Scrutiny vs. Show Cause: When GST Authorities Cross the Line

1. Introduction

The Goods and Services Tax (GST) regime empowers officers to verify returns and recover tax dues through a structured mechanism. However, misuse of these provisions often results in double jeopardy for taxpayers. Two landmark judgements—Rajasthan High Court’s decision in Goverdhandham Estate Pvt. Ltd. v. State of Rajasthan [2024] 68 TAXLOK.COM 314 (Rajasthan) (affirmed by the Supreme Court) [2024] 77 TAXLOK.COM 201 (SC) and Gauhati High Court’s decision in Pepsico India Holdings Pvt. Ltd. v. Union of India [2025] 88 TAXLOK.COM 174 (Gauhati)—have significantly clarified the boundaries between scrutiny proceedings under Section 61 and demand proceedings under Section 73 of the GST Act.

These rulings are crucial in ensuring that departmental officers act within the limits of law and do not harass registered taxpayers once their explanations have been accepted.

2. Case Analysis: Goverdhandham Estate Pvt. Ltd. [2024] 68 TAXLOK.COM 314 (Rajasthan)

Background

The petitioner, a hotel operator registered under GST, filed regular GSTR-3B returns for FY 2017-18. The department issued a notice under Section 61 (scrutiny of returns), alleging wrongful availment of Input Tax Credit (ITC) on lifts and air conditioners, contending that such credits were blocked under Section 17(5) of the Act.

The petitioner explained that lifts and air conditioners were integral to hotel operations and formed part of the plant and machinery used for providing outward supplies. Despite this, the officer issued a show cause notice under Section 73 even after acknowledging the petitioner’s satisfactory reply in Form GST ASMT-12, thereby initiating recovery proceedings on the same grounds.

Court’s Observations

The High Court noted that:

• Section 61(2) expressly states that if the taxpayer’s explanation is found acceptable, “no further action shall be taken.”

• Only when the explanation is unsatisfactory can the officer proceed under Sections 65, 66, 67, 73, or 74.

• In this case, issuance of ASMT-12 accepting the explanation closed the scrutiny proceedings; any further demand was illegal and without jurisdiction.

The Court strongly held that once the explanation under Section 61 is accepted, invoking Section 73 on the same issue amounts to abuse of power. Accordingly, both the show cause notice and the enclosure to ASMT-12 were set aside as illegal

Supreme Court’s Affirmation

The department’s Special Leave Petition (SLP) was dismissed by the Supreme Court (Diary No. 37824/2024) on 14 October 2024, [2024] 77 TAXLOK.COM 201 (SC) confirming that recovery proceedings cannot be initiated on the same grounds once scrutiny is concluded in favour of the taxpayer. This gives the ruling finality at the highest judicial level

3. Case Analysis: Pepsico India Holdings Pvt. Ltd. [2025] 88 TAXLOK.COM 174 (Gauhati)

Background

In this case, the department initiated proceedings under Section 74 (for fraud or suppression) based on alleged discrepancies that had already been addressed in scrutiny under Section 61. The taxpayer argued that the officer’s jurisdiction under Section 74 was wrongly invoked without recording dissatisfaction with the explanation earlier provided.

Court’s Observations

The Gauhati High Court echoed similar reasoning:

• The GST law prescribes a sequential and logical process—scrutiny first, followed by action only if discrepancies persist.

• Officers cannot simultaneously or subsequently invoke Section 73 or 74 on identical grounds that were already scrutinized and accepted.

• Any such duplication of proceedings amounts to harassment and violation of natural justice.

The Court quashed the proceedings, reaffirming that jurisdiction under Section 73/74 arises only if the explanation in Section 61 is unsatisfactory or not furnished at all.

4. Key Legal Principle Evolved

Both High Courts (Rajasthan and Gauhati), now backed by the Supreme Court, have crystallized an important procedural safeguard:

Once a taxpayer’s explanation during scrutiny under Section 61 is accepted and communication in Form ASMT-12 is issued, the matter attains finality. The department loses jurisdiction to issue a show cause notice under Section 73 or 74 on the same facts.

This ensures administrative fairness and prevents repetitive demands for the same period and issue.

5. Practical Takeaways for Taxpayers

• Maintain clear documentation: Replies to ASMT-10 must be reasoned, supported by invoices, and properly uploaded on the portal.

• Preserve ASMT-12 orders: They serve as legal evidence that scrutiny has been closed in your favour.

• Challenge overlapping SCNs promptly: If the same issue is raised under Section 73 or 74 after issuance of ASMT-12, it can be struck down as invalid.

• Understand the difference: Section 61 deals with scrutiny (verification), whereas Sections 73/74 deal with adjudication (demand and recovery)—both cannot run on the same cause.

6. Author’s Analysis

These judgements represent a major judicial push for procedural discipline in GST administration. Officers must respect the logical flow of assessment provisions and avoid misuse of show cause powers. The Rajasthan High Court’s decision—now endorsed by the Supreme Court—sends a strong message that administrative convenience cannot override statutory safeguards.

7. Conclusion & Advisory

The twin rulings in Goverdhandham Estate Pvt. Ltd. and Pepsico India Holdings Pvt. Ltd. collectively uphold taxpayers’ right to finality once their explanations are accepted during scrutiny. The courts have clearly curtailed arbitrary departmental practices and restored balance between compliance and enforcement.

Advisory for Readers:

Every GST-registered person should vigilantly respond to ASMT-10 notices and retain all communications. Once ASMT-12 is issued, the department cannot revisit the same ground under Section 73 or 74. If such duplication occurs, immediate legal remedy should be sought—armed with these landmark precedents.