The High Court of Calcutta in the case of Khokan Motors Works Pvt. Ltd. Versus Senior Joint Commissioner of State Tax W.P.A No. 1783 of 2025, decided on 03.9.2025 examined the validity of a demand notice and adjudication proceedings under the GST law, where the assessee had been denied access to the documents and materials forming the basis of the alleged tax evasion. The Court reiterated that compliance with principles of natural justice is indispensable in tax adjudication and that failure to furnish relied-upon materials at the stage of show cause notice or adjudication vitiates the entire proceedings, regardless of subsequent opportunities of hearing. This decision serves as a crucial reminder to both tax administrators and taxpayers that transparency and procedural fairness lie at the heart of GST adjudication.
FACTS
Khokan Motors Works Pvt. Ltd. (hereinafter referred to as “the Petitioner”) was issued a pre-Show Cause Notice (hereinafter referred to as “SCN”) dated 24.08.2023 alleging evasion of tax to the tune of ₹1,10,95,60,265.58 for Financial Years 2018–19. Subsequently, a SCN dated 31.08.2023 was issued raising a total alleged evasion of ₹1,18,60,34,164.25.
The Petitioner did not file a reply as both notices were cryptic, merely listing figures of “alleged discrepancies” without providing any supporting documents or materials forming the basis of the allegations. Thereafter, the adjudicating authority passed an order on 04.10.2023 under Section 73, fixing tax liability at ₹1,15,60,12,406.32.
The Petitioner sought rectification of this order, after which the adjudicating authority passed a rectified order on 16.10.2023, reducing the demand to ₹40,37,877. Aggrieved, the Petitioner filed an appeal under Section 107 before the Appellate Authority, which upheld the adjudicating authority’s findings and directed that due credit be given to tax payments already made through DRC-03.
The Petitioner thereafter approached the High Court under Article 226 challenging the rectified adjudication order, the appellate order, and the consequent demand notice dated 17.02.2025 on the ground of violation of natural justice.
ISSUES
- Whether the adjudicating and appellate orders were vitiated due to non-supply of documents and materials forming the basis of the tax evasion allegations?
- Whether the confirmation of demand under Section 73, without allowing the assessee to access evidence, violated principles of natural justice and rendered the demand unsustainable in law?
CONTENTIONS OF THE PARTIES
The Petitioner argued that the SCN lacked detailed particulars or supporting materials necessary to defend against the allegations. The demand was founded on undisclosed documents, depriving the Petitioner of an effective opportunity to rebut. The Petitioner stated that the rectification and appellate proceedings, though granting hearings, could not cure this foundational defect of non-disclosure. Consequently, the orders violated audi alteram partem, the fundamental principle that no one should be condemned unheard.
On the contrary, the State (hereinafter referred to as “the Respondent”) contended that adequate opportunity of hearing had been given at both adjudication and appellate stages. The Respondent further stated that since rectification and appeal proceedings were conducted after hearing the Petitioner, natural justice was complied with.The Respondent argued that the findings and demand were based on available records and lawful exercise of authority under Section 73.
DECISION AND FINDINGS
The Hon’ble High Court of Calcutta held that the materials relied upon to allege tax evasion were never made available to the Petitioner. It reiterated that when an administrative or quasi-judicial action has civil consequences, compliance with principles of natural justice is mandatory and non-derogable.
The Court emphasized that failure to disclose the materials at the adjudication stage is incurable, subsequent hearings or appeals cannot rectify such violation. It observed that the show cause notice and adjudication order were both cryptic, merely mentioning figures without sharing underlying data or documents.
Accordingly, the Court held that the finding of the adjudicating authority, as upheld by the Appellate Authority, and the demand notice of ₹40,37,877 were bad in law and not sustainable.
The Court quashed the rectified order, the appellate order insofar as it upheld the demand, and the consequential demand notice. The matter was remanded for fresh adjudication under Section 73 after furnishing the Petitioner with all relevant materials and granting due opportunity of hearing.
AMLEGALS REMARKS
This decision reinforces the cardinal principle of natural justice in GST proceedings. The High Court clarified that a post-facto hearing cannot cure an initial procedural lapse, once a taxpayer is denied access to the evidentiary basis of a demand, the adjudication itself stands vitiated.
The ruling mandates that show cause notices and adjudication orders under Section 73 must be speaking and self-contained clearly stating out the facts, evidence and reasoning. For GST officers, this judgment is a cautionary precedent to ensure transparency and fairness; for taxpayers, it provides a strong ground to challenge cryptic, data-deficient, or opaque adjudication orders.
The Calcutta High Court’s reasoning aligns with prior jurisprudence emphasizing that fair procedure is intrinsic to the legitimacy of taxation. The decision upholds that justice in taxation is not merely in the result but also in the process.
For any queries or feedback, feel free to connect with hiteashi.desai@amlegals.com