Legal Notes by Arvind Datar: The teasing illusion of alternative remedy

The most common ground for rejecting a writ petition at the initial stage is the existence of an alternative remedy. The unsuccessful petitioner is directed to pursue the statutory appeal or revision that is available to him.

In the case of a show cause notice, he is called upon to respond to the notice and appear before the adjudicating authority. It is a matter of regret that many High Courts make this the rule without considering whether the statutory remedy is efficacious at all. This is more so where the right to file an appeal is subject to making a pre-deposit of part of the tax or duty. In tax matters, the oft-quoted reason to dismiss the writ is that the interest of the Revenue has to be protected or that the government cannot run on bank guarantees.

In the recent past, there have been high-pitched demands that are utterly disproportionate to the sales turnover of the assessee. Under certain statutes, particularly Section 74 of the CGST Act, 2017, tax can be recovered for a five-year period only when there is suppression, fraud, or wilful default on the part of the assessee. Sadly, most High Courts do not note that the five-year period is invariably invoked, despite there being no suppression or any wilful default. There could be a mere difference of opinion on the classification of a product or the quantum of duty that is payable. There are genuine disputes that merit recovery only under Section 73 of the CGST Act, 2017 for a five-year period.

The fact that notices alleging suppression and fraud are indiscriminately issued is evidenced by the failure of the GST Amnesty Scheme, 2024. The Scheme applied only to assessees who had received notices under Section 73, when there was no suppression, fraud or wilful default. It came to light that very few notices were issued under Section 73 and there was indiscriminate reliance upon Section 74. Thus, there were hardly any cases to settle. The current provision enables the recovery of duty for 42 months in all cases. It is often forgotten that GST is an indirect tax and the assessee can pass it on to the consumer, but if the taxes are sought to be recovered after a period of 42 months, it will be impossible for any assessee to bear this burden, particularly if the rate of tax is 18% or above.

The demands for the past 5 years can deliver a crippling blow to the business of any assessee, particularly those in the Micro, Small and Medium (MSME) sector. There are cases where the turnover of the assessee is around ₹4 crore, but the tax demand is more than ₹15 crore. In several cases, there is a blanket denial of input tax credit, freezing of bank accounts and other coercive steps. In other cases, a particular business practice that has been accepted by the tax department for several years is suddenly sought to be unsettled. In other cases, there is a hopeless lack of jurisdiction. Despite the glaring errors and even lack of jurisdiction, it is regrettable that several High Courts are reluctant to interfere, particularly where the tax demands are absurdly high. Ironically, it is only where the tax demands are substantial that the interference at the High Court level is vitally necessary.

While the protection of the tax revenue of the State is indeed important, it is time for courts to seriously consider the need to protect the taxpayer, particularly those in the MSME sector. Often, the small businessman is unable to even pay the pre-deposit amount. The courts must examine the quantum of the demand and the corresponding turnover of the assessee, and whether the demand for the past 5 years can be justified.

The courts must also note that once a show-cause notice is issued, it is invariably confirmed in 99% of the cases. Even if the assessee has an excellent case on merits, or the issue is covered by a Supreme Court decision, the demand is invariably confirmed. Sadly, for any such order passed, no officer is accountable even when the order is in the teeth of a binding Supreme Court or High Court decision.

The other practical difficulty is the cases where assessees have replied to the show-cause notices and tried to explain that the demand is untenable. They do not file a writ petition at the SCN stage. As expected, the demand is invariably confirmed and if a writ is filed thereafter, the ground for dismissal is that an appellate remedy is available. It is seen that several High Courts are reluctant to even examine the order and interfere, even when an assessing officer has failed to follow a binding ruling of the Supreme Court or the High Court or his order is contrary to the statutory provision.

Lastly, the worst blow is for a writ to be dismissed on the ground of an alternate remedy at the stage of final hearing or before the Supreme Court. It is submitted that once a particular bench has entertained the writ petition and directed that a counter be filed, the courts ought not to dismiss a writ on the ground of alternative remedy; the matter should then be decided on merits.

A large part of the problem can be resolved and the damage done to ease of doing business can be avoided if there is a clear direction at the highest level to issue show-cause notices only when there is a genuine dispute or clear evidence of fraud, suppression and willful default. Show-cause notices are, unfortunately, issued just to meet revenue targets. The authorities do not realise that there is a huge disincentive to set up manufacturing units in India because of uncertainty on the tax front. When the High Courts fail to interfere even in cases where their intervention is appropriate, there is an indirect sanction of departmental action even when it is contrary to law. The alternative remedy is a mirage or just a teasing illusion.

Arvind P Datar is a Senior Advocate practising in the Supreme Court of India.