The Legality of Clubbing Show Cause Notices under GST Law: A Comprehensive Analysis

 

CA Hunny Munjal

 

1. Introduction

In recent years, the practice of clubbing Show Cause Notices (SCNs) has gained traction and various critical questions has been sought by the legal fraternity in respect of procedural fairness and administrative efficiency. An SCN serves as a quasi-judicial step in the tax assessment process, aimed at ensuring fair tax collection by notifying taxpayers of potential liabilities. With the practice of clubbing SCNs - issuing a single consolidated SCN for multiple financial years - as debate around the legal standing of such notices has arisen, especially in the context of Sections 73, 74, and 74A of the Central Goods and Services Tax Act 2017 ("CGST Act"). This article explores the legal implications, judicial interpretations, and procedural nuances of this practice.

 

2. Legal Basis for Issuing SCNs under GST

Under the CGST Act, SCNs can be issued for various reasons, including cases of non-payment tax, erroneous refunds, or incorrect Input Tax Credit (ITC) claims. Provisions within Section - 73, 74, and 74A delineate scenarios under which tax authorities may serve SCNs, establishing distinctions between bonafide and malafide cases of non-compliance.

 

Section 73 - Governs cases of unintentional tax shortfall (i.e., bonafide), prescribing a 3-year limitation for SCN issuance.

 

Section 74 - Applies to cases involving fraud or wilful misstatement, or suppression of facts (i.e., malafide), with a 5-year limitation for SCN issuance.

 

Section 74A - applicable from FY 2024 onwards, covering both bonafide and malafide instances, with a broader time frame of 42 months from the date of annual return.

 

Each financial year is legally treated as a distinct tax period under these sections, suggesting that SCNs should be issued separately for each financial year.

 

3. Judicial Interpretations on the Clubbing of SCNs

While the CGST Act does not explicitly support or prohibit clubbing SCNs across financial years, recent judgments have shed light on its legality. In the case of Titan Company Ltd. Vs. Joint Commissioner of GST & Central Excise, 2024-VIL-19-MAD Hon'ble Madras High Court ruled that clubbing SCNs to bypass statutory limitation periods for each year contradicts established procedural norms. It emphasized that each financial year's limitation should be independently observed, deeming any attempt to extend limitations through clubbing as legally impermissible.

 

The Karnataka High Court echoed this stance in M/s Veremax Technologie Services Limited vs. Assistant Commissioner of Central Tax, 2024-VIL-1028-KAR and Bangalore Golf Club vs. Assistant Commissioner of Commercial Taxes, 2024-VIL-1023-KAR, quashing bunched SCNs. These rulings underscore the courts' inclination to prevent administrative overreach in tax proceedings by ensuring each assessment period remains distinct.

 

One of the most judgment is by Madras High Court in the case of UNO MINDA LTD Vs. THE JOINT COMMISSIONER OF GST AND CENTRAL EXCISE, 2024-VIL-1055-MAD wherein High Court directed the revenue to issue separate show cause notices for each year so that taxpayer can claim the benefit of the amnesty scheme introduced by 54th GST Council via Section 128A of CGST Act. This judgment was delivered prior to the CBIC Circular No. 238/32/2024-GST [F. No. CBIC-20001/6/2024-GST] Dated 15th October 2024.

 

4. Implications of Bunching SCNs on Taxpayer Compliance and Fairness

The consolidation of SCNs for multiple years imposes practical challenges on taxpayers. Under the GST compliance framework, taxpayers must respond to SCNs using Form GST DRC-06, which mandates specifying the financial year in question. Clubbing SCNs across multiple years complicates this process, placing an undue compliance burden on taxpayer. Additionally, taxpayers may face limitations in preparing comprehensive responses for bunched demands, which often span different compliance years.

 

Moreover, bunching SCNs can inadvertently contravene the CBIC's guidelines on pecuniary jurisdiction, as outlined in Circular No. 31/05/2018-GST. This circular prescribes monetary thresholds for tax officers' jurisdiction in issuing SCNs, ensuring administrative efficiency by matching case complexity with officers' seniority.

 

5. Prospective Legislative Clarifications

The lack of explicit legislative guidance on SCN clubbing may lead to future amendments within GST laws. If consolidated SCNs are to be standard practice, a legislative amendment clarifying the conditions for clubbing would provide greater certainty for tax administrators and taxpayers alike.

 

6. Conclusion

While consolidated SCNs might enhance administrative efficiency, they are fraught with potential legal pitfalls. Judicial interpretations thus far indicate that each financial year should be treated as a separate tax period for SCN issuance. Until legislative amendments provide clear guidance, clubbing SCNs should be approached cautiously, particularly given the judicial emphasis on observing statutory limitations and procedural fairness.

 

[Date: 21/11/2024]

 

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