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Every year, thousands of businesses like you receive show cause notices from the tax department. You might even be surprised how many businessmen in your industry have gone through exactly what you are dealing with right now.

As we focus on tax and are not “general practitioners”, we know the top 2 things that must be addressed when you receive a show-cause notice BEFORE doing anything else.

LIMITATION

When you receive a tax notice, always, ALWAYS check the limitation period before doing anything else.

To put it simply, the tax department is given a limited period during which it should collect any taxes that it feels have been short paid. The tax department cannot sleepover its rights for years and years together and then come after the taxpayer.

To take an extreme example, if you receive a show-cause notice in 2021 for the assessment year 1950 stating that you have not paid the correct amount of tax, the notice (and any consequent order) is clearly barred by limitation. The tax department cannot sleepover its rights for 70 years!

Therefore, always ask if the show cause notice is barred by limitation before examining any other aspect. 

Here are some of the limitations to keep in mind under important indirect statutes:

The department's only occasion is given an extended period if the taxpayer has committed any fraud or suppression. The logic behind providing such an extended period of limitation is that fraud or suppression takes longer to detect. Therefore, the Department has given a longer time frame issue a show-cause notice.

However, every omission or irregularity cannot be called suppression or fraud by the taxpayer. To invoke extended limitation, the Department must establish some positive act of the taxpayer to play fraud.

Therefore, before doing anything else, do take a moment to check if an order or a show-cause notice is barred by limitation.

VIOLATION OF PRINCIPLES OF NATURAL JUSTICE

This is another simple yet effective remedy to when you receive a show-cause notice from the tax department. In simple words, natural justice means that the tax authorities must adopt a fair procedure before imposing any tax on the taxpayers. Here are some situations where violation of principles of natural justice can be invoked. I’ve seen cases being allowed on each of these grounds:

1 - If you straightaway receive a tax order from the Department without receiving a show cause notice, you can approach the High Court & get the order set aside since you were not given a chance to respond to the notice.

2 - After receiving a show cause notice, if you have not been given a chance to put forth your case in a personal hearing, the tax order can be set aside on this ground as you have the right to be heard.

3 - If the tax officer relies on a report, uses the report against you and does not furnish a copy of the report to you, you can get the tax order set aside on this ground as evidence cannot be used behind your back.

4 - There are odd cases where your appeal comes up before the same tax officer who heard your case as the tax officer is promoted. These proceedings fail due to bias.

CONCLUSION

Before you dig into a tax order or a show-cause notice on merits, you should consider doing a preliminary check for both these issues. If any of the two issues are present in a case, you can directly approach the High Court instead of going through the appeal process.