Section 61 of the CGST Act read with Rule 99 of the CGST Rules creates a tightly circumscribed framework for scrutiny of GST returns, and recent High Court rulings have repeatedly struck down scrutiny‑driven demands where this framework was breached. The courts have emphasised both the obligation of the assessee to reply to scrutiny notices and the correlative duty of the proper officer to deal with such replies before resorting to demand provisions like Section 73 or 74.
Statutory framework
Section 61 authorises the proper officer to scrutinise returns and related particulars filed by a registered person to verify their correctness and, where discrepancies are noticed, to communicate the same in the prescribed manner. Rule 99 operationalises this by prescribing the procedure and forms ASMT‑10, ASMT‑11 and ASMT‑12 for issuing discrepancies, taking explanations on record and either accepting or pursuing further action.
Core judicial principles 2024–25
Across 2024–25 decisions, High Courts have underscored that once a scrutiny notice is issued, the assessee must file a reasoned response, but any subsequent action under Section 73 can be taken only after due application of mind to that response. Failure to consider the reply to ASMT‑10 has been treated as a jurisdictional error, rendering ensuing Section 73 proceedings unsustainable.
Courts have also held that where the officer, after scrutiny, records acceptance of the explanation and drops proceedings under Section 61(2) through ASMT‑12, the same officer cannot later invoke Section 73 or 74 on identical grounds without cogent reasons. Such “second innings” on the very issues earlier accepted has been characterised as impermissible and beyond the statutory scheme.
Case‑wise distilled ratios
- In Jaguar Land Rover India Ltd (Bombay HC), the court declined to entertain a belated challenge to the show cause notice and instead directed the assessee to respond to the notice on merits, reinforcing that the SCN stage is the primary forum for all defences.
- In Qualicum Solutions (Orissa HC), initiation of Section 73 proceedings without dealing with the reply to ASMT‑10 was held to be without jurisdiction, leading to the order being set aside.
- In J.S.B. Trading Co. (P&H HC), once proceedings under Section 61(2) were formally dropped, later reference to the explanation as “not satisfactory” and further action under Section 74 was found self‑contradictory and vitiated the entire chain of proceedings.
- In Goverdhandham Estate (Rajasthan HC), issuance of a Section 73 notice after acceptance of the explanation and issuance of ASMT‑12, without recording fresh dissatisfaction, was held contrary to the scheme of Sections 61 and 73.
- In Sri Ram Stone Works & Ors (Jharkhand HC), scrutiny notices under Section 61 premised solely on comparing sale price of stone products with alleged market price, without alleging sham transactions, were held to be beyond the scope of scrutiny and consequently quashed.
Practical implications for scrutiny
These rulings collectively affirm that scrutiny under Section 61 is confined to examination of the correctness of returns and cannot be converted into a roving valuation or anti‑avoidance enquiry based on perceived market prices. Once an assessee’s explanation is accepted and proceedings are dropped, the same discrepancies cannot ordinarily be resurrected through Section 73/74 notices, and any such attempt is vulnerable to challenge as being without jurisdiction or an abuse of process.
FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.