Procedural Lapses Cost Revenue Department: Kerala High Court Sets Aside GST Order

In a significant ruling for taxpayers, the Kerala High Court has quashed an assessment order issued under Section 74 of the CGST/KSGST Act, citing a clear violation of the principles of natural justice. Justice Ziyad Rahman A.A. underscored that tax authorities cannot treat the mandatory requirement of a "personal hearing" as a mere formality delegated to subordinate staff, nor can they issue vague show cause notices that hinder a taxpayer's ability to mount an effective defense.

The Genesis of the Dispute

The petitioner, M/S. Ridha Polymers, a registered GST dealer, found itself in a legal tug-of-war with the state tax authorities regarding the 2017-2018 assessment year. The dispute emerged after the authorities issued a Show Cause Notice (SCN) on August 5, 2024, alleging discrepancies in the petitioner's Input Tax Credit (ITC) claims.

Despite submitting a detailed written explanation, the company’s objections were summarily rejected in the Order-in-original (Ext.P5), leading the dealer to knock on the doors of the High Court.

Allegations of a 'Mock' Hearing

The core of the petitioner’s grievance was twofold: 1. Denial of Fair Hearing: The authorized representative of the petitioner alleged that when appearing for the mandated personal hearing, they were directed to report to a clerk, Mr. Mukesh, instead of the 3rd respondent (the adjudicating officer). The representative claimed that no actual hearing took place, and the order was passed behind the guise of due process. 2. Vagueness of Notice: The petitioner contended that the SCN (Ext.P2) lacked the necessary specifics to invoke Section 74 of the CGST Act , making it impossible to address the exact allegations during the assessment process.

While the tax department argued that the representative was merely asked to verify records with a subordinate before being heard by the officer, the Court found the petitioner’s sworn affidavit by a qualified Cost Accountant to be more compelling and indicative of procedural irregularity.

Legal Analysis: Justice Must Not Only Be Done

The Court’s analysis centered on two fundamental tenets of administrative law. First, the right to be heard ( Audi Alteram Partem ) is not satisfied by simply marking attendance with a clerk. If a statute requires an opportunity for a hearing, it implies an engagement with the designated adjudicating authority.

Second, the Court highlighted the critical nature of a Show Cause Notice. Justice Ziyad Rahman A.A. observed that a notice must contain clear, specific allegations. By failing to disclose the detailed basis for invoking Section 74 , the tax department effectively deprived the petitioner of the chance to produce necessary evidence to defend their ITC claims. The Court noted that only after the final order (Ext.P5) were the specific allegations revealed, which is legally impermissible.

Key Observations

The High Court’s ruling included several pointed observations regarding the conduct of the tax authority:

• "When a professional, swears an affidavit before this Court highlighting the matters that transpired during the course of hearing, the same cannot be simply ignored."
• "The 3rd respondent directed the authorized representative to appear and make the submission before his clerk named Mukesh. Thereafter, the order was passed as if, the petitioner was heard by the 3rd respondent."
• "Had these details been furnished in the show cause notice itself, they could have contested the matter more effectively, by producing the documents to substantiate their contentions."
• "In the light of the violation of principles of natural justice as referred to above, in connection with failure to extend a proper hearing and also in the light of the vagueness in Ext.P2 show cause notice, the matter requires reconsideration."

The Decision and Its Impact

Observing a clear failure in the adjudication process, the Kerala High Court quashed the order (Ext.P5). The authority has been directed to conduct a fresh assessment, giving the petitioner a genuine opportunity to be heard and to submit additional documentation. The department has been given a three-month deadline to finalize the new order.

This case serves as a vital reminder to tax authorities that procedural compliance is not optional. For businesses, it reinforces the necessity of documenting every interaction with tax officials—including affidavit-backed accounts of potential hearing violations—which can prove decisive in legal challenges against high-handed assessment practices.