Mandatory Nature of Pre-show Cause Notice- A Silver lining For Tax Reforms?

[By Priyanshi Jain]

The author is a student at the Institute of Law, Nirma University.


A show-cause notice consists of a prima facie opinion by the tax department with respect to the offence made out against a taxable person. The aim of pre-show cause notice is to reduce the burden of unnecessary litigation before issuing the final show-cause notice. The need for the same was initially highlighted in the First Report of the Tax Administration Reforms Commission, wherein it was held that a vertical dispute mechanism for pre-show cause consultation should be set up; this shall ensure that preventable and unwanted disputes do not take much time of the tax department. Following these recommendations, through a circular published on December 21, 2015[i], the Central Board of Excise & Customs (‘CBIC’) made the “Pre-notice Consultation” mandatory in all cases comprising a demand of Rs. 50 lakhs or more.

Recently, in the case of Gulati Enterprise vs Central Board of Indirect Taxes and Customs & Ors[ii], the Delhi High Court emphasized the mandatory nature of the pre-show cause consultation notice. It negated the substitution of this statutory notice with a voluntary statement. Section 74(1) of the Central Goods and Service Tax Act, 2017, read with rule 142(1)(a) of the Central Goods and Service Tax Rule, aims to establish the above-said principle by offering an opportunity to the assessee on a pre-show cause notice stage.

The blog puts weight on the High Court decision by reiterating the necessity of a ‘pre-show cause consultation notice’ to eliminate the unnecessary burden of litigation by promoting voluntary compliance. The blog also aims to highlight the existing face-off between the department and the taxpayer in accordance with pre-show-cause consultation.

Unnecessary Burden of Litigation

The First Report of the Tax Administration Reform Commission (‘TARC’)[iii] advised the department to avoid disputes in cases where a collaborative effort can render an effective solution. The present Indian Tax Regime is filled with procedural complexities, ultimately leading to unreasonable delays and hefty expenses. Prolonged litigation in matters related to taxation and the overall hassle of reaching an amicable solution has created a perception that the current tax system is unfavorable to taxpayers. This issue is placed on the centre stage when a substantial amount of revenue is blocked in disputes, which could benefit the Indian economy if the dispute is settled amicably. Hence, in such a scenario, it becomes imperative to introduce a system by which the head-to-head approach can be rationalized in three precise steps first, effective case management; second, preventing procedural formalities and third, providing multiple opportunities for settlement and alternative dispute resolution.

In order to implement the above-said system into practice, through a circular published on December 21, 2015, the CBIC made the “Pre-notice Consultation” mandatory in all cases comprising a demand of Rs. 50 lakhs or more. Such an administrative mechanism may be instituted to resolve tax disputes prior to the notice stage by creating a forum for open dialogue between the taxpayer and the department. The forum promotes a bilateral discussion to articulate and scrutinize their positions on the present matter. The possibility of an amicable resolution increases when both parties resolve the dispute through a consensus.

The Delhi High Court in Amadeus India Pvt. Ltd. vs Pr. Commissioner, C.Ex, ST & CT (2019)[iv], while reiterating the mandatory nature of pre-show cause consultation notice, highlighted that if the process of such notice is followed in a proper spirit, it shall reduce a significant number of disputes. However, it should be noted that the process is not indefectible since it is subject to failure in case a mutual agreement is not reached.

The Tax Administration Reform Commission (‘TARC’) further recommended that tax officers should not be permitted to fall back on coercive methods for facilitating recovery during the pre-consultation process. The report advises three essential guidelines for the department to follow for promoting the above-said forum for discussion and open communication: first, only the officer competent to issue a notice shall be allowed to take part in such consultation; second, the tax officer shall adopt a receptive and open vantage point; third, the tax officer shall provide full consideration to the views of the taxpayer before reaching to a conclusion.

The above-mentioned guidelines aim to narrow down the contentions made by any party if a legal action arises thereof. The contentions on which an agreement has been reached shall not be contested further by either party. Therefore, the pre-show-cause consultation mechanism aims to achieve a more effective and efficient dispute resolution system. This, in turn, reduces the unwanted burden of litigation in the Indian indirect tax regime.

Tax Payer vs The Department 

It is imperative to note that the process of pre-show-cause consultation is not a statutory procedure but rather a procedure meted out by the Central Board with the objective of increasing compliance and decreasing the need to issue show-cause notices. The overall conclusion is that any procedure developed by the CBIC to balance the interests of the assessee and the revenue should be given due consideration. Unfortunately, the department, in several instances, has failed its obligation to grant an adequate opportunity for consultation to the taxpayer, completely disregarding the instructions provided by the CBIC through their circulars. It was observed in the case of M/s Dharamshil Agencies vs Union of India (Gujarat High Court) Special Civil Application No. 8255 of 2019[v] that it was the department’s responsibility to issue a pre-show cause consultation notice immediately after the final audit report was published. The court held that an ‘illusionary’ pre-show cause notice, in its essence, is arbitrary and against the very object and purpose of the Master Circular. The Central Board’s circulars bind the department, and it cannot simply disregard the numerous circulars issued by the CBIC regarding the said consultation or issue show cause notices on its own.

In a situation where we accept that the department has issued the pre-show-cause notice in accordance with the circular published by the CBIC, the taxpayer cannot be completely relieved. In a large number of cases, this notice turns out to be bait for the taxpayers. Part B of Form GST-DRC-01A is carved out to provide the taxpayer with an opportunity to make his submissions if the taxpayer does not wholly or partly agree with the proposed liability. However, it can be noted that the tax officer, in most cases, dismisses the submissions forwarded by the taxpayer at the pre-dispute stage and eventually issues the show-cause notice. This issued notice contains the allegations the department makes; these allegations are usually repeated and reproduced from the pre-show-cause consultation stage. In this scenario, there remains no difference between the defence statement made by the innocent taxpayer at both stages of the process. Hence, the first line of defence made by the taxpayer crumbles on account of it being exposed at the pre-show-cause consultation stage; this negates the true essence of pre-show-cause notice.


The face-off between the taxpayer and the department because of procedural inadequacies drives the taxpayer away from voluntary compliance. The objective thus meted out by CBIC seems farfetched due to the inability of the tax department to comply with the procedures laid down in the Master Circular.

The proper implementation of pre-show-cause consultation notice will alleviate the dreary process that haunts the taxpayers. The design of pre-show-cause consultation intends to promote consensus and harmonize the otherwise time-taking procedures. The above-mentioned is achieved by simply increasing participation from both ends and eliminating superficial mechanisms.

However, the Hon’ble Courts are ad nauseam reiterating the mandatory nature of pre-show-cause consultation, as evident in the case of Gulati Enterprise vs Central Board of Indirect Taxes and Customs & Ors. In the absence of adequate opportunity for consultation with the taxpayer, the court shall render the proceeding to be quashed and set aside; this may be considered a silver lining to the dark cloud of procedural inadequacy of the tax department.


[i] Department Of Revenue, Central Board of Excise and Customs: Master Circular on Show Cause Notice, Adjudication and Recovery-reg

[ii] 2022 SCC OnLine Del 1501

[iii] First Report of the Tax Administration Reform Commission (TARC), Govt. of India, Ministry of Finance, Tax Administration Reform Commission

[iv] 2020 SCC OnLine ITAT 8694

[v] TIOL 1563 HC


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