HC holds Show Cause Notice cannot be clubbed and issued for more than one financial year

This Tax Alert summarizes the recent ruling of the Madras High Court (HC)  on bunching of show cause notices (SCN) for multiple financial years (FY).

In the present case a single SCN was issued, and a single assessment order was passed by the assessing authority for six financial years, i.e. from FY 2017-18 to 2022-23. Aggrieved, the petitioner approached HC by filing a writ petition.

The key observations of the HC are:

• Section 73 and 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) treats each FY as a separate unit with its own limitation period. Thus, clubbing multiple years in a single SCN violates the above provisions, as the limitation for each year is independent and cannot be combined.
• A combined reading of Section 73(1), (3), and (4) shows that term “any period” means a “tax period” which, as per Section 2(106), is based on monthly or annual returns. Since no return under the CGST Act covers more than one financial year, SCN cannot be issued for multiple financial years.
• If a SCN covers multiple years, it creates hardship in availing benefits of amnesty schemes notified by the Government under Section 128 of the CGST Act or for applying for compounding of offences under Section 138. Moreover, a multi-year notice under Section 74 may lead the department to treat all years as offences, restricting the petitioner’s right to contest individual period under Section 73.
• Issuance of composite SCN covering multiple FYs and making composite demand without separate adjudication per year, frustrates the limitation scheme and prevents the assessee from giving year-specific rebuttals.

Accordingly, HC held SCN cannot be clubbed for multiple financial years, and an order covering more than one year is invalid and liable to be quashed.

Comments:

• While CGST Rules specifically allows conduct of audit for multiple financial years or a part thereof, no such provisions exist for adjudication under Section 73 or 74.
• It may need to be examined whether the department is permitted to issue fresh, year-wise SCNs beyond the statutory time limits prescribed under Sections 73 or 74, in instances where the original consolidated SCN was issued within the applicable limitation period.