Different Financial Years Cannot Be Clubbed In One Section 73 Show Cause Notice: Bombay High Court

The Bombay High Court on 28 August reiterated that demands for different financial years cannot be clubbed in a single show cause notice issued under Section 73 of the Central Goods and Services Tax Act, 2017 (CGST Act).

A Division Bench of Justices Anil L. Pansare and Nivedita P. Mehta held that the statutory scheme treats each financial year as a separate tax period for assessment and recovery, with separate due dates and limitation periods. It therefore held that different financial years cannot be consolidated into a single proceeding under Section 73. It observed:

“Consolidation would collapse these years, specific steps and grounds, harming the tax payers' ability to respond year by year and violating the explicit year wise structure of the statute. These niceties, in our view, were not considered by the Delhi High Court.”

The ruling came in a petition challenging a show cause notice issued under Section 73 of the CGST Act, which empowers authorities to recover tax that has not been paid or has been short-paid for reasons other than fraud or wilful misstatement or suppression of facts. The notice alleged suppression of taxable value and consequent short-payment of GST, while the petitioner objected to the Department having combined three financial years in a single notice.

The petitioner relied on the Bombay High Court's earlier rulings in Milroc Good Earth Developers v. Union of India and Rite Water Solutions (India) Ltd. v. Joint Commissioner, CGST & Central Excise, in which the Court had held that the scheme of the CGST Act does not permit consolidation of different financial years or tax periods while issuing a notice under Section 73.

The Department relied on the contrary view taken by the Delhi High Court in Mathur Polymers v. Union of India. The Delhi High Court had held that the legislation does not prohibit a consolidated notice covering multiple years and that such a notice may, in certain cases involving fraudulent availment of Input Tax Credit spread across several years, be necessary to establish the manner in which the transactions were carried out.

It also argued that the Supreme Court had declined to interfere with the Delhi High Court's ruling. The Bombay High Court, however, held that dismissal of the Special Leave Petition in limine, without a decision on merits, did not attract the doctrine of merger.

The Bench maintained its earlier view that the statutory scheme is structured around separate financial years. It noted that limitation for demand and recovery also operates separately for each year. A single notice covering several years would therefore combine tax periods carrying different due dates and limitation periods.

It further held that GST authorities functioning within Maharashtra are bound by the law declared by the Bombay High Court. It noted that its earlier rulings on the issue had neither been stayed nor overruled by the Supreme Court.

The Bench was also informed that the issue concerning clubbing of different tax periods had been referred to a Larger Bench in another proceeding. It therefore granted liberty to the Department to seek revival of the proceedings if the earlier Bombay High Court decisions are set aside or if the Larger Bench subsequently takes a different view.

Accordingly, the High Court quashed the show cause notice while leaving it open to the Department to issue a fresh notice strictly in accordance with Section 73 of the CGST Act, subject to there being no other legal impediment.

Appearances: Mr. Ram Heda, Advocate for the Petitioner; Mr. K. K. Nalamwar, Advocate for the Respondent no. 1; Mr. N. R. Patil, AGP for Respondent nos. 2 and 3