M/S Mahavir Enterprise vs Assistant Commissioner Of State Tax

J.B.Pardiwala, J

1 By this writ application under Article 226 of the Constitution of India, the writ applicant, a proprietary concern through its proprietor, has prayed for

the following reliefs:

“(a) Quash and set aside the show cause notice in Form GST DRC 01 dated 30.11.2019 at Annexure A to this petition.

(b) declare the Rule 142(1)(a) of CGST/GGST Rules, being ultra vires and dehors the Act and violative of Articles 14 and 19 (1) (g) of the

Constitution of India, to the extent it says notice issued under section 122.

(c) Pending the admission, hearing and final disposal of this petition,

(i) Proceeding and Adjudication of impugned show cause notice at Annexure A to this petition to be stayed; and

(ii) No coercive action to be taken against the petitioners;

(d) Grant ad-interim reliefs in terms of prayers above;

(e) Any other and further relief deemed just and proper be granted in the interest of justice;

(f) To award Costs of and incidental to this application be paid by the Respondents;

2 The facts giving rise to this writ application may be summarised as under:

2.1 The writ applicant seeks to challenge the legality and validity of the show cause notice dated 30th November 2019 issued by the respondent No.1

under Section 122(1) of the Central Goods and Services Tax Act, 2017 (for short, 'the CGST Act') calling upon the writ applicant to show cause why

an amount of Rs.6,87,68,821/- (Rupees Six Crore Eighty Seven Lac Sixty Eight Thousand Eight Hundred Twenty One only) should not be recovered

for the alleged contravention of the provisions of the Act and the Rules.

3 Prima facie, it appears on plain reading of the impugned show cause notice that it is the case of the department that the writ applicant is involved in

bogus billing transactions without any physical movement of the goods.

4 The show cause notice is yet to be adjudicated.

5 In such circumstances referred to above, the writ applicant has come up before this Court seeking to get the impugned show cause notice quashed

and set aside.

6 It also needs to be stated at this stage that there is also a challenge to the constitutional validity of Rule 142(1)(a) of the CGST Rules on the ground

that the same travels beyond the provisions of the Act and is a result of excessive delegation of powers.

● SUBMISSIONS ON BEHALF OF THE WRIT APPLICANT:

7 Mr. Avinash Poddar, the learned counsel appearing for the writ applicant vehemently submitted that the impugned show cause is invalid as Section

122 of the Act, 2017 does not contemplate issue of any show cause notice. According to the learned counsel, if it is the case of the department that

the writ applicant is guilty of fraud or suppression, then a show cause notice under Section 74 of the Act, 2017 is contemplated for the purpose of

determination of the tax liability.

8 Mr. Poddar would submit that the respondent No.1 has committed a serious error in adding both the outward supply and the input tax credit for the

purpose of imposition of the amount of penalty. According to him, it is contrary to the scheme of the CGST Act, more particularly, Section 74 of the

Act, 2017.

9 Mr. Poddar would submit that Rule 142(1)(a) of the CGST Rules contemplates for issuance of summary notice electronically along with the notice

issued under Section 52 or Section 73 or Section 74 or Section 76 or Section 122 or Section 123 or Section 124 or Section 125 or Section 127 or

Section 129 or Section 130 of the GST Act, 2017. According to the learned counsel, as Section 122 of the Act, 2017 does not contemplate issue of any

show cause notice, the Rule 142(1)(a) travels beyond the provisions of the Act. In such circumstances, according to the learned counsel, Rule 142(1)

(a) deserves to be declared as ultra vires being in excessive delegation of the powers.

10 In such circumstances referred to above, Mr. Poddar, the learned counsel prays that there being merit in his writ application, the same may be

allowed and the reliefs prayed for in the writ application may be granted.

● SUBMISSIONS ON BEHALF OF THE STATE:

11 Ms. Manisha Lavkumar Shah, the learned Government Pleader assisted by Mr. Dharmesh Devnani, the learned A.G.P. appearing for the State

has vehemently opposed this writ application. According to Ms. Shah, the writ application seeking to question the legality and validity of a show cause

notice is not maintainable because it cannot be said in the present case that the show cause notice issued by the respondent No.1 is without jurisdiction

or a nullity. According to Ms. Shah, the show cause notice is yet to be adjudicated. It is submitted that the writ applicant must file his reply and make

good his case for getting impugned show cause notice discharged.

12 Ms. Shah further contended that the challenge to the constitutional validity of Rule 142(1)(a) of the Rules is without any foundation. In this

connection, Ms. Shah invited the attention of this Court to Section 164 of the Act, which confers powers upon the Government to make rules. Ms.

Shah pointed out that Section 164 confers powers upon the Government on the recommendations of the counsel by a notification to make rules for

carrying out the provisions of the Act, 2017. Ms. Shah would submit that Rule 142(1)(a) of the Rules is valid and does not travel beyond the provisions

of the Act, 2017. In short, the submission of Ms. Shah is that Rule 142(1)(a) is not invalid on account of excessive delegation.

13 In such circumstances referred to above, Ms. Shah prays that there being no merit in this writ application, the same deserves to be rejected

summarily.

14 Having heard the learned counsel appearing for the parties and having gone through the materials on record, two questions fall for our

consideration:

[1] Whether the impugned show cause notice deserves to be quashed and set aside as prayed for by the writ applicant?

[2] Whether Rule 142(1)(a) of the Rules 2017 is in any manner ultra vires the provisions of the parent Act i.e. the GST Act, 2017?

15 Before adverting to the rival submissions canvassed on either side, we deem it appropriate to look into the few provisions of the Act and the Rules.

Section 122(1) of the Act, 2017 reads thus:

“Penalty for certain Offences

(1) Where a Taxable Person who-

(i) Supply without invoice or supply with incorrect or false invoice;

(ii) Issuing invoice without making supply of goods/ services under this act or rules made there under;

(iii) Collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment

becomes due;

(iv) Collects any tax in contravention of provisions of this act but fails to pay same to the Government beyond a period of three months from the date

on which such payment becomes due;

(v) fails to deduct the tax in accordance with provisions of sub-section (1) of section 51 or deducts an amount which is actually less than the amount

required to be deducted under the said sub-section, or where he fails to pay to the Government under sub-section (2) there of, the amount deducted as

tax;

(vi) fails to collect tax in accordance with the provisions of the sub-section (1) of Section 52, or collects an amount which is less than the amount

required to be collected under the said sub-section or where he fails to pay to the Government the amount collected as tax under sub-section (3) of

section 52

(vii) take or utilizes of input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of

this Act or the rules made thereunder;

(viii) Fraudulently obtains refund of tax under this act;

(ix) take or distribute input tax credit in contravention of section 20, or rules made there under

(x) falsifies or substitute financial records or produce fake accounts or documents or furnishes any false information or return with an intention to

evade payment of tax under this Act;

(xi) is liable to be registered under this act but fails to obtains registration;

(xii) furnishes false or incorrect information either at the time of applying for registration of subsequently;

(xiii) Obstruct or prevent any officer in discharge of his duties under this act;

(xiv) transport any taxable goods without the cover of documents as may be specified in this behalf;

(xv) Suppress his turnover leading to evasion of tax under this act;

(xvi) Fails to keep, maintain or retain books of account and other documents in accordance with the provision of this act or rules made thereunder;

(xvii) fails to furnish information or documents called by an officer in accordance with the provisions of this Act or rules made there under or furnishes

false information or documents during the proceedings under this act;

(xviii) Supplies, transport or stores any goods which he has reason to believe are liable to confiscation under this act;

(xix) issue any invoice or document by using the registration number of another registered person;

(xx) tampers with, or destroys any material evidence or document;

(xxi) Disposes off or tampers with any goods that have been detained, seized, or attached under this act,

He shall be liable to pay a penalty of TEN THOUSANDS RUPEES or an amount equivalent the tax evaded or the tax not deducted/ collected under

section 51 or short deducted or deducted but not paid to government or tax not collected under section 52 or short collected or collected but not paid to

the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.â€​

16 Section 74 of the Act, 2017 reads thus:

“74 Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any

wilful misstatement or suppression of facts.

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been

wrongly availed or utilised by reason of fraud, or any wilful- misstatement or suppression of facts to evade tax, he shall serve notice on the person

chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has

wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with

interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

(2) The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of

order.

(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not

paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub- section

(1), on the person chargeable with tax.

(4) The service of statement under sub-section (3) shall be deemed to be service of notice under sub-section (1) of section 73, subject to the condition

that the grounds relied upon in the said statement, except the ground of fraud, or any wilful-misstatement or suppression of facts to evade tax, for

periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under

section 50 and a penalty equivalent to fifteen per cent. Of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the

proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty

payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to

issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty

equivalent to twenty-five per cent. Of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to

be concluded.

(9) The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest

and penalty due from such person and issue an order.

(10) The proper officer shall issue the order under sub-section (9) within a period of five years from the due date for furnishing of annual return for

the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within five years from the date of

erroneous refund.

(11) Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a

penalty equivalent to fifty per cent. Of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be

deemed to be concluded.

Explanation 1.â€" For the purposes of section 73 and this section,â€

(i) the expression “all proceedings in respect of the said noticeâ€​ shall not include proceedings under section 132;

(ii) where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against

the main person have been concluded under section 73 or section 74, the proceedings against all the persons liable to pay penalty under sections 122,

125, 129 and 130 are deemed to be concluded.

Explanation 2.â€"â€"For the purposes of this Act, the expression “suppressionâ€​ shall mean non-declaration of facts or information which a taxable

person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to

furnish any information on being asked for, in writing, by the proper officer.â€​

17 Section 164 of the Act, 2017 reads thus;

“Power of the Government to make Rules

(1) The Government may, on the recommendations of the Council, by notification, make rules for carrying out the provisions of this Act.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Government may make rules for all or any of the matters which by this

Act are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by rules.

(3) The power to make rules conferred by this section shall include the power to give retrospective effect to the rules or any of them from a date not

earlier than the date on which the provisions of this Act come into force.

(4) Any rules made under sub-section (1) or sub-section (2) may provide that a contravention thereof shall be liable to a penalty not exceeding ten

thousand rupees.â€​

18 Rule 142 of the CGST Rules, 2017 reads thus:

“Notice and order for demand of amounts payable under the Act.

Rule 142: (1) (a) The proper officer shall serve, along with the (a) notice issued under section 52 or section 73 or section 74 or section 76 or section

122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC-

01,

(b) statement under sub-section (3) of section 73 or sub-section (3) of section 74, a summary thereof electronically in FORM GST DRC-02,

specifying therein the details of the amount payable.

(1A) The proper officer shall, before service of notice to the person chargeable with tax, interest and penalty, under sub-section (1) of Section 73 or

sub-section (1) of Section 74, as the case may be, shall communicate the details of any tax, interest and penalty as ascertained by the said officer, in

Part A of FORM GST DRC-01A.

(2) Where, before the service of notice or statement, the person chargeable with tax makes payment of the tax and interest in accordance with the

provisions of sub-section (5) of section 73 or, as the case may be, tax, interest and penalty in accordance with the provisions of sub-section (5) of

section 74, or where any person makes payment of tax, interest, penalty or any other amount due in accordance with the provisions of the Act,

whether on his own ascertainment or, as communicated by the proper officer under sub-rule (1A), he shall inform the proper officer of such payment

in FORM GST DRC-03 and the proper officer shall issue an acknowledgement, accepting the payment made by the said person in FORM GST DRC-

04.

(2A).....â€​

19 We do not propose to enter into the merits of the allegations levelled against the writ applicant as regards bogus billing transactions without there

being any physical movement of the goods as the matter is at the stage of a show cause notice, we only propose to consider whether the impugned

show cause could be termed as per se without jurisdiction and a nullity and the validity of Rule 142(1)(a) of the Rules.

20 The scope of judicial review, against the show cause notice, is required to be dealt with first. In the case of Standard Chartered Bank and others

vs. Directorate of Enforcement and others reported in AIR 2006 SC 1301, it is held that ordinarily the Court should be reluctant to interfere with the

show cause notice unless the notice is shown to have been issued apparently without any authority of law. The relevant observations are thus:

The prayer for the issue of a writ of prohibition restraining the authorities under the Act from proceeding with the adjudication and the prosecution

is essentially based on the constitutional challenge to the relevant provisions of the Act on the ground that they violate Articles 14 and 21 of the

Constitution of India. Once we have held, as the High Court did, that the provisions are constitutional, the basis on which the writ of prohibition is

sought for by the appellants disappears. It is settled by the decisions of this Court that a writ of prohibition will issue to prevent a Tribunal or Authority

from proceeding further when the Authority proceeds to act without or in excess of jurisdiction; proceeds to act in violation of the rules of natural

justice; or proceeds to act under a law which is itself ultra vires or unconstitutional. Since the basis of the claim for the relief is found not to exist, the

High Court rightly refused the prayer for the issue of a writ of prohibition restraining the Authorities from continuing the proceedings pursuant to the

notices issued. As indicated by this Court in State of Uttar Pradesh v. Brahm Datt Sharma [(1987) 2 SCC 179 ]when a show cause notice is issued

under statutory provision calling upon the person concerned to show cause, ordinarily that person must place his case before the Authority concerned

by showing cause and the courts should be reluctant to interfere with the notice at that stage unless the notice is shown to have been issued palpably

without any authority of law. On the facts of this case, it cannot be said that these notices are palpably without authority of law. In that situation, the

appellants cannot successfully challenge the refusal by the High Court of the writs of prohibition prayed for by them.

21 In the case of Commissioner of Customs And Central Excise, Madurai -vs- Charminar Nonwovens Limited reported in 2004(167) E.L.T. 372

dispute involved therein was a classification dispute and challenge was made to a show cause notice wherein it is held that the High Court should

remit the matter to the concerned authority for adjudication. However, in the case of State of Uttar Pradesh and another vs. Anil Kumar Ramesh

Kumar Chandra Glass Works and another reported in (2005) SCC 451, the Apex Court carved out an exception that if the facts, narrated in the show

cause notice, are not accepted to be correct; if it can be demonstrated that offence is not disclosed; or the show cause notice is without jurisdiction,

the Court should not entertain the writ petition under Article 226 of the Constitution of India in the following words :

In our view, the High Court proceeded on an incorrect basis. Hence, the decision cannot stand. In any event, this Court had repeatedly held that

Article 226 should not be permitted to be invoked in order to challenge show-cause notices unless accepting the fact in the show-cause notices to be

correct, either no offence is disclosed or the show-cause notices are ex facie without jurisdiction. That could not be said as far as the eight show-

cause notices in question are concerned. The High court, therefore, should not have interfered and should have left the respondents to pursue their

remedy by way of an appeal under Section 9 of the Act from the order of assessment which, according to the High Court, had admittedly been passed

before the writ petition had been filed by the respondent.

22 The ratio which could be culled out from the aforesaid judgment is that the power of judicial review, under Article 226 of the Constitution of India,

can be exercised where challenge to a show cause notice is made provided it is patently demonstrated that the same is issued without jurisdiction or it

does not disclose any offence to have been committed. Ordinarily High Court should not embark to decide the factual disputes but relegate the party

to submit the reply before the authority concerned who is obliged to decide the same. The aforesaid rule is, however, not free from exception. The

exception, carved out in the case of Indian Cardboard Industries Limited vs. Collector of Central Excise reported in 1992 (58) E.L.T. 508(Cal.), in our

opinion, still holds the field. The aforesaid exception can be aptly quoted hereunder :

On the basis of the decisions cited it appears that the court in exercise of its jurisdiction under Art. 226 of the Constitution will interfere with a

show cause notice in the following circumstances :

(1) When the show cause notice ex facie or on the basis of admitted facts does not disclose the offence alleged to be to be committed;

(2) When the show cause notice is otherwise without jurisdiction;

(3) When the show cause notice suffers from an incurable infirmity;

(4) When the show cause notice is contrary to judicial decisions or decisions of the Tribunal;

(5) When there is no material justifying the issuance of the show cause notice.

Therefore, to sum up, the High Court can interfere under Article 226 of the Constitution of India against a show cause notice where the same is

issued by an authority in exercise of the power which is absent; the facts does not lead to commission of any offence; the show cause notice is

otherwise without jurisdiction; it suffers from incurable infirmity; against the settled judicial decisions or the decisions of the Tribunal and bereft of

material particulars justifying commission of offence.

23 The Supreme Court, in the case of Union of India -vs- Vicco Laboratories, reported in 2007 (13) S.C.C. 270, also deprecates interference at the

stage of issuance of show cause notice by the authorities unless it is without jurisdiction or in abuse of process of law in these words :

Normally, the writ court should not interfere at the stage of issuance of show-cause notice by the authorities. In such a case, the parties get

ample opportunity to put forth their contentions before the authorities concerned and to satisfy the authorities concerned about the absence of case for

proceeding against the person against whom the show-cause notices have been issued. Abstinence from interference at the stage of issuance of

show-cause notice in order to relegate the parties to the proceedings before the authorities concerned is the normal rule. However, the said rule is not

without exceptions. Where a show-cause notice is issued either without jurisdiction or in an abuse of process of law, certainly in that case, the writ

court would not hesitate to interfere even at the stage of issuance of show-cause notice. The interference at the show-cause notice stage should be

rare and not in a routine manner. Mere assertion by the writ petitioner that notice was without jurisdiction and/or abuse of process of law would not

suffice. It should be prima facie established to be so. Where factual adjudication would be necessary, interference is ruled out.

24 When we invited the attention of Mr. Poddar to Rule 142 of the Rules, which provides that the proper officer shall serve, along with the notice

under Section of the Act, a summary thereof electronically in form GST DRC â€" 01, the quick reply was that Rule 142(1)(a) is ultra vires as a result

of excessive delegation. Rule 142 is specifically with respect to “notice and order for demand of amounts payable under the Actâ€. We find no

merit in the contention of Mr. Poddar that Rule 142(1)(a) is invalid in any manner.

25 A rule under delegated legislation can be held to be ultra vires the statutory provisions of the Act if it is shown :

(i) that it is beyond the scope of or in excess of the rule-making power of the delegate conferred under the Act, or

(ii) that it is in conflict with or repugnant to any enactment in the Act. 26 The question whether any particular legislation suffers from excessive

delegation has to be decided having regard to the subject matter, the scheme, the provisions of the Statutes including its preamble and the facts and

circumstances in the background of which the Statute is enacted. (See Registrar, Co-operative Societies vs. K. Kunjabmu, AIR 1980 SC 35 0and

State of Nagaland v. Ratan Singh, AIR 1967 SC 212.) It is also well settled that in considering the vires of subordinate legislation one should start with

the presumption that it is intra vires and if it is open to two constructions, one of which would make it valid and other invalid, the Courts must adopt

that construction which makes it valid and the legislation can also be read down to avoid its being declared ultra vires [See St. Johns Teachers

Training Institute vs. Regional Director, National Council for Teacher Education reported in AIR 2003 SC 1522].

27 In the case of Ajay Canu vs. Union of India, AIR 1988 SC 202,7 the Supreme Court held that it was well established proposition of law that where

a specific power is conferred without prejudice to the generality of the power already specified, the particular power is only illustrative and it did not in

any way restrict the general power.

28 We have already quoted Section 164 of the Act which provides for the power to make rules. It may be noted that Section 164 of the Act confers

power on the Central Government to frame the rules. Under Section 164 of the Act, the Central Government has the power to make rules generally to

carry out all or any of the purposes of the Act.

29 In our opinion, Rule 142(1)(a) of the Rules, 2017 is valid and is no manner conflict with any of the provisions of the Act.

30 The challenge to the legality and validity of the show cause should fail having regard to the scope of judicial review and the challenge to the validity

of Rule 142(1)(a) of the Rules should also fail.

31 In the result, this writ application fails and is hereby rejected.

32 We clarify that we have otherwise not gone into the merits of the matter. The show cause notice shall be adjudicated on its own merits and it shall

be open for the writ applicant to raise all legal contentions available to him.