Denial of Cross-Examination upon Imposing Penalty under GST Act Violates Natural Justice: Kerala HC sets aside Order [Read Order]

In a recent case, the High Court of Kerala viewed that failure to grant an opportunity for cross examination upon imposing penalty under the Central Goods & Services Tax Act, 2017 ('CGST Act') violated the principles of natural justice and set aside the said order.

According to the Goods and Services Tax regulations, the petitioner, Nishad K.U., is a registered taxpayer. In addition to a further sum of Rs. 9.40 Crores under section 122(1) of the State Goods & Services Tax Act, 2017 (the "SGST Act"), he contests an order that imposes a penalty of more than Rs. 9.40 Crores under section 74(9) of the Central Goods & Services Tax Act, 2017 (the "CGST Act"), as well as consequential interest and other penalties. Despite having the right to appeal under section 107 of the CGST/SGST Act, the petitioner has invoked the jurisdiction of Article 226 of the Indian Constitution, claiming that the impugned ruling breached natural justice principles.

The petitioner is the owner of M/s. Wood Tunes Enterprises, a plywood company. The petitioner was asked to explain why the penalty suggested in show cause notice should not be applied to alleged willful misstatements and suppression of facts to avoid GST payment.  According to the report, 20 distinct people's statements were obtained, showing that the petitioner had engaged in fraudulent registrations and sales suppression to obtain an excessive amount of the input tax credit.

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In addition to refuting all of the accusations, the petitioner explicitly asked for the chance to cross-examine the individuals from whom the statements were purportedly taken. The petitioner further claimed that the statements were all retracted and that they were even obtained under duress. Meanwhile, the petitioner was heard on January 31, 2024, and subsequently, on February 7, 2024, the petitioner's motion for cross-examination was denied.

As soon as possible, the petitioner submitted a second reply that included three affidavits of retractions from those who had supposedly made comments. The petitioners asked that the proceedings be withdrawn and that they be given another chance to be cross-examined. The first respondent went ahead and issued the final order, placing a significant liability on the petitioner, ignoring the request for cross-examination.

It was observed that the petitioner had engaged in fraudulent conduct by using the PAN and Aadhar card information of other people—referred to as "goalies" in local trade jargon. A carousel of input tax credits across multiple states is said to have been created by the petitioner's alleged misuse of the invoices and e-way bills to enable the covert supply of plywood in the names of goalies who were only name lenders in the transaction and who were then serviced by other goalies. 

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It is clear from reading section 107(11) of the Act that the Appellate Authority lacks the authority to remand the matter in the event that the contested order exhibits any irregularities or even when the natural justice standards are broken. Only the order that is being appealed against may be confirmed, changed, or revoked by the Appellate Authority.

The petitioner said that by denying the people whose statements the tax authorities had recorded the chance to be cross-examined, the norms of natural justice had been violated.  In this respect, it is important to note that section 75(4) of the Act merely requires an opportunity for hearings; it makes no mention of the possibility for cross-examination of the witnesses.

In the contested order, the adjudicating authority stated that the petitioner does not need to be permitted cross-examination since it will not compromise the validity of the evidence gathered through the testimonies of those witnesses who are already on file. The Adjudicating Authority concluded that the request for cross-examination lacked substance after reviewing a number of rulings and making the necessary observations.

A single bench of Justice Bechu Kurian Thomas  believed that the norms of natural justice have been broken by not giving the petitioner a chance for cross-examination and by using people's remarks to impose punishment. The contested ruling of May 29, 2024, is overturned, and the first respondent is instructed to reexamine the case after giving the individuals whose statements were obtained during the investigation a chance to be cross-examined. 

To Read the full text of the Order CLICK HERE

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