High Court Quashes Show Cause Notice Issued Before Reply Deadline in GST Audit Proceedings

The audit process was started against the taxpayer, covering the period from Financial Years 2017–18 to 2022–23, through the audit notice dated 11 January 2024. The taxpayer, in turn, provided information and explanations via letters dated 22 February 2024, 19 April 2024, 6 September 2024, and 24 September 2024. After that, the Department shared a draft audit report asking for more clarifications on 4 October 2024. The taxpayer replied with their detailed response on 11 October 2024.

After that, on 25 November 2024, a pre-Show Cause Notice (pre-SCN) was sent out, giving the objector three days to give their reply by 28 November 2024. However, before the expiry of the said period, a formal Show Cause Notice (SCN) dated 27 November 2024 was issued. The assessee challenged the premature SCN as well as the final audit report dated 11 February 2025, communicated on 13 February 2025. The petitions were filed because (i) the audit report was issued beyond the limitation prescribed under Section 65 of the Central Goods and Services Tax Act, 2017, and (ii) the SCN was issued in violation of the principles of natural justice.

Issue Raised: Whether the issuance of the SCN before expiry of time granted under the pre-SCN was sustainable, and whether the audit report communicated on 13 February 2025 was beyond limitation under Section 65 of the CGST Act.

HC Held: The Court analyzed the statutory timelines prescribed under Section 65 of the CGST Act and concluded that “commencement of audit” starts when the records and documents requested are provided to the authorities. The Court, depending on the last submission of the taxpayer on 11 October 2024, decided that the audit started on 12 October 2024 and rightly would be finished in three months, which period could be prolonged by six months. The audit report was made public on 11 February 2025, and was sent out on 13 February 2025, hence it was regarded to be within the limitation period.

However, the Court faced a procedural issue because the SCN was issued prior to the expiration of the pre-SCN reply period. A notice of the SCN issued on 27 November 2024, when the time for reply had not yet expired and was until 28 November 2024, was seen as an infringement of natural justice. As a result, the SCN was declared void and the matter was returned to the stage before the SCN. The taxpayer who had already submitted a preliminary reply was allowed to provide any additional reply to the pre-SCN dated 25 November 2024 on or before 10 November 2025. The authority was then instructed to decide if a new SCN was necessary and to act according to the law. The Court further stated that the time during which these petitions were pending would not be counted against the limitation period for either party.

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