Karnataka HC Quashes GST Demand Order: Same Officer Cannot Conduct Audit and Adjudication

The Karnataka High Court has cancelled a GST demand order that was issued without the presence of a real estate developer from Mangaluru. This decision significantly benefits the developer by overturning the order that required them to pay a substantial tax amount.

The court held that the same officer could not issue audit observations and adjudicate GST show-cause notice proceedings, as this constituted a breach of legal procedure and the principles of natural justice. Justice S.R. Krishna Kumar, who headed the bench, emphasized the procedural issue, stating that a single officer should not be tasked with both conducting an audit and issuing adjudication orders. To address this lapse, the Court has mandated that the proceedings, which have been referred back, must be assigned to a distinct and separate adjudicating authority.

The case arose from a show-cause notice issued by the Department, aiming to impose GST on the sale of completed immovable property for the Financial Year 2017-18. The real estate developer argued that, based on Entry 5 of Schedule III of the GST Act, the sale of completed buildings—provided that the necessary completion certificate has been obtained—should not be classified as a taxable supply.

The assessing officer initially issued an audit observation on March 20, 2023, followed by a show-cause notice. The applicant claimed this notice was issued without proper jurisdiction. Due to unavoidable circumstances, the applicant was unable to respond to the show-cause notice, leading to an ex parte order dated December 23, 2023, which directed the payment of GST, interest, and penalties.

The developer contested the subsequent recovery proceedings initiated before the JMFC Court, Mangaluru, asserting they were premature and illegal. The department indicated that the State would not object if the Court chose to set aside the ex parte order and remit the case for reconsideration. The representative also clarified that, if the case were remanded, it would be reassigned to a different officer, one who was not involved in the initial audit observation or order, to prevent any procedural bias.

The court accepted the applicant's appeal that they were not given a fair chance before the demand order was passed. Considering the procedural irregularity and the requirement for a fair hearing, the court ruled that the case needed a fresh adjudication. The court further considered the claim that the same officer could not both conduct an audit and issue the adjudication orders and ensured that a new adjudicating authority would manage the remanded proceedings.

The High Court quashed the order in the original and related recovery proceedings. The Joint Commissioner of Commercial Taxes is required to assign the case to any officer and not to the previous DCCT (Audit-3). The matter is remitted to the stage of submitting a reply to the SCN on July 15, 2023. All statutory claims might be claimed by the applicant, including the argument that the sale of completed immovable property is not under the scope of GST. A new chance of hearing should be given by the new officer. The applicant must appear before the newly assigned officer on December 8, 2025; failing to do so, the High Court’s order will stand automatically recalled.