Kerala High Court Quashes GST Notice Issued Before Audit Findings Were Finalised
The Kerala High Court has held that a GST show cause notice issued on the basis of preliminary audit observations, before the audit findings attain finality, cannot be sustained. The court also held that tax authorities must consider a taxpayer's reply to discrepancies before finalising the audit findings.
Justice Ziyad Rahman A.A. was hearing a petition filed by The Alleppey Company Ltd., challenging a GST show cause notice issued despite its requests for additional time to respond to audit observations.
The Court held that Rule 101(4) of the CGST Rules requires the authorities to finalise audit findings after duly considering the taxpayer's reply. It observed:
“Therefore, the only conclusion possible from the aforesaid proceedings is that, the statutory mandate as contemplated under Rule 101 (4) of the CGST Rules has not been followed, while finalising the audit proceedings.”
The dispute arose after GST authorities conducted an audit of the company's records and issued draft audit observations on July 4, 2024, pointing out certain discrepancies. Since the observations contained information relating to several years, the company sought additional time to submit its explanation.
However, without deciding the company's requests, the authorities issued an audit note on July 16, 2024, followed by a show cause notice on July 31, 2024. A corrigendum to the notice was issued on August 1, 2024.
The company argued that the authorities had failed to follow the procedure prescribed under Section 65 of the CGST Act and Rule 101 of the CGST Rules. It also contended that the audit had not been completed within the statutory time limit.
The Department opposed the petition, arguing that the company could raise its objections during the proceedings initiated through the show cause notice. It contended that interference by the High Court under Article 226 of the Constitution was unnecessary.
Rejecting the company's limitation argument, the Court held that the three-month period for completing an audit must be calculated from the later of the date on which the required records are made available or the date on which the audit actually begins at the business premises.
The Court noted that the audit was conducted at the company's premises on various days between May 24 and June 4, 2024. It held that the audit commenced on May 24, 2024, and that the final audit report issued on September 3, 2024, could not be treated as time-barred on the ground raised by the company.
However, the Court found that the authorities had failed to follow the prescribed procedure before finalising the audit findings.
It noted that the show cause notice was issued on July 31, 2024, before the final audit report was prepared. The notice relied on the audit observations dated July 16, 2024, which the Court found were only an intimation of discrepancies and not the final audit findings.
The Court further held that the final audit report issued on September 3, 2024, could not be sustained because the company had not been given the opportunity to submit its objections as required under Rule 101(4) of the CGST Rules. The authorities had issued the audit note without deciding the company's requests for additional time to respond to the draft observations.
Accordingly, the High Court quashed the show cause notice and the final audit report. It directed the competent authority to permit the company to submit its objections to the July 16, 2024 audit observations within one month of receiving a copy of the judgment.
The authorities were directed to finalise the audit proceedings after considering the company's reply, as expeditiously as possible.
For the Petitioner (The Alleppey Company Ltd.): Senior Advocate K. Srikumar, Advocates Ammu Charles and K. Manoj Chandran.
For Respondents (GST Department): Standing Counsel V. Girish Kumar.