The Kerala High Court held that issuing a Show Cause Notice (SCN) based solely on preliminary audit observations, which are not finalised findings, is legally unsustainable.
SCN Must Be Based on Finalised Audit Findings
The Kerala High Court has ruled that a Show Cause Notice (SCN) under the GST regime cannot be issued solely on the basis of preliminary audit observations that have not been finalised. The Court emphasized that such observations are merely indicative of discrepancies and do not constitute conclusive determination of tax liability.
The petitioner challenged the issuance of an SCN which was grounded entirely on draft audit findings that had not been formally accepted or finalised. The Court observed that initiating recovery proceedings at a stage when the audit itself is not concluded violates principles of natural justice and statutory due process.
A demand cannot be predicated on tentative observations which are yet to attain finality,the Court stated.
This decision provides critical protection to taxpayers against premature enforcement actions. Practitioners should ensure that SCNs based on draft or interim audit reports are promptly challenged, especially where no final audit report has been issued. The ruling reinforces the necessity for tax authorities to follow a structured and fair procedure before initiating adjudication.
