Rajasthan High Court on GST Overreach: Section 73 Show Cause Notice Quashed After Section 61 Acceptance

Introduction

The Hon’ble High Court of Rajasthan, in Goverdhandham Estate (P.) Ltd. v. State of Rajasthan[i] addressed a crucial issue concerning the invocation of jurisdiction under ss. 61 and 73 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). The petitioner challenged a show cause notice (‘SCN’) issued under s. 73 of the CGST despite the acceptance of its explanation under s. 61 regarding alleged ineligible input tax credit (‘ITC’).

The key question before the Court was whether the GST Department (‘Department’) could initiate proceedings under s. 73 after accepting the taxpayer’s explanation during scrutiny under s. 61 and issuing Form GST ASMT-12. Examining the statutory framework governing return scrutiny, tax liability determination, and the interplay between these provisions, the Court held that once an explanation under s. 61 is accepted, further proceedings under s. 73 are impermissible.

Brief Facts

• The petitioner, a hotel business operator, was registered under the GST Act and filed monthly GSTR-3B returns for the financial year (FY) 2017-18. The Department scrutinized the petitioner’s returns and issued a notice (Form GST ASMT-10), citing discrepancies under s. 61 of the CGST Act/ Rajasthan Goods and Services Tax Act, 2017 (‘RGST Act’).

• The notice alleged that the petitioner had wrongly availed ITC on purchases of elevators and air conditioners, which were classified as block credit under s. 17(5) of the RGST Act. Accordingly, the petitioner was asked to reverse Rs. 18,44,884/- and furnish an explanation by 15.09.2023.

• The petitioner submitted a preliminary reply on 15.09.2023, contending that the elevators and air conditioners qualify as ‘plant and machinery’, which are essential for hotel operations and, therefore, not subject to the ITC restrictions under ss. 17(5)(c) and 17(5)(d). Further, the petitioner sought additional time to submit a detailed reply.

• The Department, despite the pending response, issued a SCN under s. 73 of the CGST Act on 21.09.2023 for tax recovery, along with interest under s. 50 of the RGST Act. Subsequently, on 29.09.2023, the Department issued Form GST ASMT-12, stating that the petitioner’s response to the s. 61 notice was found satisfactory, and no further action was required. However, the Department did not withdraw the s. 73 SCN, prompting the petitioner to challenge the legality of continued tax proceedings.

Held

• The High Court quashed the SCN issued under s. 73 and held that the assumption of jurisdiction after the issuance of Form GST ASMT-12 was legally unsustainable. It was noted that the proper officer had already scrutinised the petitioner’s return under s. 61 sought an explanation and subsequently accepted the taxpayer’s response by issuing Form GST ASMT-12. Thus, it was held that once proceedings under s. 61 were concluded favourably for the petitioner, the Department could not invoke s. 73 on the same issue without a valid legal basis.

• The High Court analyzed ch. XII of the RGST Act, emphasizing that s. 61 scrutiny is meant to verify discrepancies in returns and allow taxpayers to respond. It ruled that:

  • If the taxpayer’s explanation is found satisfactory, no further action shall be taken.

  • Only if the explanation is unsatisfactory or corrective measures are not taken can the Department invoke ss. 65, 66, 67, 73, or 74.

  • Since the petitioner’s explanation was accepted under s. 61, the Department could not invoke s. 73 arbitrarily without a valid reason.

• Additionally, the High Court observed that the issuance of Form GST ASMT-12 signified the closure of the scrutiny process under s. 61, as it implies that the proper officer has reviewed the taxpayer’s explanation, found it satisfactory, and decided that no further action is required. Hence, the Court emphasized that any further action under s. 73 without fresh material evidence would amount to an overreach of statutory provisions.

• The Court rejected the Department’s argument that ss. 61 and 73 operate independently, clarifying that these provisions function sequentially – meaning that if the discrepancies identified under s. 61 have been satisfactorily explained and accepted, reopening the issue under s. 73 would be legally impermissible. Thus, the Court ruled that the assumption of jurisdiction under s. 73, after the issuance of Form GST ASMT-12, was legally unsustainable, as it amounted to reopening a settled issue without any new justification.

Our Analysis

This decision reaffirms the principle that the Department cannot arbitrarily invoke its powers and must adhere to procedural safeguards enshrined in the CGST Act. It sets an important precedent regarding the finality of assessments under s. 61 of the CGST Act and the limits of reassessment under s. 73, thereby ensuring greater certainty for taxpayers.

Applying the rule of harmonious construction, the High Court clarified that ss.  61 and 73 are not independent but sequential, meaning that scrutiny under s. 61 must be conclusively closed before invoking recovery provisions under s. 73. This interpretation enhances legal certainty in GST law and limits administrative discretion, ensuring that settled matters cannot be reopened arbitrarily. The ruling sets a crucial precedent against procedural overreach by tax authorities, thereby safeguarding taxpayer rights and promoting fair taxation practices.

End Note

[i] 2024 SCC OnLine Raj 3229 dated 17.01.2024.

Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.