GST Audit Proceedings Distinct From Section 74 Adjudication; Delhi High Court Declines To Quash SCN

The Delhi High Court has held that proceedings arising from a GST audit are distinct from the subsequent adjudicatory proceedings initiated under Section 74 of the Central Goods and Services Tax (CGST) Act, 2017.

The Division Bench of Justices Anil Kshetarpal and Bharat Parashar declined to interfere with a show cause notice issued to a pharmaceutical distributor under Section 74, observing that the taxpayer could raise all its objections before the competent adjudicating authority.

The Court was dealing with a petition filed by Dhruv Medicos Pvt Ltd challenging an Audit Report dated April 29, 2025 and a demand-cum-show cause notice dated June 27, 2025.

The company had also challenged the appropriation of ₹40,10,153 deposited through Form GST DRC-03 during the course of the audit. It alleged that the payment had been made under coercion by the audit team.

Petitioner contended that its detailed reply to the audit objections had not been properly considered before the audit findings were finalised. Reliance was placed on Rule 101(4) of the CGST Rules, which requires the proper officer to finalise the audit findings after considering the reply furnished by the registered person.

The Court however noted that the audit proceedings had already culminated in the Audit Report and that thereafter, the authorities had issued Form GST DRC-01A followed by the Section 74 SCN.

“Thus, the statutory adjudicatory proceedings contemplated under the CGST Act have already been set in motion,” the Court observed.

It drew a distinction between the audit process and the subsequent adjudication.

“The distinction between an audit proceeding and the subsequent adjudicatory proceeding is material…The Audit Report constitutes the outcome of the audit process. However, once proceedings under Section 74 of the CGST Act have been initiated by issuance of a show cause notice, the Petitioner has an opportunity to place before the adjudicating authority all objections which it seeks to raise against the proposed demand,” it observed.

The Court further noted that Petitioner's objections were not limited to the alleged non-consideration of its audit reply. They also concerned limitation, computation of the proposed liability, jurisdiction, the manner in which the audit was conducted and the treatment of the ₹40,10,153 payment.

On the argument that the petitioner's detailed audit reply had been dealt with in one sentence, merely by describing it as “non-satisfactory”, the Court observed that it could not be said at this stage that the audit authorities had wholly ignored the reply.

“Whether the manner in which the reply has been dealt with satisfies the statutory requirement, and whether the objections raised by the Petitioner warrant acceptance, rejection or partial acceptance, are matters which can be examined by the competent Adjudicating Authority,” it said.

As such, the Court permitted Petitioner to place before the adjudicating authority all its objections, including those concerning the audit process.

For Petitioner: Advocate Preetam Singh

For Respondents: Advocates Arun Khatri, SSC, Mudit Gupta, Sr. Standing Counsel with K.V. Bhaskar Reddy, Assistant Commissioner, CGST Delhi East Commissioner and Mr. Tribhuwan Yadav, Deputy Commissioner (CGST Division Laxmi Nagar) , Anoushka Bhalla,Pranavjeet,for CGST.