Madras HC quashes Assessment order passed without issuing GST DRC-1 Notice

Fact and Issue of the case

The petitioner is a sole proprietary concern, they engaged in the business of iron and steel scrap. The petitioner is registered under GST with GSTIN Nos: 33CDVPR5729K1ZP/ 2017-2018, 33CDVPR5729K1ZP/2019-2020 and 33CDVPR5729K1ZP/2018-2019 respectively dated 05.08.2021. That the petitioner had filed return under the GST Act regularly, while so, as per the investigation of the Department concerned, a communication in Form No. DRC-01A dated 15.10.2020 was issued to the petitioner alleging that some of the suppliers, who have supplied iron and steel scrap to the petitioner were either non-existent or were not conducting any business therefore, the petitioner had wrongly availed Input Tax Credit i.e., ITC during the period 20172018 to 2019-2020, on such purchase of an amount of Rs.3,60,02,382/- (Rupees Three crores sixty lakhs two thousand three hundred and eighty two). When such notice was issued in DRC-01A, which is the notice necessarily to be issued under Section 74(5) of CGST Act, 2017 (in short, ‘the Act’), the said notice has been replied by the petitioner on 19.10.2020, not accepting the said proposal issued under the notice in DRC-01A.

Thereafter the respondent Revenue has passed the order dated 05.08.2021 under Section 75(1) of the Act, whereby, an assessment has been made, where not only ITC reversal under Section 74 of the Act, but also the penalty under Section 74(5) of the Act has been made, thereby, the assessment order has been issued with instructions that the electronically generated summary of the order specifying the ITC reversal, penalty and interest payable by the petitioner is also electronically uploaded in the common portal. Assailing the said order of assessment dated 05.08.2021, the petitioner has moved this writ petition with the aforesaid prayer.

Observation of the Court

The first step, if the revenue wants to initiate proceedings under Section 74 of the Act, has to serve a notice to pay the amount of tax along with interest payable under Section 50 and a penalty equivalent to 15% 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. Therefore, what has been proposed by the revenue would be intimated by way of notice under Sub Section 5 of Section 74 of the Act initially to the assessee/dealer, who on receipt of the same may or may not accept and once he accepted there would be a conclusion. However, if he does not accept the proposal sent by the Revenue under Section 74(5) of the Act, the next course of action to be followed is to issue a notice under Section 74(1) of the Act as has been quoted herein above.

Therefore a Section 74(1) notice is an independent notice to be issued in DRC-01, whereas the notice under Section 74(5) was to be issued in DRC-01A. Herein the case in hand, admittedly DRC-01A was issued, thereafter straightaway the respondent revenue proceeded to pass the impugned assessment order. The DRC-01 notice under Section 74(1) of the Act, which is also mandatory to be issued before passing the impugned order of assessment has not been issued in this case. In the absence of any such notice, the proceedings, which is culminated in the order of assessment, which is impugned herein, is, no doubt, vitiated.

Therefore, this Court has no hesitation to hold that the impugned order cannot stand in the legal scrutiny and in that view of the matter, these writ petitions are disposed of with the following orders: “The respective impugned orders in these writ petitions are hereby quashed. All these three matters are remitted back to the respondent for re-consideration. While re-considering the same, they shall commence the proceedings from where, it has already been stopped i.e., till DRC-01A notice, which means, they should issue DRC-01 notice to the petitioner and thereafter after giving a fair opportunity of being heard to the petitioner, necessary orders shall be passed with regard to the assessment, if any.” 16. With these directions, these writ petitions ar