HC upholds validity of consolidated show cause notice issued for multiple financial years

 This Tax Alert summarizes the recent ruling of the Delhi High Court (HC) on validity of consolidated show cause notice (SCN) issued for multiple financial years.

The petitioner is a sole proprietor dealing in metal scrap. A single SCN raising demand for financial years 2017-18 to 2021-22 was issued to him for fraudulent availment and wrongful passing of input tax credit (ITC), under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act). The adjudication Order was passed confirming the said demand.

Aggrieved, the petitioner filed a writ petition before the HC inter alia on the ground that consolidation of SCN for multiple financial years is impermissible.

The key observations of the HC are:

• Section 74(3) and 74(4) uses the language “for any period” and “for such periods”, respectively. Similar language is used in Section 73. This contemplates that a notice can be issued for a period which could be more than one financial year.
• In contrast, the phrase “financial year” is used in Section 73(10) and 74(10) which prescribes time limit to issue order under the respective provisions. Thus, Legislature is conscious of the fact that insofar as wrongfully availed ITC is concerned, the notice can relate to any period and need not be for a specific financial year.
• The nature of ITC is such that fraudulent availment and utilization of the same cannot be established on most occasions without connecting transactions over different financial years.
• A solitary availment or utilization of ITC in one year may not be capable of establishing the pattern of fraud. Only through analysis and investigation of a series of transactions can a consistent pattern of fraudulent ITC utilization be identified. Thus, the language in the provisions, i.e. ’period’ or ’periods’ as against ’financial year’ or ’assessment year’, is significant.
• A consolidated notice is not merely permissible but, in fact, required in order to establish the illegal modality adopted by such businesses and entities.

Basis above, HC upheld the validity of consolidated SCN and Order issued for multiple financial years.

Comments:

• Madras HC in two different cases [TS-644-HC(MAD)-2025-GST and (2024) 15 Centax 118 (Mad)] has held that clubbing of SCN for multiple financial years is impermissible. In light of the divergent HC rulings, the issue is now likely to be settled by the Supreme Court.
• In instances where prosecution under GST law depends on the quantum of tax evaded, taxpayers must assess whether the relevant monetary threshold should be determined qua SCN or for each financial year.