GST Assessment Quashed: Tax Authority Denied Fair Hearing to Taxpayer

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Case Name

M/S Mittal Plywood And Furniture v. State of U.P. and Another

Case No.: WRIT TAX No. - 906 of 2022

Court Name: Allahabad High Court (Court No. 3)

Order Date: 8th July 2022

Bench: Hon’ble Surya Prakash Kesarwani, J. and Hon’ble Jayant Banerji, J.

Key Takeaways

1. Natural Justice is Non-Negotiable: Even in tax proceedings, the authorities must give the taxpayer a fair and reasonable opportunity to be heard before passing any adverse order.

2. First Adjournment Cannot Be Casually Rejected: The court found it particularly problematic that this was the very first adjournment request by the petitioner, and the reason given for seeking more time was not even disbelieved by the tax authority — yet it was still rejected!

3. Assessment Orders Can Be Quashed for Procedural Violations: If a tax authority skips proper procedure and violates principles of natural justice, the High Court can quash the orders under its writ jurisdiction.

4. Rectification Orders Also Fall: When the original assessment order is bad in law, any subsequent rectification order (here under Section 161 of the UPGST Act) built on it also gets quashed.

5. Fresh Opportunity Must Be Given: The matter was remitted back to the tax authority with a clear direction to give the taxpayer reasonable time to submit a reply and a proper hearing opportunity.

Issue

The central legal question here is:

Did the tax authority violate the principles of natural justice by rejecting the petitioner’s very first adjournment application — without disbelieving the reason given — and then proceeding to pass a tax assessment order under Section 74 of the UPGST Act?

In short: Yes, the court found that it did.

Facts

• The Business: M/S Mittal Plywood And Furniture is the petitioner — a business dealing in plywood and furniture, registered under GST in Uttar Pradesh.

• The Notice (15th March 2022): The tax authority (Respondent No. 2) sent the first notice to the petitioner on 15th March 2022, asking them to submit a reply regarding allegedly unverified transactions worth ₹3,19,22,729/- (roughly ₹3.19 crore). They were given 15 days to respond.

• The Adjournment Request (30th March 2022): On 30th March 2022, the petitioner filed an online adjournment application requesting an additional 15 days to prepare and submit their reply. Importantly, this was their first and only adjournment request.

• The Rejection & Assessment Order (31st March 2022): Without accepting the adjournment — and crucially, without even disbelieving the reason given for seeking more time — the tax authority rejected the adjournment application and passed an assessment order under Section 74 of the UPGST Act for the tax period April 2018 to March 2019 (F.Y. 2018-19).

• The Rectification Order (11th April 2022): Shortly after, on 11th April 2022, a rectification order under Section 161 of the UPGST Act was also passed, along with Form GST DRC-08.

• The Writ Petition: Feeling aggrieved, the petitioner approached the Allahabad High Court challenging both orders.

Arguments

Petitioner’s Arguments (M/S Mittal Plywood And Furniture):

1. The impugned order under Section 74 of the UPGST Act and Form GST DRC-07 dated 31.03.2022 was passed in violation of the provisions of the Act and in gross violation of the principles of natural justice.

2. The rectification order under Section 161 of the UPGST Act and Form GST DRC-08 dated 11.04.2022 was also illegal and should be quashed.

3. The petitioner had filed only one adjournment application — their very first — and the reason given was not disbelieved. Despite this, the authority rejected it and rushed to pass the assessment order. This was fundamentally unfair.

4. The petitioner also sought a direction that no coercive action be taken against them while the matter was pending.

Respondent’s Arguments (State of U.P.):

The judgment does not elaborate extensively on the respondent’s counter-arguments. The State was represented by the learned Standing Counsel. However, based on the facts, the respondent’s implicit position was that the assessment order was validly passed under Section 74 of the UPGST Act for the relevant tax period.

Key Legal Precedents & Provisions

The judgment, while brief, references the following key legal provisions. No separate case law precedents were cited by name in this particular judgment, but the following statutory provisions were central:

Section 74 of the UPGST Act

Deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or wilful misstatement or suppression of facts. This is the provision under which the assessment order was passed.

Rule 142(5) of the UPGST Rules

Relates to the issuance of Form GST DRC-07, which is the summary of the demand order.

Section 161 of the UPGST Act

Deals with rectification of errors apparent on the face of record in any decision or order passed under the Act. This was the basis for the second impugned order.

Form GST DRC-08

The form issued under Section 161 for rectification of the demand order.

Principles of Natural Justice

The overarching legal principle that every person must be given a fair opportunity to be heard before an adverse order is passed against them. This was the core ground on which both orders were quashed.

Judgment

The Petitioner — M/S Mittal Plywood And Furniture — won

What Did the Court Decide?

The Allahabad High Court (Bench of Hon’ble Surya Prakash Kesarwani, J. and Hon’ble Jayant Banerji, J.) held that:

1. The impugned orders were passed in gross breach of the principles of natural justice.

2. The fact that the adjournment application was the petitioner’s first request, and that the reason for seeking adjournment was not disbelieved by the authority, made the rejection of that application and the subsequent passing of the assessment order completely unjustified.

Orders Passed by the Court:

• The assessment order under Section 74 of the UPGST Act dated 31.03.2022 was quashed.

• The rectification order under Section 161 of the UPGST Act dated 11.04.2022 was also quashed.

• The matter was remitted back to Respondent No. 2 (the tax authority) with a direction to:
• Give the petitioner reasonable time to submit their reply, and
• Afford the petitioner a reasonable opportunity of hearing,
• And then pass a fresh order in accordance with law.
• The writ petition was disposed of with the above directions.

FAQs

Q1. What is Section 74 of the UPGST Act, and why is it significant here?Section 74 is a serious provision — it’s invoked when the tax authority believes there has been fraud, wilful misstatement, or suppression of facts by the taxpayer. It carries higher penalties. Here, the authority used this provision to raise a demand of over ₹3.19 crore against the petitioner.

Q2. Why did the court quash the order? Was there a mistake in the tax calculation?

Not necessarily! The court didn’t go into whether the tax demand was correct or not. The sole reason for quashing was procedural unfairness — the petitioner was not given a fair chance to respond. The court said natural justice was violated.

Q3. What happens next? Does the petitioner escape the tax demand?

No, not necessarily. The matter has been sent back to the tax authority. The authority will now have to give the petitioner a proper opportunity to reply and be heard, and then pass a fresh order. So the tax demand could still be confirmed — but only after a fair process.

Q4. What is the significance of this being the “first adjournment application”?

It’s very significant! Courts generally take a dim view of authorities rejecting a taxpayer’s very first request for more time, especially when the reason given is not disbelieved. It shows the authority was not acting fairly.

Q5. What is Form GST DRC-07 and Form GST DRC-08?

• Form GST DRC-07 is the summary of the demand/order issued under Rule 142(5) of the UPGST Rules — basically the formal tax demand notice.
• Form GST DRC-08 is issued under Section 161 for rectification of the demand order.

Q6. Can this judgment be used as a precedent in other GST cases?

Absolutely! This judgment reinforces the well-established principle that natural justice must be followed in all tax proceedings. Any GST taxpayer who has been denied a fair hearing can cite this case to challenge such orders.

1. Heard learned counsel for the petitioner and the learned Standing Counsel for the State-respondents.

2. This writ petition has been filed praying for the following reliefs:-

“(i) Issue a writ, order, or direction in the nature of certiorari quashing the impugned order passed under Section 74 of the U.P.GST Act and Form GST DRC-07 dated 31.03.2022 issued under rule 142(5) of the Rules by the Respondent No.2 for the tax period April 2018-March 2019 (F.Y. 2018-19) in violation of provision of the Act as well as in gross violation of the principle of natural justice (Annexure No 4 to this writ petition).

(ii) Issue a writ, order, or direction in the nature of certiorari quashing the impugned order passed u/s 161 of the GST Act and GST DRC-08 dated 11.04.2022 issued/passed by the Respondent No.2 for the Tax period: April 2018 March 2019 (FY 2018-19).

(iii) Issue a suitable writ order or direction in the nature of mandamus directing the respondent No.2 not to take any coercive action against the petitioner.”

3. The impugned order dated 31.03.2022 under Section 74 of the UPGST Act for the period from April 2018 to March 2019 (F.Y. 201-19) has been passed rejecting the adjournment application of the petitioner, followed by rectification order dated 11.04.2022 under Section 161 of the UPGST Act.

4. From the record, it appears that the first notice was given by the respondent no.2 to the petitioner on 15.03.2022 granting 15 days’ time to submit reply with respect to the allegedly unverified transaction of Rs.3,19,22,729/-. On 30.03.2022, the petitioner submitted online

adjournment application seeking 15 days’ time. Undisputedly, that application was the first adjournment application of the petitioner. The cause shown for taking adjournment was not disbelieved by the respondent no.2 and, yet, the adjournment application has been rejected and liability to tax has been assessed in the impugned orders.

5. From the facts as noted above, it is evident that the impugned orders have been passed by the respondent no.2 in gross breach of principles of natural justice.

6. For all the reasons aforestated, the impugned assessment order under Section 74 of the UPGST Act dated 31.03.2022 and the rectification order under Section 161 of the UPGST Act dated 11.04.2022 are, hereby, quashed. The matter is remitted back to the respondent no.2 to pass a fresh order in accordance with law, after giving reasonable time to the petitioner to submit his reply and after affording reasonable opportunity of hearing to the petitioner.

6. With the aforesaid direction, the writ petition is disposed of .