Audit based Show Cause Notices

By Vijay Kumar

In DDT 474, the Board’s direction that the government should not take two different stands before appellate authorities and Audit was covered. Today a netizen writes to us with the following questions.

1. Why the direction to issue Show Cause Notice is there in the first place? Does it presume that CERA is mostly correct and the Revenue is mostly wrong?

2. Is not issuing a Show Cause Notice itself a quasi judicial function? Can it be directed for issue generally?

3. What if the Audit objection is accepted by the Ministry? Is the Adjudicating Authority to fall in line or he is free to decide?

4. What if the Audit objection is not accepted by the Ministry but accepted by the Adjudicating Authority? Which one survives?

5. How long it will take to reach a conclusion? For the Ministry or PAC or who ever it is? What happens to the uncertainity, both for the Revenue and the Tax payer?

6. What is the fate of such SCNs all along? Are the SCNs Wherever the Ministry of Finance differed with the CAG’s Audit Objectionto sleep permanentlyin Call Book? Is it still a grey area?

1. No sir, the presumption is not that CERA is correct. Most often, the presumption is that CERA is not correct, but the “protective” Show Cause Notices are issued as a “save your skin” technology. If finally the CERA objection survives and then demands are hit by time bar, there would be another objection that huge amounts were lost because Show Cause Notices were not issued on time.

2. Issue of Show Cause Notice is certainly not a quasi judicial function; if it is held so, there has to be a notice as to why a notice cannot be issued and that notice has to be preceded by another similar notice and that by another one – meaning there can be no notice at all.

3. The adjudicating authority is certainly not required to fall in line with the Board’s acceptance of the Audit objection, but if the Board issues directions on the issue, the Adjudicating Authority is bound by them, but the whole problem is – this is not the way the Board works. The section that deals with Audit objections is different from the one that gives clarifications – And the twain shall never meet.

4. If the Audit objection is accepted by the Adjudicating authority and not accepted by the Ministry, the lawyers make money. Litigation can go on merrily.

5. There is absolutely no time limit. There are objections which are live for more than two decades. Even the PAC is not the final authority. Litigation can be unending.

6. The ghosts are sometimes resurrected from the call books and assessees suddenly find themselves stuck with Show Cause Notices on issues which they had forgotten long ago. Fortunately in many offices, call books are not traceable. In fact the CAG once conducted a special audit on call book cases.

There was an Audit objection that Show Cause Notices are pending for adjudication for more than ten years involving huge revenue running into Crores of rupees. Why were the Show Cause Notices kept pending? Because of an audit objection which was yet to be resolved!

Of late, even the department has started emulating the CAG’s Audit. Frivolous issues are raised by overzealous Audit teams and the department is issuing Show Cause Notices. There are cases where the same Commissioner has given a clarification and later given a Show Cause Notice on the same issue, because his Audit team raised an objection.

What is the solution? A clever assessee told us, “When the auditors come, give them good food and treat them well but as far as possible, don’t give them any records”

Food for thought?