Court holds that audit commencement date reckons actual audit, final audit observations must follow opportunity to reply under CGST Rules
In a significant judgment dated September 30, 2026, the Kerala High Court, before Justice Ziyad Rahman A.A., set aside a show cause notice issued to The Alleppey Company Ltd. by the Assistant Commissioner of Central Tax and Central Excise. The case arose from a GST audit conducted under Section 65 of the Central Goods and Services Tax Act, 2017 (CGST Act), where the company challenged the validity of the audit proceedings and related show cause notice on grounds of procedural lapses.
The petitioner, a registered taxpayer under the CGST and Kerala State GST Acts, was issued an audit notice in January 2024 and submitted the requisite documents the same month. However, the actual audit on the petitioner's premises occurred only in late May 2024. The petitioner argued that since records were furnished in January, the audit should have concluded within three months by April 2024 under Section 65(4) of the CGST Act, rendering later proceedings time-barred.
The Court clarified that the "commencement of audit" for limitation purposes under Section 65(4) is the later of two events: when records are made available or when the audit is physically instituted at the business premises. Since the audit physically commenced on May 24, 2024, the limitation period started then, validating the audit completion in September 2024.
More crucially, the Court found that the audit procedures mandated under Rule 101(4) of the CGST Rules were not properly followed. The petitioner received a draft audit report and requested additional time to respond. Before any opportunity to reply to an audit note highlighting discrepancies (issued on July 16, 2024) was granted, a show cause notice (dated July 31, 2024) was issued. This show cause notice was based on preliminary observations and not on finalized audit findings. Subsequently, a final audit report was issued on September 3, 2024, but again without providing the petitioner an opportunity to submit objections.
The Court emphasized that Section 65(6) and Rule 101(4) require the proper officer to inform the registered person of discrepancies found during the audit and allow them to submit a reply before finalizing findings. The issuance of the show cause notice without this opportunity was "contrary to statutory mandate" and therefore unsustainable.
Consequently, the Court quashed the show cause notice and the final audit observations, directing the tax authorities to allow the petitioner to submit their objections to the audit note of July 16, 2024, and then finalize the audit proceedings in accordance with law. The petitioner was given one month from receipt of the judgment copy to file their reply, after which the audit must be completed expeditiously.
This ruling reinforces the procedural safeguards available to taxpayers during GST audits, ensuring that audit findings are not finalized without affording a fair opportunity to respond to discrepancies. It also clarifies the correct reckoning of audit commencement for limitation purposes under the CGST Act.
Bottom Line:
GST Audit - Show cause notice issued on basis of audit note which had not attained finality is unsustainable - Final audit observations issued without granting opportunity to reply as required under Rule 101(4) of CGST Rules are also invalid - For limitation under Section 65(4) of CGST Act, commencement of audit is reckoned from later of furnishing of records or actual institution of audit at place of business.
Statutory provision(s): Central Goods and Services Tax Act, 2017 Section 65(4), Section 65(6), Central Goods and Services Tax Rules, 2017 Rule 101(4)
