The Madras High Court delivered an important judgment on December 31, 2023, concerning a case involving L&T Finance Limited (hereafter referred to as "the petitioner") and the Assistant Commissioner (hereafter referred to as "the respondent") under the Goods and Services Tax (GST) regime. The primary issue in the case was the breach of natural justice principles by the respondent in the process of assessing the tax liabilities of L&T Finance Limited.

This judgment is significant because it underscores the fundamental legal principle of procedural fairness, a cornerstone of administrative law. The case revolves around L&T Finance’s response to a GST audit and show-cause notice, discrepancies found in their turnover reporting, and claims for exemptions on interest income.

Background:

L&T Finance Limited, a prominent financial services company, underwent a GST audit. Following the audit, the respondent issued a show-cause notice to L&T Finance on September 29, 2023, raising concerns about discrepancies between the turnover reported in the company’s books of accounts and the various GST returns (such as GSTR-1, GSTR-3B, and GSTR-9) filed for the relevant financial periods. Specifically, the show-cause notice highlighted the following issues:

• Discrepancies in the reporting of the turnover.
• Claims for exemptions on interest income that were seemingly unsubstantiated.

L&T Finance responded to the notice on two separate occasions—on October 14, 2023, and October 27, 2023—providing explanations and documents in defense. Despite this, the respondent issued an assessment order on December 31, 2023, confirming certain tax liabilities against L&T Finance. This assessment order led to the filing of a writ petition by L&T Finance before the Madras High Court.

Issues in Dispute:

The crux of the dispute lay in two key issues:

• Turnover Discrepancy: The respondent alleged that L&T Finance had not properly reconciled the difference in turnover reported between its books of accounts and the various GST returns (GSTR-1, GSTR-3B, and GSTR-9). However, L&T Finance contended that these discrepancies arose because certain transactions had not been fully reported in the GSTR-1 form, but the omissions were corrected when they filed the annual return in GSTR-9. The total value of exempt supplies was also reported during this reconciliation process, and the corresponding tax liabilities were paid via DRC-03 (a payment form for rectifying errors in the tax payment).
• Exemption Claim for Interest Income: L&T Finance also claimed that interest income worth Rs. 43,68,93,176 was exempt from GST as per the applicable provisions. The company provided partial documentation, including sample copies of statements of accounts to substantiate the claim. However, the respondent found the documentation insufficient, stating that the full details of all transactions related to the exempt turnover were not provided.

The Court’s Analysis:

The key legal principle at stake in this case was the principle of natural justice, which guarantees fair procedural treatment to all parties involved in a legal or administrative process. One of the crucial components of natural justice is the right to a personal hearing, which ensures that parties are given the opportunity to present their case and explain their positions in front of the concerned authorities.

1. Failure to Provide a Personal Hearing:

One of the central arguments made by L&T Finance was that the personal hearing scheduled for December 28, 2023, was not provided, even though they requested a deferment due to their commitment to filing the annual returns for the financial year 2022-2023. The petitioner communicated this request on December 27, 2023, yet the respondent issued the assessment order on December 31, 2023, without granting the hearing or considering the deferment request. Furthermore, while the order itself referenced a personal hearing notice issued on December 31, 2023, no such notice was found on record, raising doubts about whether the respondent had genuinely considered L&T Finance’s request.

The court found that denying the personal hearing violated the principles of natural justice, as the company was not provided an opportunity to present its full defense and further documentation. The judgment emphasized the necessity of a hearing in ensuring that the taxpayer's arguments and explanations are fully considered before making any final decisions.

2. Incomplete Consideration of the Documents Submitted by L&T Finance:

L&T Finance had submitted detailed explanations and rectifications for the discrepancies raised in the notice, including proof of tax payments via DRC-03 and documents supporting their exemption claim. The court observed that these explanations were not adequately reflected or addressed in the assessment order, particularly concerning the reconciliation of the turnover discrepancies.

The assessment order merely recorded that L&T Finance had failed to reconcile the differences between the various returns without adequately considering the rectifications made in the GSTR-9 or the payments made via DRC-03. In addition, the respondent had only reviewed sample statements of accounts provided by the company to substantiate the exempt interest income claim, without giving due consideration to the voluminous documentation that the petitioner had offered to support their case.

The court concluded that the respondent’s assessment was deficient due to the lack of proper consideration of the taxpayer’s explanations, which amounted to a failure of due process.

The Court’s Ruling:

In light of the above findings, the Madras High Court set aside the assessment order dated December 31, 2023, and remanded the matter for reassessment. The court’s instructions were as follows:

• L&T Finance was granted the opportunity to submit additional documents in support of its responses to the show-cause notice within 15 days of receiving the copy of the court’s order.
• Upon receipt of the additional documents, the respondent was directed to provide a reasonable opportunity for personal hearing and review the submissions carefully.
• The respondent was instructed to issue a fresh assessment order within two months of receiving the additional documentation from L&T Finance.

Conclusion:

This judgment reinforces the importance of ensuring procedural fairness in tax assessments. The right to a fair hearing is a fundamental tenet of justice, and in this case, L&T Finance’s request for a personal hearing due to its ongoing filing commitments was not properly addressed. The failure to consider the company’s full explanations and supporting documentation further compounded the denial of a fair process.

The ruling serves as a reminder to tax authorities that taxpayers must be given adequate opportunity to present their case, and that all evidence provided should be thoroughly examined before making any determinations. This case emphasizes the need for tax authorities to balance efficient assessments with respect for the taxpayer’s right to be heard, especially when the issues at hand are complex, such as discrepancies in reporting and claims for exemptions.

In conclusion, this case not only highlights the procedural shortcomings in tax assessment processes but also underscores the critical importance of adhering to the principles of natural justice and ensuring that taxpayers are given a fair opportunity to present their case before the authorities make any final determinations regarding tax liabilities. The court's decision to set aside the order and remand the case for reassessment is a victory for transparency and fairness in tax administration.