Issuance Of Show Cause Notice Under Section 74 CGST Act Does Not Warrant Writ Interference Merely Due To Alleged Inadequacy In Audit Reply Consideration: Delhi High Court

"The issuance of a show cause notice, by itself, does not amount to determination of the liability of the Petitioner. The allegations and proposals contained therein remain to be adjudicated upon by the competent authority in accordance with law." Delhi High Court, in a ruling dated September 29, 2026, held that a writ petition challenging a Demand-cum-Show Cause Notice (SCN) issued under Section 74 of the CGST Act is premature when the petitioner has a full-fledged opportunity to contest the findings before the adjudicating authority.

A bench of Justice Anil Kshetarpal and Justice Bharat Parashar observed that the statutory adjudicatory process provides an adequate mechanism to address grievances regarding audit procedures, including the alleged failure of authorities to properly consider an assessee's reply.

The petitioner, Dhruv Medicos Pvt Ltd, challenged an Audit Report and a subsequent Show Cause Notice issued under Section 74 of the CGST Act, alleging procedural lapses. Specifically, the petitioner contended that an amount of over Rs. 40 lakhs deposited through Form GST DRC-03 was extracted under coercion and that the audit authorities failed to consider its detailed objections, merely labeling them as "non-satisfactory." The petitioner sought to interdict the ongoing adjudicatory proceedings on these grounds.

The primary question before the court was whether the issuance of a Show Cause Notice warrants judicial interference under Article 226 of the Constitution of India if the petitioner contends that the audit reply was not adequately considered by the proper officer under Rule 101(4) of the CGST Rules. Additionally, the court addressed whether allegations of coerced tax payments could be adjudicated at the SCN stage or must be raised before the adjudicating authority.

The court emphasized the fundamental distinction between the audit stage and the subsequent adjudicatory phase under the CGST Act. While acknowledging that Rule 101(4) mandates the consideration of a taxpayer's reply, the bench clarified that the adequacy of that consideration is a matter for the adjudicating authority to determine during the proceedings initiated by the Show Cause Notice.

Distinction Between Audit And Adjudication

The court noted that the issuance of an SCN is not a final determination of liability but rather the commencement of a statutory process. The bench observed that the petitioner is entitled to raise all substantive and procedural objections, including the alleged non-consideration of its audit-stage reply, directly before the competent authority.

Court Rejects Premature Intervention

The bench held that it would not be appropriate for the High Court to examine the underlying tax liability or quash the SCN based on the petitioner's claim that the reply was dealt with cursorily. The court maintained that the statutory adjudicatory mechanism must be allowed to run its course, as the petitioner remains free to place its entire case on record during the adjudication process.

Judicial Caution Regarding Merits

The court explicitly refrained from commenting on the factual merits of the petitioner's claims. Whether the payment made via Form GST DRC-03 was indeed coerced, or whether the tax demands are barred by limitation, remains an open question for the adjudicating authority to decide independently.

"It is clarified that this Court has not examined the merits of any of the aforesaid objections. No opinion is being expressed as to whether the payment of Rs.40,10,153/- was voluntary or was made under coercion."

Closing of Contempt Proceedings

Regarding the parallel contempt proceedings initiated against the respondents for alleged non-compliance with an interim order, the court noted that the respondents had provided a satisfactory explanation. The bench observed that the order in question had not been brought to the personal notice of the officer concerned at the time of the alleged violation. Consequently, the court closed the contempt proceedings and relegated the parties to the adjudication process.

In its conclusion, the High Court directed that the petitioner is at liberty to raise all available objections, including those related to the audit process and computation of liability, before the Adjudicating Authority. The court ordered that the Adjudicating Authority must consider these objections independently and in accordance with the law, without being influenced by the fact that the writ petition was filed.

Date of Decision: 29 September 2026