Orient Traders VS The Deputy Commissioner Of Commercial Taxes

In this petition, the petitioner has approached the court seeking several significant judicial remedies concerning issues that have arisen in relation to their compliance with the Goods and Services Tax (GST) law. The petitioner, who is engaged in the business of supplying machinery, mechanical appliances, parts, and providing services related to their erection, commissioning, and installation, has filed this petition to address grievances related to their GST returns for specific periods during the financial year 2017-18.

Firstly, the petitioner has requested the court to issue a Writ of Mandamus. A Writ of Mandamus is a court order compelling a public official or authority to perform a duty that is legally mandated. In this case, the petitioner is asking the court to direct Respondent No. 1, who is likely a GST authority or a related government official, to allow the petitioner to rectify the GST returns that were filed for the months of July 2017 and March 2018. The petitioner’s request to rectify these returns suggests that they have identified errors or discrepancies in the originally filed returns, which they believe need to be corrected to reflect the true state of their transactions during those months. The exact nature of these errors is not detailed, but the petitioner likely contends that the corrections are necessary to ensure compliance with the law and to avoid any undue financial or legal consequences.

In addition to the Writ of Mandamus, the petitioner is also seeking a Writ of Certiorari. This type of writ is typically issued by a higher court to quash or nullify the decision or order of a lower court or authority. The petitioner is asking the court to quash an Audit Report dated August 27, 2021, which was issued by Respondent No. 1 and bears the reference number 3207/27.08.2021. The petitioner’s request to quash this audit report indicates that they believe the report was either issued improperly, contains erroneous findings, or was based on a flawed assessment process. The audit report likely outlines discrepancies or issues in the petitioner’s GST returns, which could potentially result in additional tax liabilities, penalties, or other adverse consequences for the petitioner. By seeking to have this report quashed, the petitioner is attempting to invalidate its findings and avoid any negative implications it might have.

Furthermore, the petitioner has also requested the court to pass any other orders, writs, or directions that it deems appropriate based on the facts and circumstances of the case. This is a broad request that allows the court to consider any additional remedies that might be necessary to address the petitioner’s grievances fully. The petitioner emphasizes that any such orders should be in the interest of justice and equity, suggesting that they believe the current situation is unfair or unjust and requires judicial intervention to correct.

The background of this petition is rooted in the petitioner’s submission of GST returns in the prescribed Form GSTR 3-B for the financial year 2017-18. These returns are mandatory for businesses registered under the GST regime, and they summarize the monthly or quarterly transactions, including sales, purchases, and tax paid. The petitioner’s compliance with this requirement is not in dispute, but the subsequent actions of the tax authorities have led to the current legal challenge.

On January 20, 2021, Respondent No. 1 issued a notice to the petitioner, initiating a Desk Audit. This audit process involved a request for the petitioner’s books of accounts, with a directive for the petitioner to attend a meeting or audit session. A Desk Audit typically involves a review of a taxpayer’s records and documents by the tax authorities to ensure compliance with tax laws. The issuance of this notice indicates that the tax authorities had identified potential issues or discrepancies in the petitioner’s GST returns that warranted further investigation.

The petitioner’s response to this notice and the subsequent audit report forms the crux of this petition. The petitioner appears to believe that the audit findings are incorrect or that the audit process itself was flawed, leading them to seek judicial intervention. By requesting the rectification of their GST returns and the quashing of the audit report, the petitioner is essentially seeking to correct what they perceive as errors in the administrative handling of their tax affairs.

In summary, the petitioner’s case revolves around their efforts to amend past GST returns, contest the findings of an unfavorable audit report, and seek broader judicial remedies to protect their interests. The court’s decision in this matter will likely focus on whether the petitioner has the right to rectify their returns, the validity of the audit report issued by the tax authorities, and the broader implications of ensuring that the tax compliance process is both fair and accurate. The outcome of this case could have significant implications for how tax authorities conduct audits and handle requests for rectification of tax returns under the GST regime.

On February 12, 2021, in response to the notice issued by Respondent No. 1, the petitioner’s duly authorized representative appeared before the tax authorities on multiple occasions. During these meetings, the representative provided the necessary books of accounts and records for verification. This was in compliance with the notice, which required the petitioner to submit their financial documents as part of the ongoing Desk Audit initiated by the tax authorities.

Subsequently, on July 12, 2021, Respondent No. 1 escalated the audit process by issuing an Audit Enquiry under Section 65(6) of the Karnataka Goods and Services Tax Act, 2017 (KGST Act), in conjunction with Rule 101(4) of the Karnataka Goods and Services Rules, 2017. This Audit Enquiry further elaborated on the initial concerns raised during the Desk Audit and formally requested the petitioner to file a detailed response to the observations made by the tax authorities. The petitioner was given a deadline of seven days to respond, indicating the urgency and seriousness with which the tax authorities were treating the matter.

The petitioner, in compliance with this directive, duly filed their response to the audit enquiry within the stipulated timeframe. In the process of reviewing the tax returns filed for the financial year 2017-18, the petitioner discovered certain inadvertent errors and mistakes that had been made in the original filings. Specifically, the petitioner realized that there had been a misclassification of Input Tax Credit (ITC) in the returns for July 2017 and March 2018. This error pertained to ITC relating to imports under the Integrated Goods and Services Tax (IGST), where the credit had mistakenly been claimed under Column No. 4A(5) instead of the correct Column No. 4A(1).

This misclassification, according to the petitioner, was due to oversight and inadvertence during the preparation and submission of the GST returns. The petitioner identified this as a significant error because the correct classification of ITC is crucial for accurate tax reporting and compliance. Misreporting ITC can lead to discrepancies in the tax liability calculations and potentially result in penalties or additional tax assessments by the authorities.

The petitioner’s discovery of this error during the audit process highlights the complexities involved in GST compliance, particularly in the early years of its implementation when businesses were still adapting to the new tax regime. The petitioner’s realization that an error had been made and their subsequent attempt to rectify it forms a critical part of their defense in the ongoing audit and the related legal proceedings. The petitioner likely argues that this was a genuine mistake rather than an intentional attempt to evade tax, and they are seeking the court’s permission to correct the error retrospectively.

The issue at hand is whether the court will allow the petitioner to rectify these errors in their GST returns for the financial year 2017-18, thereby potentially avoiding the negative consequences of the audit findings. The petitioner’s case hinges on demonstrating that the error was indeed inadvertent and that rectification is necessary to ensure fairness and accuracy in their tax filings. This request is particularly significant given that the audit enquiry has already been issued, indicating that the tax authorities may have already formed preliminary conclusions about the petitioner’s compliance based on the original, incorrect filings.

The petitioner explains that they inadvertently misclassified the Integrated Goods and Services Tax (IGST) related to imports for two specific periods—July 2017 and March 2018—when filing their GST returns. Specifically, the petitioner mistakenly recorded the import IGST for July 2017 as local IGST and the import IGST for March 2018 as local Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). This error occurred when the figures were entered in the incorrect columns on the GST returns.

As a result of this misclassification, there was a discrepancy between the data reported in the GSTR-3B forms (which summarize the tax liability) and the GSTR-2A forms (which capture details of inward supplies). The mismatch caught the attention of the Deputy Commissioner of Commercial Taxes (DCCT), the first respondent in this case, during their audit. The audit report subsequently concluded that the Input Tax Credit (ITC) claimed by the petitioner was ineligible and should be disallowed due to the incorrect classification.

Recognizing the mistake, the petitioner sought to rectify the error by requesting permission to submit a revised input table that would correct the misclassified amounts. On July 29, 2021, the petitioner formally filed this request with the DCCT. However, the DCCT rejected the petitioner’s request to amend the returns, refusing to allow the correction of the erroneous data.

Following the rejection, the DCCT proceeded to issue an audit report on August 27, 2021, which upheld the disallowance of the ITC claimed by the petitioner. Based on this report, a show cause notice was issued to the petitioner on January 17, 2022, under Section 73(1) of the Karnataka Goods and Services Tax (KGST) Act and the Central Goods and Services Tax (CGST) Act. The show cause notice formally proposed the disallowance of the ITC that had been claimed incorrectly due to the errors committed by the petitioner in the GST filings.

Faced with the disallowance of a significant portion of ITC and the potential financial and legal repercussions, the petitioner has now approached the court through the present petition. The petitioner is seeking judicial intervention to rectify the GST returns and overturn the disallowance of ITC as proposed in the audit report and the subsequent show cause notice. The petition underscores the petitioner’s argument that the errors were inadvertent and that fairness and justice require allowing the petitioner to correct these errors retrospectively to avoid undue penalties and liabilities.

The court heard the arguments presented by the learned Senior Counsel representing the petitioner and the learned Additional Government Advocate (AGA) appearing for the respondents, representing the State.

The Senior Counsel for the petitioner emphasized several key points during the proceedings. Firstly, he reiterated the various contentions laid out in the petition and referred to the relevant material on record to support the petitioner’s case. He argued that the errors made by the petitioner in filing the GST returns were committed during the early stages of the Goods and Services Tax (GST) regime, which had been newly implemented from July 1, 2017. The Senior Counsel highlighted that the introduction of GST represented a significant shift in the indirect tax landscape, requiring businesses to adapt to a new system that involved filing multiple returns in unfamiliar formats.

Given the quantum change in the tax regime and the complex requirements imposed on taxpayers, the Senior Counsel contended that the errors made by the petitioner were minor, inadvertent, and entirely bona fide. He argued that these mistakes were a result of the challenges faced by taxpayers during the transition to the new GST system, and that such errors should be viewed with leniency by the court. He further asserted that allowing the petitioner to rectify these errors at this stage would not lead to any loss of revenue for the government nor would it have any cascading effect that might disrupt the overall GST framework.

In addition, the Senior Counsel pointed out that during the financial year 2017-18, the filing of returns through Form GSTR-3B was intended only as a temporary or stop-gap measure. This was because the government had not yet operationalized the statutory returns that were supposed to be filed under Forms GSTR-2, GSTR-2A, and GSTR-3, as prescribed by the GST Act. He noted that the auto-fill facility or auto-setter mechanism, which was later introduced to automatically populate certain fields in the returns, was not available during this period. This lack of automated support added to the difficulty taxpayers faced when filing their returns, contributing to the errors that occurred.

The Senior Counsel’s arguments were designed to persuade the court that the petitioner’s errors were understandable given the circumstances, and that a lenient and equitable approach should be adopted. He emphasized that rectifying these errors would not have any adverse impact on the government’s revenue collection and would be in line with the principles of fairness and justice, considering the nascent stage of the GST system at the time the errors were made.

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