The GST Departmental Audit, envisaged under Section 65 of the CGST Act, 2017, has gradually evolved into one of the most critical areas of dispute between taxpayers and the revenue authorities. While the statutory framework empowers officers to scrutinize compliance, procedural safeguards are equally vital. Unfortunately, these safeguards are often overlooked, leading to prolonged litigation.
Courts across India have consistently reiterated that an audit cannot be reduced to a mechanical exercise; it must strictly adhere to statutory mandates and principles of natural justice. A few recent judgments demonstrate the judiciary's protective role in balancing departmental powers with taxpayer rights.
1. Notice Requirement Prior to Audit
The Himachal Pradesh High Court in Saboo Tor Pvt. Ltd. [(2024) 26 CENTAX 88] stayed proceedings under Section 74 when no notice under Section 65(3) was issued to the taxpayer before initiating audit. This ruling underscores that absence of statutory notice vitiates the very foundation of departmental action.
2. Timelines for Conclusion of Audit
In Hubergroup India Pvt. Ltd. [(2024) 24 CENTAX 56], the Gujarat High Court dealt with notices issued after expiry of the period prescribed under Section 65(4). While the proceedings were permitted to continue, the Court prohibited final adjudication without judicial oversight. This highlights the significance of adhering to statutory timelines.
3. Consideration of Reply and Personal Hearing
The Madras High Court in Tokyo Zairyo India Pvt. Ltd. [(2024) 84 GSTL 201] set aside an assessment order passed without due consideration of the taxpayer's reply. The Court directed the authorities to grant a reasonable opportunity of hearing before issuing fresh orders.
4. Audit Observations Must Be Properly Conducted
In Manpower Group Services India Pvt. Ltd. [(2024) 88 GSTL 66], the Delhi High Court remanded the matter for re-adjudication where demand and penalty were imposed based on cryptic audit observations without a proper audit under Section 65.
5. Concurrent Central and State Audits
The Madras High Court in P.S.K. Engineering Construction & Co. [(2024) 20 CENTAX 462] clarified that audit by Central GST authorities is permissible even after State GST audit, provided the subject matter is different. Section 6(2)(b) does not create a blanket prohibition.
6. Multiplicity of Notices
The Rajasthan High Court in Nestle India Ltd. [(2024) 81 CENTAX 224] stayed a subsequent notice issued by an Additional Commissioner when a Superintendent had already issued one based on the same audit report. This ruling prevents harassment through duplicative proceedings.
7. Violation of Natural Justice
Finally, in Natural Remedies Pvt. Ltd. [(2024) 17 CENTAX 102], the Madras High Court quashed the impugned order for failure to provide a personal hearing or consider the reply filed by the assessee. The matter was remanded, reaffirming the indispensability of natural justice in audit-based proceedings.
Conclusion
The above rulings collectively demonstrate that while departmental audit is a legitimate tool for ensuring tax compliance, its misuse or casual execution is impermissible. Courts have repeatedly stepped in to:
- Safeguard statutory rights of taxpayers,
- Prevent parallel or duplicative actions,
- Enforce timelines and due process, and
- Reaffirm the principles of natural justice.
As the GST regime matures, taxpayers must be vigilant in asserting their rights during departmental audits. At the same time, authorities must recognize that audit is not an unchecked power, but a quasi-judicial process bound by law.
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