GST ARTICLE

Can an Audit Report be used as a substitute for Show Cause Notice?

CA Nipun Arora, Founder, Arora Nipun & Associates

Introduction
Can an Audit report be used as a substitute for show cause notice?
Isn’t this a bit weird question? But this question stems from the
action from Tax Authorities in a recent case which has further been
affirmed by the Hon’ble High Court of Himachal Pradesh where the
petitioner had challenged that the adjudication process followed by the Tax
Authorities.

Though the hon’ble High Court has affirmed the actions taken by Tax Authorities,
but this action leads to another question as to whether a by-pass to the due process
defined under law is acceptable where the Tax Authorities have adhered to the
principles of natural justice. Let’s dive deep into the issue and understand the
problem.

The Legal process

Adherence to the defined process as per the law plays a vital role in adjudication
process. Also, it is not merely an option for the adjudicating authorities but a
mandate to follow the due process defined as per the law. Moreover, it has been
repeatedly held by the Supreme Court that it is settled law that where law requires
a thing to be done in a certain manner or where a power is given to do a certain
thing in a certain manner, the thing must be done in that manner or not at all and
other methods of performance are necessarily forbidden.

It is also a renowned legal maxim “ex pressio unius est exclusio alterius” which
means that the expression of one thing is the exclusion of another. In nut shell,
where the law provides a due process to adjudicate a matter in a particular manner,
the adjudication shall take place in such manner or should not take place at all.

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In GST law, Tax Authorities have been provided with the substantive powers for
examination of records maintained by the taxpayer to ensure that the taxpayer
discharges due GST liability and no loss is caused to the exchequer due to the
negligence of the taxpayers.

One such powers relates to taking up of the Audit of books of accounts and records
of the taxpayer by the Department. Section 65 of Central Goods and Service Tax
(‘CGST) Act contains provisions to this effect and provides as follows:

(1) The Commissioner or any officer authorised by him, by way of a general or

a specific order, may undertake audit of any registered person for such period,
at such frequency and in such manner as may be prescribed.
(2)…
…
……
……
(6) On conclusion of audit, the proper officer shall, within thirty days, inform the
registered person, whose records are audited, about the findings, his rights and
obligations and the reasons for such findings.

(7) Where the audit conducted under sub-section (1) results in detection of tax
not paid or short paid or erroneously refunded, or input tax credit wrongly
availed or utilised, the proper officer may initiate action under section 73 or
section 74 or section 74A.

Whereas sub-section (1) of Section 65 authorises the Commissioner or any officer

authorised by the Commissioner to undertake the Audit of the registered person,
Sub-section (7) provides the next course of action required to be undertaken by the
tax authorities where the Audit results in detection of short payment of tax or
evasion of tax. The said section clearly provides for initiation of proceedings under
Section 73 or Section 74 or Section 74A of CGST Act as the case may be.

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Further, provisions of section 73 and section 74 are more or less similar. Whereas
the former are applicable to cases not involving fraud or wilful misstatement, the
later are applicable to cases involving fraud or wilful misstatement.

Sub-section (1) of Section 73 and 74 provides for issuance of Notice where it

appears to the proper officer that tax has not been paid or short paid or erroneously
refunded or where input tax credit has been wrongly availed or utilised by the
taxpayer. For the ease of reference, Sub-section (1) of Section 73 provides as
follows:

(1) Where it appears to the proper officer that any tax has not been paid or
short paid or erroneously refunded, or where input tax credit has been
wrongly availed or utilised for any reason, other than the reason of fraud or
any wilful-misstatement or suppression of facts to evade tax, he shall serve
notice on the person chargeable with tax which has not been so paid or which
has been so short paid or to whom the refund has erroneously been made, or
who has wrongly availed or utilised input tax credit, requiring him to show
cause as to why he should not pay the amount specified in the notice along
with interest payable thereon under section 50 and a penalty leviable under
the provisions of this Act or the rules made thereunder.

Further the follow-on provisions of Section 73 provide other provisions such as time
period in which notice is to be issued etc. In addition to above, Rule 142 of CGST
Rules prescribes procedures in relation to issuance of Notice and order for demand
of amounts payable under the Act. Sub-rule 1(a) of the said rule provides as follows:

(1) The proper officer shall serve, along with the

(a) Notice issued under section 52 or section 73 or section 74 10 or section
74A or section 76 or section 122 or section 123 or section 124 or section 125
or section 127 or section 129 or section 130, a summary thereof electronically
in FORM GST DRC-01

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From a conjoint reading of the above provisions, it can be ascertained that wherever,
pursuant to an Audit undertaken by the tax authorities, the proper officer is of the
opinion that the tax has not been paid or short paid or erroneously refunded, or
where input tax credit has been wrongly availed or utilised for any reason, the
proceedings shall be requires to be initiated under Section 73 or 74 of CGST Act as
the case may be.

Further, whereas Section 73 (or Section 74, as the case may be) requires issuance
of Show cause notice, the provisions for issuance of a summary thereof in Form GST
DRC-01 has been prescribed under Rule 142(1) of CGST Rules.

The above process designed by the lawmakers provides adequate safeguards to

both i.e. taxpayers and tax authorities to discharge the liability and recover the
unpaid taxes in an appropriate manner.

However, the question which arises here is whether in a case where the Tax
Authorities have communicated detailed findings to the taxpayer under sub-section
(6) of Section 65 i.e. and audit report, whether the requirements of sub-section (1)
of Section 73 or Section 74 regarding issuance of notice to the taxpayer can be
dispensed with?

Observations of Hon’ble Court

The issue discussed above has been dealt by Hon’ble High Court of Himachal Pradesh
in the case of M/s Saluja Motors Pvt. Ltd. vs State of H.P. and others (2025-
VIL-382-HP) wherein the petitioner filed the writ petition challenging the orders
passed by the respondents on the grounds that whereas the petitioner was issued
a detailed audit report and a summary show cause notice in Form GST DRC-01, no
notice was issued to the petitioner in accordance with the provisions of Section 74
of CGST Act. Hence, the procedure prescribed under the law was not followed by
the respondent in the instant case and therefore, the order is liable to be quashed.

In the said case, the petitioner argued that once the statutory rules provide that an
act must be done in a prescribed manner, then the conditions of rules and prescribed

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procedure must be satisfied and there must be application of mind. Meaning thereby,
once methodology for doing a particular act is provided under the statute, Rules,
regulations, instructions etc. then, such act must be done in the manner and way
prescribed alone and in no other way.

Though the Hon’ble court agreed that there can be no quarrel with the aforesaid
propositions of law, however, the Court mentioned that here they were dealing with
a case where the petitioner is basically complaining of violation of principles of
natural justice, whereby the second show cause notice has not been issued to him
in terms of GST DRC-01.

The Court further observes as follows:

18. Once, it is concluded that the petitioner is fully aware of the case it is
required to meet, then, we have no hesitation to conclude that the petitioner
is mainly using this argument as a device to stall the proceedings.

19. Even otherwise, the petitioner is required to show and establish that non-
furnishing of the notice has caused it prejudice and that this has prevented it
from effectively defending itself. After all, in a matter like the instant one, this
Court cannot be oblivious that where the procedural and/or substantive
provisions of law embody the principles of natural justice, the infraction per
se does not lead to invalidity of the order passed. The prejudice must be
caused to the litigant except in the case of a mandatory provision of law,
which is conceived not only in individual interest, but also in public interest.

20. This issue has been considered in detail by a three Judge Bench of the
Hon'ble Supreme Court of India in case titled as State of Uttar Pradesh vs.
Sudhir Kumar Singh and others, AIR 2020 SC 5215, wherein, after taking into
consideration the law on the subject, the Hon'ble Supreme Court has laid
down the following principles: -

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 "39. We are not concerned with these aspects in the present case as
the issue relates to giving of notice before taking action. While
emphasising that the principles of natural justice cannot be applied in
straitjacket formula, the aforesaid instances are given. We have
highlighted the jurisprudential basis of adhering to the principles of
natural justice which are grounded on the doctrine of procedural
fairness, accuracy of outcome leading to general social goals, etc.
Nevertheless, there may be situations wherein for some reason-
perhaps because the evidence against the individual is thought to be
utterly compelling-it is felt that a fair hearing "would make no
difference"-meaning that a hearing would not change the ultimate
conclusion reached by the decision- maker-then no legal duty to supply
a hearing arises. Such an approach was endorsed by Lord Wilberforce
in Malloch v. Aberdeen Corpn. [(1971) 1 WLR 1578], who said that:
(WLR p. 1595)

". A breach of procedure cannot give [rise to] a remedy in the courts,
unless behind it there is something of substance which has been lost by
the failure. The court does not act in vain."

Relying on these comments, Brandon L.J. opined in Cinnamond v.

British Airports Authority [(1980) 1 WLR 582] that: (WLR p. 593)

".no one can complain of not being given an opportunity to make

representations if such an opportunity would have availed him nothing."

In such situations, fair procedures appear to serve no purpose since the

"right" result can be secured without according such treatment to the
individual."

Pursuant to the above, the Hon’ble Court mentioned that they have no hesitation to
conclude that the petitioner is mainly using this argument as a device to stall the
proceedings the petition and hence dismissed the petition.

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The Dilemma involved
On one hand, the Hon’ble court while dismissing the petition has observed that the
petitioner was fully aware of the case and therefore the case does not involve the
violation of principles of natural justice. The Court has also mentioned that the
petitioner is required to show and establish that non-furnishing of the notice has
caused it prejudice and that this has prevented it from effectively defending itself.

Whereas on the other hand, it is interesting to note that as per the procedure
established by the law the proper officer is required to communicate his findings to
the taxpayer in due course as per provisions of sub-section (6) of Section 65, but
such communication does not automatically lead to initiation of recovery
proceedings under Section 73/74 as the case may be. The law even does not cast
any responsibility on the taxpayer even to acknowledge the findings communicated
by the Department in accordance with the provisions of Section 65(6).

In the light of above judgement, a question which arises here is whether the law
settled by Hon’ble Apex Court that “where law requires a thing to be done in a
certain manner or where a power is given to do a certain thing in a certain manner,
the thing must be done in that manner or not at all and other methods of
performance are necessarily forbidden” would prevail in GST law as well or merely
adherence to principles of natural justice would be sufficient.

[Date: 07/05/2025]

(The views expressed in this article are strictly personal.)

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