High Court of Kerala Directs Separate Proceedings for Each Financial Year in GST Case: Authorities Must Treat Each Year Independently Despite Consolidated Show Cause Notice

Introduction:

In a recent judgment passed by the High Court of Kerala in WP(C) No. 33659 of 2024, a writ petition was filed by Haries Muhammed, challenging the consolidated show cause notice issued under Section 74 of the CGST/SGST Acts for the financial years 2017-18 to 2021-22. The petitioner sought relief from being subjected to penalties and other proceedings under Section 74 on the grounds that proper returns had been filed and taxes remitted for the subsequent years, despite initial non-compliance in 2017-18. The case presents important aspects regarding the issuance of consolidated show cause notices and their validity under the GST law.

Background:

The petitioner, Haries Muhammed, aged 53, had been issued a consolidated show cause notice (Exhibit P1) invoking Section 74 of the CGST/SGST Acts, spanning the tax periods from 2017-18 to 2021-22. The petitioner claimed that while there had been non-compliance in 2017-18 due to failure to file returns, for the subsequent years (2018-19 to 2021-22), the necessary returns were filed, and taxes were remitted at a rate of 5%. Despite this, the respondent authorities invoked Section 74 to impose penalties and initiate proceedings for the entire period covered in the notice.

Petitioner’s Arguments:

1. Consolidated Notice Challenge: The petitioner argued that issuing a consolidated show cause notice for multiple years under Section 74 of the CGST/SGST Acts was unwarranted. The consolidated notice treated all years alike, even though for the years after 2017-18, returns were filed and taxes were paid.
2. Separate Notices for Different Years: The petitioner further submitted that the proceedings under Section 74 for the period from 2018-19 to 2021-22 should not be initiated, given that the error was only in the rate of tax and that this mistake did not constitute suppression of facts or fraud. Therefore, he requested that the competent authorities issue separate notices for each of the years, allowing him to present his case distinctly for each period.
3. Payment of Taxes: The petitioner contended that all tax dues, including those arising from the incorrect rate of tax and the unpaid amounts from 2017-18, had already been remitted. The petitioner submitted supporting documents such as GST DRC-03 (Exhibits P3 to P3(e)) to confirm this.

Respondent’s Arguments:

The learned Government Pleader, representing the GST authorities, provided the following submissions:

1. Separate Orders Despite Consolidated Notice: It was clarified that while a consolidated notice was issued, the proceedings would result in separate orders for each financial year. The authorities would consider the specific contentions raised by the petitioner with respect to each year before finalizing any orders.
2. Credit for Taxes Paid: The Government Pleader confirmed that any taxes paid by the petitioner for the years 2018-19 to 2021-22 had been duly credited to his account and would be reflected in the final orders. 

Judgment:

After hearing both parties, the court delivered the following judgment:

1. No Justification for Section 74 Proceedings for 2018-19 to 2021-22: The court acknowledged the petitioner’s argument that, for the years 2018-19 to 2021-22, the taxes had been paid, and there was no fraud or suppression of facts. Hence, the court directed the authorities to consider each year separately and evaluate whether invoking Section 74 for these periods was justified.
2. Separate Proceedings for Each Year: The court directed the competent authority to finalize proceedings separately for each year and consider the petitioner’s specific contentions for each period. It was emphasized that while a consolidated show cause notice may have been issued, the authorities must treat each year independently when passing their orders.
3. Opportunity for Personal Hearing: Importantly, the court ordered that the petitioner must be afforded an opportunity for a personal hearing before the final orders were passed. This would ensure that the petitioner could present any evidence or arguments in defense of each tax year.
4. Tax Payments to be Credited: The court made it clear that any taxes paid by the petitioner, including those made to rectify the incorrect rate of tax, must be credited to the petitioner’s account while finalizing the proceedings.

Conclusion:

This judgment from the Kerala High Court emphasizes the importance of fair and distinct consideration in tax proceedings. While the GST authorities had issued a consolidated notice under Section 74 of the CGST/SGST Acts, the court upheld the petitioner’s right to have the proceedings for each year treated separately. It was also crucial that any tax payments made by the petitioner be credited and that the authorities could not simply invoke Section 74 without justification for each year.

The case serves as a precedent for similar disputes where taxpayers may be facing consolidated show cause notices for multiple years, especially when the facts and circumstances vary for each period. It underscores the need for due process and fair adjudication in GST-related disputes.

This judgment also highlights the court’s role in safeguarding taxpayers from unnecessary penalties, provided they have made good faith efforts to rectify errors in tax payments. The direction to provide a personal hearing ensures that taxpayers can effectively defend themselves and clarify any genuine mistakes that may have occurred in filing returns or paying taxes.

This article provides a detailed analysis of the judgment in WP(C) No. 33659 of 2024 and its implications on tax proceedings under the CGST/SGST Acts.

Full text of the judgment 

Petitioner has approached this Court, being aggrieved by the fact that a consolidated show cause notice (Ext.P1) has been issued by invoking the provisions of Section 74 of the CGST/SGST Acts for the years 2017-18 till 2021-22. 

2. Learned counsel appearing for the petitioner submits that, in the year 2017-18 , there was failure to file returns and even if that can be seen as a case of suppression, for the subsequent years (which are also subject matter of the show cause notice), returns have been filed and tax has been remitted at the rate of 5%. It is submitted that, even if there is a mistake in the rate of tax , the same cannot be a ground to invoke the provisions of Section 74 of the CGST/SGST Acts for the years 2018-19 to 2021-22. It is submitted that since a consolidated notice has been issued under Section 74 of the CGST/SGST Acts, the petitioner will be unnecessarily subjected to penalty and other proceedings under Section 74 of the CGST/SGST Acts . It is submitted that the competent Authority may be directed to issue separate notices for each of the years in question.

3. Learned Government Pleader would submit, on instructions that, even if a consolidated notice has been issued to the petitioner, the proceedings have to be finalized and orders have to be uploaded separately for each of the years in question and any contention taken by the petitioner specific to any particular year will also be considered by the Adjudicating Authority, while passing orders. It is also submitted that taxes paid by the petitioner for the year 2018-19 till 2021-22 (at the rate of 5%) have been given due credit to.

4. Learned counsel appearing for the petitioner submits that, by now, the amounts payable on account of the application of an incorrect rate of tax has also been remitted by the petitioner. It is also submitted that, the amounts payable for the year 2017-18 have also been paid.

5. Having heard the learned counsel appearing for the petitioner and the learned Government Pleader and having regard to the facts and circumstances of the case, the writ petition will stand disposed of, directing that the Competent Authority shall consider the issue for each of the years separately, if there is warrant for doing so, also taking into consideration the submission of the petitioner that there was no just cause or reason to invoke the provisions of Section 74 of the CGST/SGST Acts, for the years 2018-19 till 2021-22. Any taxes paid by the petitioner shall also be given due credit to while finalizing the proceedings. It is made clear that the petitioner shall be afforded an opportunity of personal hearing before orders are passed by the Adjudicating Authority.

The writ petition is disposed of with the aforesaid directions.