GST Department’s Failure To Follow Procedure Amounts Violation of Natural Justice: HC Quashes Summary Order in Form GST DRC-07

The summary order contained in Form GST DRC-07 was quashed by the High Court of Jharkhand. The bench of Justice Aparesh Kumar Singh and Justice Deepak Roshan quashed the order as the department failed to follow the procedure prescribed in law before issuing a summary of the order on Form GST DRC-07, resulting in a violation of the principle of natural justice.

The petitioner/assessee challenged the Central Board of Indirect Taxes and Customs (CBIC) circular dated 10.02.2020, which stated that interest due on late tax payments might be collected under the terms of Section 79 read with Section 75 (12) of the CGST Act.

The petitioner has sought the quashing of the order for the demand notices issued on Form GST DRC-01 for the various tax years. Despite the explicit statement in Form GST DRC-01, counsel for the petitioner claimed that no show cause notice under sections 73 and 74 of the JGST Act was given before passing the adjudication order.

The petitioner’s counsel argued that interest should be sought under section 50(1) of the JGST Act for a delay in completing a monthly return on Form GSTR-3B rather than a delay in paying the taxes. When a person “fails to pay” tax, Section 50 deals with the obligation to pay interest on “unpaid” tax. When a person has paid tax in line with the law, it says nothing. When a person has paid tax in line with Section 49, it says nothing. The proviso to Section 50(1) cannot go beyond the primary provision, be conflicting with it, or add to it. It must be limited to the enacting clause’s subject matter.

According to counsel for the petitioner, the proviso to Section 50(1) of the JGST Act simply states that the Input Tax Credit (ITC) is as good as the tax paid, and so no interest is payable on it. Because Section 50(1) deals with tax paid, it says nothing regarding payments from the electronic credit ledger, hence no interest is due. Section 50(1) solely deals with cases of unpaid or failed tax, so it doesn’t mention payment from the computerized credit ledger. Under section 50(1), the term “debiting” refers to the allocation of a sum on which interest is due if it is not paid in accordance with Section 49. The words “fails to pay” and “unpaid” in sub-Section (1) and (2) of Section 50 of the JGST Act must be read in conjunction with the term “debiting.”

Counsel for the petitioner further argued that a late fee could be requested for the petitioner’s late submission of GSTR-3B, which the petitioner has previously paid. Section 50(1) interest is compensatory in nature. As a result, money goes to the Government Exchequer after the amount is deposited or credited in the electronic cash ledger in line with Section 49, particularly the Explanation thereto, and no interest can be claimed for the period following. The government does not have to wait for the filing of a return or the appropriation of the tax to benefit from the amount credited in the Electronic Cash Ledger.

According to the petitioner’s counsel, the amount could not Be considered to be “unpaid” or “fail to pay” to attract Section 50 (1) of the JGST Act if the money was enjoyed by the government. Because the sum was already paid, no interest is charged when a person has paid tax in line with Section 49 of the JGST Act. Because interest is always compensatory in nature, it can be claimed on the amount withheld.

The petitioner’s counsel also brought up Section 54(12) of the JGST Act, which states that if the amount in the electronic cash ledger is not refunded by the government within the specified time, the registered person is entitled to interest at a rate not exceeding 6%, indicating that money is going into the government’s coffers. As a result, compensatory interest cannot be claimed. A late charge can be imposed for any delay in filing a return under section 47 of the Act, but interest cannot be imposed because it would be contradictory to the idea of interest in a taxing act.

The counsel for the petitioner further contested that, interest cannot be required if tax is put into the Electronic Cash Ledger in compliance with Section 49 before the 20^th of the following month. Only for the duration of delay after then can interest be charged. For the purposes of Section 50 of the JGST Act, the date of filing the return or the delay in filing the return is irrelevant. Section 9 generates a tax charge, whereas Section 50, which only allows interest on “unpaid” amounts, is significant for the purpose of claiming interest.

Section 50(1) requires only a credit in the credit/cash ledger to stop interest from accruing. As a result, the fee imposed under Section 9 should not be mistaken with the levy imposed under Section 50. It’s a stand-alone charging system.

The court pointed out that the department did not follow the legal procedure before issuing a Summary of the Order in Form GST DRC-07 declaring the petitioner liable to pay interest under section 50(1) of the JGST Act for late filing of GSTR-3B and not depositing the required interest on its own.

“As a result, the writ petition succeeds exclusively on the basis of a failure to observe natural justice principles and legal procedure,” the court said.

The Summary of the Order included in Form GST DRC-07 relating to different tax periods was overturned by the court.

Before delivering any adjudication ruling, the court ruled that the department is free to issue a suitable show-cause notice in compliance with Section 73(1) of the JGST Act, 2017 and provide an opportunity for the petitioner to make a response. The petitioner has the option of raising the issue of the leviability of interest on the late filing of GSTR-3B, based on its claim that the tax was properly deposited in the Electronic Cash Ledger before the due date.

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