Is Provisional attachment of bank account valid when other assets offered as security?

Introduction

Section 67 of CGST Act deals with inspection, search and seizure and Section 83 empowers the Commissioner to provisionally attach any property including bank account during the pendency of proceedings under various provisions including the one under Section 67. It is quite common these days for the tax authorities to attach provisionally bank account of the taxpayer whenever an investigation begins.

According to Section 67(a), where the proper officer not below the rank of Joint Commissioner had reasons to believe that a taxable person has suppressed any transaction relating to supply of goods, services or both or the stock of goods in hand or has claimed input tax credit in excess of his entitlement under the CGST Act or had indulged in contravention of any of the provisions of the CGST Act or the rules made thereunder to evade tax under the CGST Act, he may authorize in writing inspection of any place of business of the taxable person.

According to Section 83(1), where during the pendency of any proceedings under section 62, section 63, section 64, section 67, section 73 or section 74, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property, including bank account, belonging to the taxable person in such manner as may be prescribed. Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order.

Let us refer to the case of Aje India Private Limited vs The Union of India, where the issue under consideration was whether Provisional attachment of bank account valid when other assets offered as security or not.

Facts of the Case:

• The petitioner, a company, was engaged in the business of manufacture and supply of carbonated fruit drinks, such as, Big Cola, Big Orange Cola, Big Lemon and similar other products.
• Petitioner was manufacturing such fruit juice-based drinks since December, 2017 having more than 5% juice content in apple drink and 2.5% in respect of lemon drink.
• Petitioner was classifying such goods under Tariff Item 2202 99 20 of the Customs Tariff Act, 1975 and specified at Serial No.48 under Schedule-II as “fruit pulp or fruit juice-based drinks” of the Central Government Notification dated 28th June, 2017 taxable at the rate of 12%.
• Petitioner stated that on the basis of such classification petitioner was filing its GST returns and paying the taxes regularly.
• According to the petitioner, the departmental authorities, initiated investigation sometime in March, 2019 with regard to classification of the goods which was however dropped.
• Such inquiry was revived in January, 2020 but no progress was made because of Covid-19 pandemic and the resultant lockdown.
• Then on 21st September, 2020, officials of the respondent visited the petitioner’s factory for further investigation.
• Order was issued by respondent and addressed to the Branch Manager, ICICI Bank, provisionally attaching bank accounts of the petitioner under section 83 of the CGST Act.
• Petitioner filed objection before the respondent against such provisional attachment.
• Though a personal hearing was granted, the respondent told the representative of the petitioner that provisional attachment would not be lifted.
• Aggrieved, petitioner preferred a writ petition before the High Court (HC)

Observations of the HC on the issue of the current case

• The investigation had revealed that fruit juice contained in the products of the petitioner was either 5% or slightly above 5%.
• As per regulation 2.3.30 of the Food Safety and Standards (Food Products, Standards and Food Additives) Regulations, 2011, it was clear that in a case where the quantity of fruit juice was below 10% but not less than 5% (2.5% in case of lime or lemon) the product shall be called carbonated beverages with fruit juice and it was not carbonated fruit beverages or fruit drinks.
• In such cases the correct classification would be at HSN Code 2202 10 90 attracting GST at the rate of 28% and cess at the rate of 12%.
• This view was also upheld by the GST Council in its 37th meeting.
• Thus, investigation revealed that because of misclassification of the products by the petitioner it has resulted in short payment of tax to the tune of approximately Rs.33 crores during the period from December, 2017 to February, 2020.
• In this proceeding HC was concerned with the legality and validity of the provisional attachment of the bank accounts of the petitioner and not on the merit of the classification.
• HC found that according to respondent, proceedings were launched against the petitioner under section 67 of the CGST Act to determine the tax or any other amount due from the petitioner.
• From the information available it came to the notice of the respondent that petitioner had three bank accounts.
• In order to protect the interest of revenue and exercising power conferred under section 83 of the CGST Act, respondent provisionally attached the aforesaid bank accounts.
• The Branch Manager of the ICICI Bank was requested that no debit should be allowed to be made from the said accounts or any other accounts operated by the petitioner without the prior permission of the department.

Observations of HC on the Provisions of Law

• From an analysis of section 83(1), HC found that for invoking the said provision there had to be pendency of any proceeding under any one of the six sections mentioned therein including section 67.
• Thereafter, the Commissioner should form an opinion that for the purpose of protecting the interest of Government revenue, it was necessary to provisionally attach any property including bank accounts of the taxable person.
• Since in this case it was the stand of respondent that because of pendency of proceedings under section 67 of the CGST Act, power under section 83 was invoked, section 67 could be looked into.
• Section 67 of the CGST Act dealt with power of inspection, search and seizure.
• A conjoint reading of the relevant provisions of section 67 and section 83 of the CGST Act would indicate that the proper officer must have reasons to believe that the taxable person has suppressed any taxable transaction to evade payment of tax.
• It was clear that petitioner had disclosed the details of its goods and had applied the classification which it thought was appropriate.
• On that basis it had filed its CGST returns and had been assessed.
• It was not the case that petitioner had defaulted in payment of tax as per its returns or assessment.
• On the other hand, respondent had contended that it was a case of misclassification which had led to short payment of GST.

Reference to an older case by HC

• HC referred to the decision of Commissioner of Customs (Appeals), in the case of M/s Anutham Exim Private Limited who had imported beverages under the brands of Big Cola, Big Orange, Big Lemon etc. from Bhutan.
• The adjudicating authority by the order in original took the view that such products like Big Cola, Big Orange, Big Lemon etc. were classifiable under CTH 2202 10 20 for which the taxable person was liable to pay IGST at the rate of 28% and compensation cess at the rate of 12%.
• Assailing the findings of the adjudicating authority M/s Anutham Exim Private Limited preferred appeal before the Commissioner of Customs (Appeals).
• Commissioner of Customs (Appeals) held that even after taking into consideration amendments made to the Food Safety and Standards (Food Products, Standards and Food Additives) Regulations, 2011, a sub set has been created under regulation 2.3.30 covering therein beverages having fruit juice contents between 5% to 10% and 2.5% to 5% for lime or lemon.
• Referring to the decisions of the Supreme Court in Parle Agro (P) Ltd. and the larger bench of CESTAT it was held that products falling under regulation 2.3.30 would qualify as fruit juice-based drinks.
• Thus, carbonated beverages with fruit juice falling under clause 3A of regulation 2.3.30 would be treated as fruit juice-based drink only and classifiable under tariff Item 2202 99 20.

Observations of HC on whether this was a case of tax evasion or not

• In the reply affidavit of the respondent, a statement was made by the Commissioner that the department had filed an appeal against the aforesaid decision of Commissioner of Customs (Appeals) and therefore, the said order had lost relevancy.
• HC did not subscribe to such a view taken by the Commissioner.
• Besides being devoid of any particulars, it showed complete disregard to an order of an appellate authority.
• But the moot point was whether on the basis of the above facts could it be said to be a case of suppression of a taxable transaction by the petitioner or a case of contravention of any of the provisions of the CGST Act to evade payment of tax?
• The answer to this, in HC’s view, would have to be in the negative.
• HC perused the details of the investigation under section 67 and therefore, the need to take action under section 83.
• Whether recourse to section 83 was warranted at this stage was not dealt with in the record.
• Merely because there was a proceeding under section 67 would not mean that recourse to such a drastic power as under section 83 would be an automatic consequence, more so when petitioner has cooperated with the investigation.
• That apart, section 83 spoke of provisional attachment of any property including bank account.
• The record was silent as to whether any attempt has been made for provisional attachment of any property of the petitioner and instead why the bank accounts should be attached.
• Besides, by use of the word “may” in sub-section (1) of section 83 Parliament had made it quite clear that exercise of such a power was discretionary.
• When discretion was vested in an authority, such discretion had to be exercised in a just and judicious manner, more so when the power conferred under section 83 admittedly was a very drastic power having serious ramifications.
• Such power having the potential to adversely affect property rights of persons as well as life and liberty under Article 21 of the Constitution of India had to be exercised in a fair and reasonable manner.
• Being possessed of power was one thing and exercise of such power was altogether another thing.
• Because the Commissioner was conferred with the power of provisional attachment under section 83 it would not ipso-facto mean that he can straight away proceed to provisionally attach any property including bank accounts of a taxable person merely on the ground of pendency of proceedings under section 67.
• It was submitted that petitioner had already offered to the respondent its land, building and plant and machinery having estimated gross value of approximately Rs.44 crores to secure the interest of the revenue.
• In such circumstances, HC was of the view that recourse to section 83 by respondent straight away was not justified.
• Prima facie, such an exercise appeared to be harsh and excessive, thus arbitrary.

Consequently, HC stayed the impugned order and directed withdrawal of the provisional attachment of the bank accounts of the petitioner. However, petitioner was directed to furnish an undertaking before the Court by way of affidavit that it shall not alienate its land, building, plant and machinery during pendency of the present proceeding.

Therefore, provisional attachment of bank account is not valid when other assets are offered as security.