Karnataka High Court Nullifies GST Adjudication and Recovery for Breach of Natural Justice

Background of the Dispute

The matter before the Karnataka High Court in Bleuclif Apparels India Private Ltd & Anr. Vs Assistant Comercial Tax (Karnataka High Court) centered around the validity of a GST adjudication order and consequent recovery proceedings. The assessee approached the Court challenging:

  • The Adjudication Order dated 09.02.2024 and its summary (Annexures-A and B), and
  • The Recovery Notice dated 20.05.2024 (Annexure-F) issued under the GST law.

The primary grievance was that these actions were taken without affording the assessee a meaningful and effective opportunity to respond to the show cause notice, thus violating principles of natural justice.

Sequence of Events Leading to the Writ Petition

Initial Intimation in Form GST DRC-01A

The assessee received an intimation in Form GST DRC-01A on 20.12.2022. This is a pre-show cause notice intimation of tax liability under the GST regime.

  • On receipt of this intimation, the assessee submitted only a partial reply.
  • It was asserted on behalf of the assessee that a comprehensive response could not be filed due to financial distress and parallel proceedings initiated by its banker for default.
  • As a result of such banker’s action, the assessee’s business premises were allegedly placed under the banker’s lock and key, restricting physical access and routine operations.

Issuance of Show Cause Notice in Form GST DRC-01

Subsequently, the Department issued a show cause notice in Form GST DRC-01 dated 28.12.2023.

  • The notice was dispatched through RPAD (Registered Post Acknowledgment Due).
  • The postal endorsement revealed that the cover was returned with a remark that the assessee had left the premises “without instruction”.
  • The assessee contended before the High Court that this postal remark was a consequence of the premises being under the control of the banker and thus not accessible to the assessee.

Passing of the Adjudication Order

Based on the returned postal article and in the absence of any detailed reply to the show cause notice, the adjudicating authority proceeded to:

  • Finalize the proceedings; and
  • Pass the Adjudication Order dated 09.02.2024, along with the corresponding summary in the prescribed form.

Recovery Action and Debit from Personal Bank Account

Following the adjudication:

  • A Recovery Notice dated 20.05.2024 (Annexure-F) was issued, purportedly under the GST provisions dealing with recovery of dues (including Section 79).
  • The assessee also placed reliance on its bank statement (Annexure-E), asserting that a sum of ₹25,00,000 had been recovered from the personal bank account of its representative, Sri Sreejith Kumar P.

The assessee argued that this debit from the personal account was connected with the GST demand arising out of the impugned adjudication order, and therefore, it must be allowed to contest the tax demand and justify or dispute such recovery.

Contentions of the Assessee

The learned counsel for the assessee, Sri E. I. Sanmathi, advanced the following key arguments:

  • Lack of proper opportunity:

    • Only a partial response could be given to the earlier Form GST DRC-01A because of the financial enforcement measures taken by the banker.
    • The subsequent show cause notice dated 28.12.2023 was never effectively served on the assessee due to the premises being under lock and key by the banker, which explained the postal remark that the assessee had left without instruction.

  • Inability to operate from business premises:

    • The premises were under the banker’s possession, and hence the assessee had no meaningful access, which affected its ability to receive notices and to respond.