Circular No 258/04/2026 : Clarification on Demand Adjudication and Appeal Proceedings

• The Central Board of Indirect Taxes and Customs (CBIC) has issued comprehensive guidelines under Section 168(1) of the CGST Act, 2017, to ensure fairness, transparency and consistency in GST demand, adjudication and appeal proceedings.
• The Circular addresses concerns about vague Show Cause Notices (SCNs), orders passed without considering taxpayers’ submissions, unjustified allegations of fraud, inadequate personal hearing opportunities and delays in adjudication and appeal proceedings.
• The key objective is to ensure that GST demands and orders are based on proper evidence, relevant legal provisions and reasoned findings, while protecting taxpayers’ rights under the principles of natural justice.

Key Highlights

• Fraud cannot be presumed: Mere non-payment of GST or a discrepancy found during scrutiny is not sufficient to invoke Section 74 or Section 74A(5)(ii).
• SCNs must contain specific allegations: Demands must be supported by facts, evidence, relevant legal provisions and proper quantification.
• Personal hearing is important: A reasonable opportunity of being heard must be provided where requested or where an adverse decision is contemplated.
• Speaking orders are mandatory: Authorities must examine taxpayers’ submissions, evidence and case laws and provide clear reasons for their decisions.
• No demand beyond the SCN: An adjudication order cannot confirm a higher demand or introduce grounds not mentioned in the original notice.
• Rectification has limited scope: Section 161 cannot be used to reconsider the merits of an adjudication order.
• Appeal proceedings must be fair: Proper scrutiny, hearing records, consideration of additional evidence and reasoned appellate orders are required.

1. Pre-Show Cause Notice Intimation – FORM GST DRC-01A

• Under Rule 142(1A) of the CGST Rules, 2017, the proper officer may issue a pre-SCN intimation in Part A of FORM GST DRC-01A before issuing a formal Show Cause Notice under Sections 73, 74 or 74A.
• CBIC has clarified that such an intimation may be issued wherever feasible, allowing taxpayers to explain their position before formal proceedings begin.
• This can encourage voluntary compliance and reduce unnecessary Show Cause Notices.

2. Show Cause Notice – A Foundation for GST Proceedings

• A Show Cause Notice is issued where the Department proposes an action adversely affecting a taxpayer, such as determination of tax liability, recovery of erroneous refunds, rejection of refund claims or rejection of registration applications.
• The SCN must clearly explain the allegations and provide the taxpayer with a reasonable opportunity to submit a reply. Under Rules 100 and 142, the summary of the SCN or statement must also be issued electronically on the GST portal in FORM GST DRC-01 or GST DRC-02, as applicable.

3. What Must a Proper Show Cause Notice Contain?

CBIC has provided detailed guidelines on the structure and drafting of SCNs.

• Where multiple persons are involved, the allegations and roles of each noticee must be identified separately.
• The SCN should not use language suggesting that the matter has already been decided. Expressions such as “it appears that” are preferred over categorical conclusions.
• CBIC has relied upon the Telangana High Court judgment in Nice Enterprises v. Deputy Commissioner ST (2024) 21 Centax 554, emphasising that merely reproducing statutory provisions without explaining the allegations is insufficient.
• The Circular also refers to the Supreme Court decision in G.R. Infra Project Ltd. v. State of Madhya Pradesh (2026) 45 Centax 331, dated 19 August 2026, highlighting that essential deficiencies in a notice cannot subsequently be cured.

4. Fraud, Wilful Misstatement or Suppression of Facts Cannot Be Invoked Mechanically

One of the most significant clarifications in the Circular

CBIC has clarified that Section 74(1) or Section 74A(5)(ii) cannot be invoked merely because a taxpayer has not paid GST, has made an incorrect declaration or because a discrepancy has been identified during return scrutiny.To invoke these provisions, the Department must establish fraud, wilful misstatement or suppression of facts with an intention to evade tax.

• Important clarifications

• Mere non-payment of tax does not automatically establish fraud.
• An incorrect statement does not amount to wilful misstatement unless it was knowingly made incorrectly.
• Suppression of facts must be deliberate and intended to evade tax.
• Where the relevant facts are already known to both parties, an omission does not by itself constitute suppression.
• A discrepancy detected during scrutiny cannot automatically justify proceedings alleging fraud.
• The SCN must clearly identify the specific facts, circumstances and evidence supporting such allegations.

The Circular relies upon the Supreme Court judgment in G.R. Infra Project Ltd. v. State of Madhya Pradesh and the Andhra Pradesh High Court judgment in Sriba Nirman Company v. Commissioner (Appeals) (2025) 29 Centax 206.

Repeated SCNs on the same grounds

• Where the Department has already issued an SCN alleging fraud or suppression, issuing another SCN for a subsequent period on the same facts and grounds is generally not legally valid unless fresh and independent grounds exist.
• For subsequent periods, the Circular indicates that proceedings should ordinarily follow Section 73 or Section 74A(5)(i), as applicable, rather than repeating fraud allegations without new material.

5.Separate Quantification of Fraud and Non-Fraud Demands

Where an SCN proposes demands under both Sections 73 and 74, the Department must clearly distinguish between fraudulent and non-fraudulent transactions.The notice must explain the factual and legal basis for each category and separately quantify the demands.From FY 2024-25 onwards, Section 74A applies, with a common SCN issuance period of 42 months from the due date of the annual return.Even under Section 74A, allegations involving intent to evade tax must be clearly distinguished from cases where no such allegation exists.

6. No Parallel Proceedings on the Same Subject Matter

Under Section 6 of the CGST Act, where the SGST or UTGST officer has already initiated proceedings concerning a particular subject matter, the CGST officer cannot initiate separate proceedings on the same subject matter.

Similar provisions operate under the respective State GST Acts.

CBIC has referred to the Supreme Court judgment in Armour Security (India) Ltd. v. Commissioner, CGST, Delhi East Commissionerate (2025) 33 Centax 222, particularly paragraph 97.

The objective is to avoid duplicate proceedings, conflicting decisions and unnecessary litigation.

7. Timely Issuance and Proper Service of SCNs

Officers have been advised to issue SCNs sufficiently in advance rather than immediately before the limitation deadline.This allows taxpayers adequate time to prepare their replies and enables authorities to complete adjudication within statutory timelines.SCNs must be served through the methods prescribed under Section 169, including direct delivery, speed post/courier, registered email or the GST common portal, as applicable.The summary of the demand notice must also be uploaded in FORM GST DRC-01.

8. Personal Hearing – Important Taxpayer Rights

Under Section 75(4), an opportunity of personal hearing must be granted where the taxpayer requests it in writing or where an adverse decision is contemplated.

CBIC has clarified the following:

Where the officer conducting the hearing is transferred, the Circular advises that the outgoing officer should, wherever practicable, pass the order before relinquishing charge. Otherwise, the succeeding officer must provide a fresh hearing.

9.Adjudication Orders Must Be Speaking and Reasoned Orders

CBIC has emphasised that adjudication authorities must pass speaking orders containing proper reasoning rather than merely confirming the allegations.

An adjudication order should contain:

• Details of the issuing authority, taxpayer, SCN, relevant statutory provisions, tax period, proposed demand, appeal rights and applicable pre-deposit conditions.
• Clear identification of each issue requiring determination.
• Examination of the documents and evidence supporting the allegations.
• Independent consideration of the taxpayer’s reply filed in FORM GST DRC-06 and submissions made during personal hearings.
• Discussion of relevant statutory provisions, circulars and judicial precedents.
• Clear findings on each issue, supported by reasons.
• Accurate quantification of tax, interest and penalty.
• A reasoned conclusion confirming or dropping the demand.

Merely stating that the taxpayer’s reply has been considered is not sufficient. The order should explain why each material submission or supporting document has been accepted, partly accepted or rejected. The Circular refers to the Supreme Court judgment in Joint Commissioner of Income Tax, Surat v. Saheli Leasing & Industries Ltd., 2010 (253) ELT 705 (SC), concerning clarity, relevance, chronology, judicial reasoning and timely pronouncement of orders.

10. An Adjudication Order Cannot Travel Beyond the SCN

Section 75(7) provides that the tax, interest and penalty determined in the order cannot exceed the amounts specified in the SCN. Further, the demand cannot be confirmed on grounds different from those mentioned in the notice.

Accordingly:

• The authority must restrict its decision to the allegations contained in the SCN.
• Fresh issues cannot be introduced directly in the adjudication order.
• Any new issue identified must be pursued through a separate SCN.

This protects taxpayers from demands that were not originally communicated to them.

11.Proper Examination of Evidence, Case Laws and AI-Generated Information

Authorities must critically examine evidence instead of merely reproducing documents. The order must discuss the relevance and reliability of the evidence and acknowledge where the material does not support the Department’s allegations. Judgments relied upon by both the Department and taxpayer must be examined. Officers should verify the accuracy, applicability and current legal status of cited judgments, including whether they have been overruled.Where a judgment relied upon by the taxpayer is not applicable, reasons must be recorded.

Important clarification on the use of Artificial Intelligence

CBIC has specifically addressed the use of AI and other technology in adjudication proceedings. Where AI tools are used, the information generated must be independently verified for accuracy before it is relied upon or incorporated into an order. The issuing authority remains responsible for the correctness of the order, irrespective of the use of AI or other technological tools.

12. Demand Must Be Properly Quantified

The adjudication order must clearly quantify the demand confirmed after examining each issue. As far as possible, calculations should be shown financial year-wise, issue-wise and tax-head-wise (CGST, SGST, IGST and UTGST).

Interest on short-paid or unpaid tax continues up to the date of actual payment. Under Section 75(9), interest remains payable even where it is not specifically mentioned in the order. Any penalty must be supported by clear reasons, the nature of the default and the relevant statutory provisions, keeping in view Section 126. Penalty should not be imposed mechanically.

13.Timely Adjudication and Uploading of Orders

CBIC has advised officers to avoid passing adjudication orders at the last moment, as hurried adjudication may affect the quality of decision-making. Monthly disposal targets and monitoring by senior officers may be introduced. The adjudication order must be accompanied by its summary in FORM GST DRC-07, uploaded electronically on the GST portal.

14. What Happens When Fraud or Suppression Is Not Established?

Where the SCN invokes fraud, wilful misstatement or suppression of facts, the Adjudicating Authority must independently examine whether the allegations are supported by evidence If the evidence does not justify invocation of the extended period or fraud-related provisions, the authority should record specific findings. In such cases, the demand must be confined to the provisions applicable under Section 73 or Section 74A(5)(i), as relevant. The adjudication order must clearly explain its findings concerning the taxpayer’s objections to the fraud or suppression allegations.

16.Rectification of Orders under Section 161

Section 161 permits rectification of errors apparent on the face of the record in decisions, orders, notices, certificates or other documents. The six-month limit does not apply to purely clerical or arithmetical errors arising from accidental slips or omissions.

Scope of rectification

CBIC has clarified that:

• Rectification can be made only by the authority that issued the original document or order.
• A senior officer cannot exercise another officer’s rectification power merely under Section 5(2).
• Rectification is limited to errors clearly apparent from the existing record.
• Errors requiring detailed investigation, interpretation, fresh appreciation of evidence or lengthy legal arguments cannot ordinarily be corrected under Section 161.
• Rectification is not a substitute for an appeal or review.

 The Circular relies on the Supreme Court judgment in Arun Dev Upadhyaya v. Integrated Sales Service Ltd. (2023) 8 SCC 11. Applications must be disposed of expeditiously through FORM GST DRC-08, and rectification orders must be communicated to the jurisdictional reviewing authority

16. First Appeal Proceedings under Section 107

The Circular also provides detailed guidance for first appellate authorities:

1. Preliminary scrutiny of appeals

Under Rule 108, the Appellate Authority must verify:

• Details of the appellant and impugned order.
• Statutory limitation.
• Correct appeal form.
• Payment of required pre-deposit.
• Grounds of appeal.
• Supporting documents.
• Jurisdiction and procedural completeness.

However, disputes involving the merits of the case should ordinarily be examined during the appeal proceedings rather than rejected summarily at the initial registration stage.

Time limit for filing an appeal

The limitation issue must be examined separately. Where an appeal is filed beyond the statutory condonable period, it should not be decided on merits even if the taxpayer has a strong prima facie case. The appellate order must record reasons for accepting or rejecting the appeal on limitation grounds.

Withdrawal of appeal

Under Rule 109C, an appeal may be withdrawn by filing FORM GST APL-01/03W.Where final acknowledgement in FORM GST APL-02 has already been issued, withdrawal requires the Appellate Authority’s approval, and the withdrawal application must be decided within seven days.

Personal hearings in appeal proceedings

The appellate authority should communicate hearing dates, including adjourned dates, through the GST portal wherever possible. Hearing proceedings may be maintained electronically on the BO Portal. The appellate order must record the hearing dates, appearance of the appellant or authorised representative, submissions, documents furnished and directions issued.

Additional grounds of appeal

Under Section 107(10), additional grounds may be permitted where their omission was neither wilful nor unreasonable. The authority should distinguish additional legal arguments arising from an existing demand from new factual issues requiring further investigation. Reasons for accepting or rejecting additional grounds must be recorded.

Additional evidence during appeal

Under Rule 112, additional evidence may be admitted in specified circumstances, including where:

• The original adjudicating authority refused to admit admissible evidence.
• The appellant had sufficient cause for not producing evidence earlier.
• The appellant was not given an adequate opportunity to submit evidence.

The appellate authority must record reasons for accepting or rejecting additional evidence. If additional evidence is rejected, a personal hearing should be provided to the appellant. Before admitting additional evidence, the original adjudicating authority or an authorised officer must be given a reasonable opportunity to examine and rebut it. Appeal proceedings should not ordinarily be converted into fresh investigations merely to correct deficiencies in the original adjudication.

Disposal of appeal and cross-appeals

Under Section 107(13), appeals should, as far as possible, be decided within one year from filing, excluding periods during which proceedings are stayed by a Court or Tribunal. Where both the Department and taxpayer have appealed against the same order, the appeals should be heard together and disposed of through a common, composite order to avoid conflicting findings.The summary of the appellate order must be issued in FORM GST APL-04, clearly showing the final demand confirmed.

17.Application of Adjudication Guidelines to Appeals

The guidelines relating to principles of natural justice, drafting of speaking orders and examination of allegations of fraud, wilful misstatement or suppression of facts also apply, with necessary modifications, to first appellate authorities. CBIC has clarified that these guidelines are illustrative and not exhaustive, and officers must not cite the Circular’s guidelines in SCNs, final adjudication orders or appellate orders. Any difficulties in implementing the Circular may be brought to CBIC’s notice.

Circular-No-258-04-2026