Audit proceedings stayed as absence of mandatory notice under Section 65(3) rendered demand prima facie unsustainable

Case Details

• Case Title: M/s Saboo Tor Pvt. Ltd. vs. State of H.P. and others

• Court: High Court of Himachal Pradesh

• Petition No.: CWP No. 13383 of 2024

• Date of Judgment: 22 November 2024

• Category of Dispute: Validity of GST Audit Proceedings / Input Tax Credit Demand

• Relevant Sections: Section 65(3), Section 74, Section 142(1)(a) of CGST Act; Rule 100(2), Rule 142(1)(a) of CGST Rules

Facts (Para refs: Order, pp. 2–4)

The petitioner, M/s Saboo Tor Pvt. Ltd., challenged audit proceedings initiated for FY 2019–20 under Section 74 of the CGST Act. The department issued a notice in Form GST DRC-01 (Annexure P-1) dated 24.05.2024, followed by an order dated 12.09.2024 (Annexure P-3). The petitioner contended that proceedings were initiated without issuing a prior notice under Section 65(3) of the CGST Act, which requires informing the registered person at least 15 working days before commencement of audit. The petitioner relied upon an earlier Division Bench ruling in CWP No. 1793 of 2024, where absence of a proper Rule 99 notice (Form AMST-10) led to a stay of proceedings.

Questions (Para refs: pp. 4–5)

The principal question before the Court was whether the issuance of Form GST DRC-01, invoking Rule 100(2) and Rule 142(1)(a), without a valid Section 65(3) audit notice, was sufficient to sustain audit-based proceedings and consequential demand under Section 74.

Observations (Para refs: pp. 5–7)

The Court noted that Section 65(3) mandates prior intimation of audit by a proper notice, not less than 15 working days before its commencement. The notice issued to the petitioner was in Form DRC-01, but that format relates to assessment and demand, not audit. Rules 100(2) and 142(1)(a) are applicable post-assessment, not at the audit initiation stage. The State’s counsel could not show any compliance with Section 65(3) requirements. Accordingly, the Court held that prima facie, the case stood on the same footing as CWP No. 1793 of 2024, where proceedings were stayed due to procedural lapses.

Judgment (Para refs: pp. 7–8)

The High Court held that since no valid notice under Section 65(3) was issued, a prima facie case existed in favour of the petitioner. Consequently, further proceedings pursuant to notice dated 24.05.2024 (Annexure P-1) and order dated 12.09.2024 (Annexure P-3) were stayed for FY 2019-20 under Section 74 of the CGST Act.

Bench: Justice Vivek Singh Thakur & Justice Rakesh Kainthla

Table of Cases Referred

Between Fine Lines

This ruling highlights that GST authorities must strictly comply with Section 65(3) when initiating audits. Absence of a 15-day prior notice renders the entire audit exercise vulnerable to judicial stay, even if subsequent DRC-01 notices are issued. For taxpayers, this establishes a strong ground to challenge demands arising from improperly commenced audits.

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