Different Grounds in Show Cause Notice and Order in Indian Indirect Tax and GST Law

Introduction

Show Cause Notice (SCN)

A Show Cause Notice (SCN) is a preliminary document issued by tax authorities to a taxpayer when there is an alleged non-compliance or violation of tax laws.

The SCN serves several purposes:

• Notification of Allegations: It informs the taxpayer of the specific allegations against them.
• Grounds for Action: The SCN must clearly state the grounds on which the allegations are based, providing the taxpayer with a clear understanding of the reasons for the notice.
• Opportunity for Defense: It offers the taxpayer an opportunity to present their case, submit evidence, and provide explanations or justifications before any formal order is passed.

Order

An order is the final decision issued by the tax authorities after considering the taxpayer's response to the SCN.

The order may:

• Confirm, Modify, or Drop the Allegations: Based on the evidence and explanations provided, the authorities may confirm, modify, or drop the charges.
• Impose Penalties or Demand Taxes: If the allegations are confirmed, the order will specify the tax liability, penalties, and any other consequences

Difference in Grounds between SCN and Order

The grounds mentioned in the SCN and the final order should ideally be consistent. In the administration of Indian Indirect Tax (IDT) and Goods and Services Tax (GST) law, the issuance of a Show Cause Notice (SCN) followed by an adjudication order is a common procedural practice. However, issues often arise when the grounds mentioned in the SCN differ from those in the final adjudication order. This article explores the sustainability of such orders and their compliance with the principles of natural justice, including the opportunity to be heard.

Are Such Orders Sustainable? Legal Perspective

The Indian judiciary has consistently held that orders based on grounds different from those mentioned in the SCN are unsustainable. This position is based on the fundamental principle that an assessee must be clearly informed of the allegations against them to prepare an adequate defense.

Key Judgments

1. Ambika Stores vs. Commissioner of GST and Central Excise

• Citation: (2024) 160 taxmann.com 433 (Madras High Court)
• Summary: The court set aside the assessment order due to contradictory tables in the SCN and the failure to consider the reply, emphasizing that the order must align with the SCN grounds.

2. Ramji Enterprises vs. Union of India

• Citation: (2023) 100 GST 81 (Bombay High Court)
• Summary: The cancellation order was quashed because the grounds for cancellation were different from those in the SCN, highlighting the need for consistency.

3. Unicorn Industries vs. Union of India

• Citation: 2019 (26) G.S.T.L. 244 (Sikkim High Court)
• Summary: The detention order was quashed due to differing reasons in the SCN and the order, violating principles of natural justice.

4. Shree Ganesha Steels vs. Commissioner of Central Excise & Customs

• Citation: (2012) 281 E.L.T. 185 (Delhi High Court)
• Summary: The adjudication order, based on different grounds from the SCN, was ruled unsustainable.

5. Sushant Gupta vs. The Commissioner Central Goods

• Citation: 2023-VIL-241-ALH (Allahabad High Court)
• Summary: Both the cancellation and appeal rejection orders were quashed for not adhering to the SCN grounds.

Conclusion on Sustainability

Orders that differ from the grounds mentioned in the SCN are generally unsustainable. The courts have emphasized that such discrepancies undermine the legal process and violate the principles of natural justice.

Compliance with Principles of Natural Justice Opportunity to Be Heard

The principles of natural justice are foundational to any fair legal proceeding. They include the right to a fair hearing and the rule against bias.

In the context of SCNs and orders under Indian IDT and GST law, the following points are critical:

1. Adequate Notice: The SCN must clearly state the grounds on which the authority intends to proceed against the assessee.
2. Right to Respond: The assessee must be given a reasonable opportunity to respond to the allegations.
3. Consistency: The final order must be based on the same grounds as those mentioned in the SCN to ensure the assessee's defense is relevant and adequately addresses the allegations.

Judicial Observations

The courts have repeatedly observed that deviations between the grounds in the SCN and the final order breach the principles of natural justice. This inconsistency deprives the assessee of the opportunity to effectively counter the allegations, thus nullifying their right to a fair hearing.

Examples:

• Ambika Stores Case: The court highlighted the contradiction in the SCN and the order as a violation of natural justice.
• Ramji Enterprises Case: The order's different grounds from the SCN were found to breach the principles of natural justice.
• Unicorn Industries Case: The court quashed the order due to inconsistency with the SCN, stressing the importance of natural justice.

Conclusion

Orders that diverge from the grounds mentioned in the SCN are not sustainable under Indian IDT and GST law. Such discrepancies violate the principles of natural justice, particularly the right to be heard and to prepare an adequate defense. The judiciary has consistently quashed such orders, reinforcing the necessity for coherence and fairness in tax proceedings. To ensure compliance with natural justice, tax authorities must maintain consistency between the SCN and the final order. Any deviation not only renders the order legally unsustainable but also compromises the fairness and integrity of the adjudication process.