was held that documents relied upon by the authorities while passing orders must be provided to party who is being held liable.

“documents that are relied upon by the department are necessarily required to be provided to a person upon whom a liability is being fastened so that, the person can deny and/or dispute the said documents. Non production of these documents to the assessee would amount to violation of the principles of natural justice unless the authority can show that the documents were not necessary and did not form part of the order passed wherein the liability was fastened on the assessee.”

Case Background

Petitioner business was searched on 27.12.2022. It was found that the corporation had wrongly availed and refunded Input Tax Credit on the purchase of glycerine, fatty acid and finishing chemical made of a perfumery compound. It was also found that during the same year, the petitioner had not produced proper evidence with regard to the cancellation of 115 e-ways bills. Thus, a notice was issued asking the petitioner to refund the excess utilization of ITC along with a penalty.

In response, the petitioner filed a reply, denying the allegations made against it and citing lack of evidence in the issued notice. However, another show cause notice was issued to the petitioner on 04.04.2024 under Section 74 of the Goods and Services Tax Act, 2017 where the amount of tax and penalty was revised to a higher figure.

Petitioner again filed a reply denying the allegations made against it. It was stated that the aforementioned compounds were not used for its business but were merely raw materials used in the manufacturing process. Petitioner also submitted explanations for the 115 e-ways bills that were cancelled during the year 2021-22.

Despite having submitted its reply, a reminder dated 08.08.2024 was issued to the petitioner, asking it to appear for a personal hearing and submit a reply by 06.09.2024. Petitioner informed the respondent that it had already submitted a detailed reply in response to the show cause notice. However, the respondent authority passed an order dated 12.09.2024 under Section 74 of the Act, imposing a demand of tax and penalty along with interest. Aggrieved, the petitioner approached the High Court.

Petitioner contended that the impugned order was a copy-paste of the reply submitted by the it in response to the show-cause notice. It was argued that the explanations given therein were not considered in a reasonable manner. It was argued that the raw materials had been used for the manufacture of fabrics and not directly in the business, a fact that had not been appreciated by the respondents.

High Court Verdict

The Court held that it was clear case where the show cause notice and the order were both “speculative” in nature. It held that there was insufficient evidence to conclude that the compounds were not being used without conducting a test of the manufactured fabrics. The Court observed that it would ordinarily not interfere with an order passed under Section 74 of the Act, due to there being a provision for statutory appeal. However, in light of the fact that the petitioner was not awarded an opportunity of hearing, the Court chose to intervene.

The Court held that the orders passed by the authority were a copy of the reply furnished by the petitioner. It held that it was the duty of the respondents to have looked into whether the raw materials were actually used for making the fabrics, especially in light of the expert certificates submitted by the petitioner. In the absence of the same, and the fact that no further opportunity of hearing was provided, the Court held that orders passed were illegal and without any authority in law.

In M/s Eastern Machine Bricks and Tiles Industries v. State of U.P. and Ors., the Allahabad High Court had held that

“Audi alteram partem, which is a part of the doctrine of natural justice, finds its roots primarily in the constitutionally guaranteed idea of equality. This principle ensures that no one is condemned, penalized, or deprived of their rights without a fair and reasonable opportunity of hearing. It acts as a safeguard against arbitrary decision-making, upholding the principle of due process while also providing a crucial foundation for just and equitable legal or administrative proceedings.”

Further, the Court held that the doctrine of audi alteram partem acted as a safeguard against arbitrary and provided a crucial foundation for equitable proceedings. It held that decisions by a judicial authority should only be made after a consideration of the relevant contentions raised. It was observed that the department was mandated to provide a person with the documents that were being used to impose liability on them, which had not been done in the present case.

The Court observed that it was necessary for a court entertaining a complaint based on violations of natural justice to see whether the aggrieved had actually suffered damages, and not just proceed on a mere breach of technicalities.

“As discussed above, non production of certain documents to the petitioner that were relied upon by the authorities, coupled with the manner in which no proper opportunity of hearing was granted to the petitioner leads us to the conclusion that severe prejudice has been caused to the petitioner. Ergo, the impugned order cannot be sustained and is liable to be quashed and set aside,” observed the bench headed by Justice Saraf.

Allowing the writ petition, the Court directed the respondents to provide the petitioner with a fresh opportunity of hearing.

Case Title: Agmotech Fabrics Private Limited v. State of Uttar Pradesh and Ors. [WRIT TAX No. - 1757 of 2024]