SCN Can't Be Issued Prior To Finalisation Of Audit Proceedings; Karnataka High Court Stays Order

The Karnataka High Court has stayed the order passed under Section 74 of the CGST Act, 2017 on the grounds that the show cause notice cannot be issued prior to the finalization of audit proceedings.

The bench of Justice Sunil Dutt Yadav has admitted the writ petition challenging the audit rules, namely Rule 101(2), (3), and (4), ultra vires to Section 65 of the CGST Act.

The petitioner/assessee is a proprietorship firm located in Karnataka and is involved in the retail business of petroleum oils and oils obtained from bituminous minerals and crude.

The Assistant Commissioner Mysuru Audit Circle, CGST, issued an audit notice under Section 65 of the CGST Act, 2017 to conduct an audit of the petitioner and raised certain queries regarding the wrongful availment of input tax credit and non-payment of tax. In response to the audit notice, the petitioner duly filed its objections against the anomalies adumbrated in the audit notice.

The Superintendent Mysuru Audit Circle issued the show cause notice under Section 74 of the CGST Act and proposed to impose a demand for tax, penalty, and interest against the petitioner. The superintendent, Mysuru, has failed to conclude the audit of the petitioner based on the anomalies pointed out in the audit notice and objections.

After issuance of the show cause notice under Section 74 of the CGST Act, the Assistant Commissioner Mysuru Audit Circle, CGST, concluded the audit and reiterated the demand for tax, interest, and penalties as proposed in the show cause notice.

The Superintendent of Central Tax, Chickmagalur, affirmed the demand for tax, interest, and penalty as alleged in the show cause notice.

The assessee contended that Rule 101(2) of the CGST Rules, 2017, is ultra vires to Section 65 of the CGST Act; the rule confers power to issue the audit notice in Form GST ADT-01 upon the “proper officer," whereas Section 65 of the CGST Act, 2017, confers power to issue notice upon the “Commissioner of Central Tax or an officer authorized by him." Rule 101(3) and (4) of the CGST Rules, 2017, are ultra-vires to Section 65 of the CGST Act, as the said rule confers power to conduct audit upon the “proper officer," whereas Section 65 of the CGST Act, 2017, confers power to issue notice upon the “Commissioner of Central Tax or an officer authorized by him. Rules, being subordinate legislation, cannot be inconsistent with the provisions of the statute.

The assessee argued that the show cause notice issued under Section 74 of the CGST Act and the order passed in that regard are contrary to Section 65(7) of the CGST Act. Section 65(7) specifically provides that the proceedings under Section 73 or 74 of the CGST Act shall only be invoked if the audit proceedings result in the detection of tax not paid, short paid, or erroneously refunded, or input tax credit wrongly availed or utilized. However, the proceedings under Section 74 were invoked without the finalization of audit proceedings.

The court, while passing the interim order, admitted the petition and stayed the operation of the order passed under Section 74 of the CGST Act, 2017.

Counsel For Petitioner: Adv. Sameer Gupta

Counsel For Respondent: Adv. Jeevan J Neeralgi

Case Title: M.S. Service Station Versus UOI

Case No.: Writ Petition No. 13322 Of 2024

Click Here To Read The Order