AN ASSESSMENT OF ASSESSMENT PROVISIONS

Tax
laws are structured on three key pillars – levy, assessment and collection.
Assessment is the link between levy and collection of taxes. Assessment
provisions under indirect tax laws, especially excise law, have evolved from
the era of officer control and assessment to self-assessment.

With
its introduction in 2017, GST law is now about to change gears and enter the
phase of ‘Assessments’. This phase operates as a litmus test over the extent of
percolation of the law into the system both at the Government’s and the tax
payer’s end. Tax payers are about to experience challenges on the front of
assessments, audits and adjudications and this article examines some of the
issues involved.

ASSESSMENT – AUDIT – ADJUDICATION

Though
the above terms are used inter-changeably, they represent distinct activities
in any legal enforcement. The GST law has made specific provisions towards each
of these aspects under its machinery provisions, i.e., Chapter XII –
Assessment; Chapter XIII – Audit; and Chapter XV – Demands & Recovery.

Assessment
has been defined u/s. 2(11) as any ‘determination of tax liability’. Advanced
Law lexicon explains assessment as ‘determination of rate or amount of
something such as tax, damages, imposition of something such as tax or fine
according to an established rate’.

Audit
u/s. 2(13) involves an elaborate exercise of examination of records, returns
and other documents maintained to verify correctness of taxes paid / refunded
and assess compliance under the Act.

Adjudication
has not been defined but the term ‘Adjudication authority’ has been defined as
an authority that ‘passes any order or decision under the Act’. Advanced
Law lexicon explains adjudication as the process of ‘trying and determining
a case judicially’.

Assessment
essentially means computation of the taxes under the law. Audit, on the other
hand, is a special procedure involving desk and / or on-site review of records.
Adjudication involves a judicious process of deciding the questions of law
which emerge from the assessment and audit processes. Assessment and audit are
the processes which lead to the adjudication function and these three functions
come under the overall umbrella of ‘Assessment’ in a tax law.

ASSESSMENT SCHEME

Chapter
XII of the GST law provides for specific instances where an assessment would be
performed:

Any
assessment initiated under these sections would have to meet the prerequisites
of the section and the authority would have to operate within the confines of
these sections while exercising its powers. For example, scrutiny assessment of
the returns u/s. 61 can be initiated only to verify the correctness of the
returns filed and examine the discrepancies noticed therein. The assessing
authority is under an obligation to provide the reasons for invoking section 61
and such reasons should emerge from the returns filed for the period under
consideration. It cannot be initiated for conducting a detailed audit of the
books of accounts of the assessee. Such powers rest within the domain of
sections 65 and 66 only. Similarly, an assessing authority can invoke section
62 only for the months for which the returns are not filed and cannot spread
the assessment for other periods.

Further,
the provisions only provide the circumstances under which assessments can be
initiated. The provisions are not a complete code for enforcement of the demand
and its recovery. Once the assessments are duly initiated and the examination
of records report a discrepancy, the officer would have to enter adjudication
provisions u/s. 73 / 74 for the recovery of tax dues. Where the officer
concludes that the taxes are duly reported and paid, adjudication need not be
invoked and an assessment order confirming the conclusions would be sufficient.

AUDIT SCHEME

Chapter
XIII provides for conducting a regular audit (65) or a special audit (66).
Going by earlier experience where audit provisions in the rules were
challenged, the legislature has introduced these powers in the main enactment
itself allaying any doubts over the jurisdiction to conduct audits. There is no
time limit to conduct an audit of an assessee. However, any demands arising
from these audits would have to follow the process u/s. 73 and 74 which have an
outer time limit of 3 and 5 years, respectively. The key features of regular
and special audit are as follows:

While
powers of audit are much wider in scope in comparison with assessment
provisions, they, too, are not unfettered powers. Audit officers cannot, in the
garb of audit, perform an inspection of the assessee’s premises. The audit
officers would have to restrict themselves to the transactions recorded in the
books of accounts and their conformity with the returns filed. For example, an
audit officer visiting the premises cannot perform a physical verification of
the stocks and its comparison with books of accounts; an officer cannot perform
seizure of stocks, records, etc., and does not possess powers equivalent to the
Cr.P.C., 1973 which are conferred upon inspecting officers. Where such
discrepancies are identified, the audit officer can at the most report the same
internally for necessary action by the empowered officers. Like assessment
provisions, where the audit officers conclude that demand of taxes has arisen,
it would have to initiate proceedings u/s. 73 or 74 as appropriate.

ADJUDICATION SCHEME

It
is evident that any assessment / audit (except section 62 / 63) involving a
demand would culminate into an adjudication proceeding u/s. 73 or 74. The said
sections provide for issuance of a show cause notice proposing a demand and are
followed by an adjudication proceeding over the issue involved. The section can
be invoked under the following instances as tabulated below:

The
key features of sections 73 and 74 are as follows:

The above scheme is substantially
similar to section 11A of the Central Excise Act and section 73 of the Finance
Act. The critical difference is with respect to time limitation. While the
erstwhile laws provided for a time limit of initiation of adjudication
proceedings and no outer time limit for its completion, the GST law provides
for the time limit over the conclusion of the said proceedings. The
adjudication proceedings are deemed to be concluded where the order is not
issued within 3 / 5 years.

The
other critical difference is with respect to recovery of erroneous input tax
credit which was contained in rule 14 of the erstwhile rules. Consequent to
inclusion of input tax credit provisions in the Act itself, sections 73 / 74
provide for recovery of input tax credits wrongly availed / utilised. Input tax
credit which has been wrongly availed and not utilised is also recoverable from
the assessee. Whether interest is applicable on such recovery is a different
aspect and needs to be viewed u/s. 50.

OTHER MISCELLANEOUS ADJUDICATION PROVISIONS (SECTION 75)

The
law-makers have scripted many settled legislative principles in this provision.
Most of the provisions have their roots in settled principles of natural
justice, fairness, double jeopardy, speaking orders, etc.

PRINCIPLES ON ISSUANCE OF SCN

An
SCN is the first step taken by the Revenue to recover any tax demands. It is
the basic and most crucial document in the entire adjudication process. Certain
settled principles of adjudication under the Excise and Service Tax law would
have applicability even under the GST regime:

PRINCIPLES FOR DIFFERENTIATING FRAUD AND NON-FRAUD CASES

Wilful
Misstatement, Suppression and Fraud

These
terms have been a matter of considerable litigation since failure of the
Revenue to meet the situations contemplated under these terms invalidated the
entire proceedings irrespective of the merits of the case. While Revenue has
applied these terms mechanically, the assessee has banked upon these terms to
defendits case.

In
Cosmic Dye Chemicals vs. CCE (1995) 75 ELT 721 (SC), the
Supreme Court explained these terms as follows:

Fraud
and collusion – as far as fraud or collusion are concerned, it is evident that
intent to evade duty is built into these very words.

Misstatement
or suppression – so far as misstatement or suppression of facts are concerned,
they are clearly qualified by the word wilful, preceding the words misstatement
or suppression of facts, which mean intent to evade duty.

The
Supreme Court in CCE vs. Chemphar Drugs & Liniments 1989 (40) ELT 276
(SC) observed that fraud, etc., is essentially a question of fact
emerging from a positive act. Non-declaration of any information in the returns
without any deliberate intention does not amount to suppression. Similarly, the
Supreme Court in Padmini Products vs. CCE 1989 (43) ELT 795 (SC)
held that mere inaction or non-reporting does not amount to suppression of
facts.

Suppression
has now been defined in Explanation 2 to section 74 which states that any
failure to report facts or information required to be disclosed in returns,
statements or reports would amount to suppression of facts. This definition has
implicitly removed the requirement that suppression should be wilful and
consequently any failure to report required information would amount to
suppression. However, if one observes section 74, suppression should be
accompanied with intention to evade payment of tax and it appears that despite
its open-ended definition, Revenue has to still establish tax evasion in cases
of suppression.

In
Tamil Nadu Housing Board vs. CCE 1991 (74) ELT 9 (SC), the
Court stated that an intention to evade would be present only in cases where
the assessee has deliberately avoided the tax payment. Cases involving
ambiguity in law or multiple interpretations in laws were not cases of tax
evasion.

The
burden of proof that circumstances of the case warrant invocation of extended
period of limitation is on the Revenue and these circumstances should be
discernible from the records of proceedings against the assessee.

PRINCIPLES IN ADJUDICATION

Adjudicating
officers are quasi judicial officers and have to follow settled legal
disciplines in the process of adjudication. Some of the principles to be
followed are:

FIXATION OF MONETARY LIMITS FOR ADJUDICATION

CBEC
in its Circular No. 31/05/2018-GST dated 09.02.2018 has prescribed monetary
limits for optimal distribution of work relating to issuance of SCNs.  The following table provides the monetary
limits for adjudication:

The
Supreme Court in Pahwa Chemicals (P) Ltd. vs. CCE – 2005 (181) ELT 339
(SC), held that administrative directions of the board
allocating different works to various classes of officers cannot cut down the
jurisdiction vested in them by statute and may be followed by them at best as a
matter of propriety. Issuance of SCN or adjudication contrary to such
directions cannot be set aside for want of jurisdiction, especially as no
prejudice is caused thereby to assessee.

CRITICAL MATTERS IN ADJUDICATION (SECTIONS 73 AND 74)

A)  Whether reversal of input tax credit is
recoverable u/s. 73 and 74?

As
the recovery provisions are limited to four scenarios, any recovery outside the
scope of the above terms is without any authority. The Supreme Court in CCE
vs. Raghuvar (India) Ltd. 2000 (118) E.L.T. 311 (S.C.) held that
section 11A is not an omnibus provision to cover any and every action to be
taken under the Act. The said section will apply only when the circumstances
specified therein are triggered.

A
typical example would be the case of reversal of common input tax credit
required in terms of section 17(1)/(2). Strictly speaking, provisions of
section 17(1)/(2) do not place a bar on availing input tax credit. Instead,
these provisions provide for a reversal of input tax credit in excess of what
is attributable to taxable supplies. Non-reversal does not amount to input tax
credits ‘wrongly availed’ or ‘wrongly utilised’. Hence there could be a
challenge on whether the Revenue has powers to invoke sections 73 / 74 to
recover input tax credit reversals under the said provisions. In the context of
Rule 57CC (parallel to Rule 6 of Cenvat Credit Rules and Rule 42 / 43 of GST
rules) which governed common inputs, the Tribunal in Pushpaman Forgings
vs. CCE Mumbai 2002 (149) E.L.T. 490 (Tri.-Mumbai)¹  held that payment of an amount is NOT ‘duty
or credit’ and in the absence of a specific provision to recover the same, the
proceedings are invalid.

B)  Whether reversal of transition credit is
recoverable u/s. 73 and 74?

The primary challenge for invoking
sections 73 and 74 for recovery of transition credit arises on account of the
definition of input tax credit u/s. 2(62) r/w 2(63) of the CGST Act. Recovery
of transitional credit could be on account of two reasons, (a) not meeting
erstwhile law conditions (e.g. not an input service, input or capital goods in
terms of Cenvat Rules, etc); and / or (b) not meeting transitional conditions
(e.g. not eligible duties defined under GST, first time credits to traders,
etc). There should be no doubt on the recovery of the former as the
non-compliance emerges under the Cenvat Rules and hence is governed by recovery
provisions of the said rules which are saved under the GST law. Once the said
amount is regularised under the erstwhile law, the transition claim stays
intact in terms of section 142. The latter, however, poses some challenge on
the recovery front.

Sections
73 / 74 can be invoked only for recovery of wrongfully availing / utilisation
of ‘input tax credit’. Input tax credit, by definition, is limited to the taxes
which are charged and paid under the IGST / CGST Acts only. The transition
provisions are a separate code by itself under Chapter XX and cannot be equated
to the input tax credit provisions under Chapter V. Transition credit is
directly credited to the electronic credit ledger and available towards discharge
of tax liabilities unlike input tax credits which have to pass the tests
prescribed in sections 17 and 18 of the GST law.

Now
Rule 121 of the transition provisions provides for recovery of such credit in
terms of sections 73 and 74 of the CGST Act. The parent provisions u/s. 140
delegate its powers to rules only for the limited purpose of prescribing the
manner of availing. The parent provisions do not authorise the Government to
prescribe the recovery provisions. Unlike the Cenvat Rules where availing of
input tax credit was itself in a delegated legislation, transitional credit is
contained in the enactment and cannot be recovered through a subordinate
legislation.

CBEC
Circular No. 42/16/2018-GST dated 13.04.2018 provides that Cenvat credit and erstwhile recovery of arrears of taxes
are recoverable as Central taxes in terms of section 142 of the CGST law. In
one case the Circular prescribes that one may invoke section 79 (such as
garnishee orders, etc.) for recovery, clearly bypassing the step of adjudication.
Circular 58/32/2018-GST dated 04.09.2018 has gone a step further and
stated that the same may be reversed as input tax credit while filing GSTR-3B.
The genesis of these conclusions appears to be hazy and the backdoor entry of
Rule 121 is open for challenge in the Courts.

C)  Whether an SCN can be issued where taxes are
fully paid prior to its issuance?

Sections
73 / 74 state that an SCN would be issued where taxes are ‘not paid’ or ‘short
paid’. While section 73 provides for waiver of the penalty, there is no such
waiver in cases covered u/s. 74. In many cases, the assessee discharges the
taxes prior to issuance of the SCN and the taxes are completely paid on the
date of issuance of the SCN. We also observe from the said section that the
notice should specify why the amount specified is not ‘payable’. Section 73(7)
also specifies that in case of any short payment, the SCN should be issued only
to the extent of the short payment. All these provisions indicate that an SCN
cannot be issued where taxes are fully paid prior to its issuance.

Historically,
the Revenue officers would raise the SCN proposing a demand and provide for an
appropriation of the tax already paid by the assessee against the proposed
demand. This practice would keep the demand outstanding until the appropriation
at the time of conclusion of the adjudication proceedings. Whether a similar
practice can be continued given that the provisions are borrowed from the
Central Excise law is a matter of detailed examination.

D)  Whether an SCN can be issued only towards
interest or penalty?

In
many cases, the assessee deposits the taxes but fails to compute the interest
on account of delayed payment of taxes. It has been held by various Courts that
interest is an automatic levy and does not require specific notice for its
recovery. Section 75(12) provides that in case of self-assessed tax, the amount
of interest remaining unpaid would be recoverable directly in terms of section
79 without issuance of a show cause notice. Therefore, there is no requirement
of any SCN proceeding to recover interest.

In
cases of fraud where taxes have been completely paid, the Revenue may invoke
adjudication proceedings u/s. 74 for recovery of penalty. As discussed above,
the said section provides only for four instances where the proceedings can be
initiated. It is only when the above conditions are satisfied that penalty can
be proposed against the assessee. Where taxes have been completely paid, none
of the four instances applies and there is a possibility to take a view that an
SCN cannot be issued merely for recovery of penalty. Whether the officer can
then directly invoke section 122(1) may be a matter of examination.

E)  What happens where multiple issues are
involved and some issues fall in the fraudulent basket while others fall in the
non-fraudulent basket?

The
examination of a case falling u/s. 73 / 74 has to be performed for each issue
on hand and not in its entirety. There could occur circumstances where some
issues genuinely arise on account of interpretation of law and some issues on
account of evasive acts. The time limitation of 3 / 5 years would have to be
examined for each issue on hand depending on which basket they fall into. The
officer cannot paint all issues with one brush and apply the time limit of 5
years for the proceedings as a whole. Once the issues are segregated, the
proceedings would be governed by the respective sections.

F)  Can parallel proceedings be conducted by two
officers either by Central / State workforce?

Section
6(2) of the GST law provides that any proceeding issued on a subject matter by
any officer would not be duplicated with another proceeding of an officer of
parallel rank. This provision is specific to the issue under examination. The
parallel administration can certainly raise other issues provided they have
jurisdiction to assess these in terms of the work allocation between the Centre
and the State administrations.

G)  Whether disclosure to Central officer still
results in suppression before the State officer and vice versa?

In
case prior disclosure of information is made to a Central authority, an issue
arises whether the State authorities can allege suppression of information. The
terms are merely an expression of the state of mind of the tax payer. Where the
tax payer has established bona fide in reporting the issue to the
jurisdictional officer, it can certainly pray that the case does not involve a
fraudulent act. Unless the assessee has specifically withheld information being
sought from a particular officer, it can claim itself to be excluded from the
above terms. In fact, it may be interesting for one to even examine whether
reporting of information in one State would amount to sufficient bona fide
in assessments of other States. These are issues which would emerge on account
of State-wise assessments and cross empowerment of administration under the
law.

H)  Tax experts are requested for their opinion on
the status of litigation as on balance sheet date in the context of
provisioning in terms of GAAP?

Departmental
audits / assessments are only inquiry proceedings over the tax dues reported by
the assessee and until a specific issue is red-flagged, such proceedings may
not fall within the domain of provisioning / contingency. But where the issue
is ascertained and adjudication proceedings are initiated by way of an SCN, the
tests of provisioning (enlisted below) would have to be performed for the
company:

The
term present obligation has been defined as an obligation whose existence as on
the balance sheet date is probable. Though an SCN is a mere
proposal, the term present obligation requires one to test the probability of
the demand in view of the SCN as on balance sheet date. An SCN is an indication
of a potential demand and the tax expert would have to weigh the issue for its
merits and judicial precedents for concluding on the probable exposure to the
company.

Going by the overall
architecture of the GST law and the work allocation, it appears that audit
would be conducted based on statistical sampling of the assessee, assessments
would be performed on case-specific non-compliance reports and both these
functions would then channel into adjudication proceedings for recovery of tax
dues from the assessee. The GST topography poses multiple hurdles in assessment
of tax payers. Cross empowerment and maintenance of uniformity in State level
assessments would be a game changer. Being a new turf, tax payers and Revenue
would have to traverse the path of assessments cautiously.