Section 67 of the CGST Archives - Faceless Compliance

Can Bank Account be attached provisionally even when proceedings under Section 67 have been completed in GST?

Introduction

A proper officer has authority to inspection, search and seizure where he has sufficient reason to believe that there is evasion of tax under the GST Act. However, the question arise if the proceedings of inspection, search and seizure under section 67 have been completed can the officer still proceed and make the provisional attachment of the bank accounts of the taxable person under section 83.

In the case of Kushal Limited vs Union of India the Gujarat High Court, in 2019 has thrown light on this subject and provided clarity for the same.

Provisions of Law:

Section 67 pertains to power of inspection, search and seizure of a Proper Officer. According to Section 67:-

1.Where the proper officer, not below the rank of Joint Commissioner, has reasons to believe that––

a. a taxable person has suppressed any transaction relating to supply of goods or services or the stock of goods in hand, or has claimed input tax credit (ITC) in excess of his entitlement under this Act or has indulged in contravention of any of the provisions of this Act or the rules made thereunder to evade tax under this Act.

b. any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act, he may authorise in writing any other officer of central tax to inspect any places of business of the taxable person or the persons engaged in the business of transporting goods or the owner or the operator of warehouse or godown or any other place.

2. Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things.

3. The documents, books or things referred to in subsection (2) or any other documents, books or things produced by a taxable person or any other person, which have not been relied upon for the issue of notice under this Act or the rules made thereunder, shall be returned to such person within a period not exceeding thirty days of the issue of the said notice.

Section 83 pertains to provisional attachment to protect revenue in certain cases. – (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.

Can property of a taxable person be attached provisionally even when proceedings under Section 67 have been completed?

Let us refer to the case of Kushal Limited vs Union of India (Gujarat High Court) (2019) to understand the same.

Facts of the Case

The petitioners are engaged in the manufacture and sale of paper and paper waste and are also engaged in trading various commodities.
Search proceedings came to be conducted by the CGST Department at the premises of the petitioners. An inquiry was made regarding the trading transactions of the petitioners and evidence was demanded regarding the purchase and sale transactions.
The petitioners intimated that the goods were sold on “as is where is” basis and thus, there was no evidence of movement of goods.

Reasons why the petition was issued

Summonses were issued to the petitioner and the petitioner duly attended to such summons and his statement was recorded.
A notice came to be issued to the petitioners calling for documents in relation to the investigation. The petitioners responded to such notice by a letter and the documents as required by the respondents were furnished. The petitioners reiterated that there was no evasion of tax under the GST Acts by them.
After such correspondence, the respondents visited the premises again for scrutiny of the same transactions.
After verification, the second petitioner was called to the Commissionerate. When the petitioner went as directed, he was issued an arrest memo under section 69 under the GST Acts and was thereafter immediately arrested.
The petitioner thereafter applied for bail which was ultimately granted under section 167(2) of the Code of Criminal Procedure, 1973
After the arrest of the petitioner, no notice had been issued to the petitioners with regard to the issue in question and no show-cause notice had been issued under section 73 or 74 of the GST Acts.
It is the case of the petitioners that despite the fact that no proceedings were pending under sections 62, 63, 64, 67, 73 or 74 of the GST Acts, the respondent proceeded to provisionally attach the bank accounts of the petitioners in exercise of powers under section 83 of the GST Acts.
According to the petitioners, the provisional attachment of their bank accounts under section 83 is wholly without jurisdiction and illegal and hence, they filed the petition seeking for relief.

Proceedings of High Court

From the facts and contentions noted, it emerged that a search came to be conducted under section 67.
Where it was discovered that the petitioners had purchased goods and availed ITC thereon and had passed on ITC to various buyers by raising GST invoices without there being any actual movement of goods at their end either as recipient or as supplier.
During the course of investigation, it was found that the petitioners were engaged in the business of trading of paper and electronics and had availed GST on the basis of only invoices and no goods were actually received by them.
According to the respondents, investigation pursuant to the search was conducted under section 67 is still going on and therefore, the proceedings under section 67 of the GST Acts are not yet completed.
In the present case, since the premises of the petitioners came to be searched, the provisions of section 67(2) of the GST Acts would be attracted. In terms thereof, pursuant to an authorisation issued in this behalf, the proper officer may search the premises in respect of which the search is authorised and seize goods, documents or books or things and retain the documents or books or things so long as may be necessary for any inquiry or proceedings under the Act.
In the present case, search proceedings were conducted at the premises of the petitioners on 27.9.2018. Thereafter, there was a visit by the respondents on 1.4.2019 which led to the arrest of the second petitioner.
Thereafter, no search has been conducted at the premises of the petitioners. The search proceedings have, therefore, ended.
It is the opinion of respondents that proceedings under section 67 of the GST Acts are not yet completed and the matter is still under investigation.
In the opinion of the court, inquiry or other proceedings under the Act may have been undertaken and it may be that pursuant to the search.
However, such inquiry or other proceedings are not under section 67 of the GST Acts and hence, it cannot be said that any proceedings are pending under section 67 of the GST Acts.
On a plain reading of section 83 of the GST Acts, it is clear that an essential condition for exercise of powers thereunder is that proceedings should be pending under section 62, section 63, section 64, section 67, section 73 or section 74 of the GST Acts.
In the present case, the proceedings under section 67 of the GST Acts are no longer pending. Proceedings under any of the other sections mentioned in section 83 have not been initiated which are in accordance with the search.
Under the circumstances, on the date when the orders of provisional attachment came to be made, the basic requirement for exercise of powers under section 83 of the GST Acts was not satisfied.
The provisional attachment of the bank accounts of the petitioners under section 83 of the GST Acts is, therefore, not in agreement with the provisions thereof and cannot be sustained.
While, on behalf of the petitioners it was contended that there is no question of disallowance of ITC merely on the ground that the petitioners have not actually received the goods at their premises and that the petitioners have adjusted such ITC against tax liability on sales made by them. There is no allegation that the petitioners have illegally benefitted from such ITC.
However, such contentions were beyond the scope of the present petition which relates to the orders of provisional attachment dated 18.10.2019 passed under section 83 of the GST Acts and hence, the merits of such contentions were not looked into.

Therefore, in the absence of pendency of any proceedings under sections 62, 63, 64, 67, 73 or 74, the orders of provisional attachment of the bank accounts of the petitioners under section 83 of the GST Acts were considered without authority of law and were rendered unsustainable.

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“Reasons to believe” – Is this concept considered crucial while conducting search and seizure?

Introduction

The factor of “reason to believe” is extremely crucial while conducting search and seizure proceedings. The same reasons are also required to be on record. Why are reasons to believe to be considered important? And what impact can it have?. We will understand this with the help of a case of Rimjhim Ispat Limited vs State Of U.P . The present petition has been filed by the petitioner challenging the entire search and seizure operation carried out at the factory premises of the company situated as being illegal, arbitrary against the mandatory provisions of law and as a mala fide exercise of statutory powers.

Impact of “Reasons to believe” while conducting search and seizure in GST

Let us refer to the case law to understand the same in detail – Rimjhim Ispat Limited vs State Of U.P.

Facts and Details provided by the Petitioner

On 13.3.2018, at about 11.30 A.M., a search party, consisting of the Officers of U.P. GST/Commercial Tax Department, started a search at the office premises and the factory premises of the company.
The search operations were monitored by respondent, who was present in the office of the company.
The authorized signatory of the company, Sri Sunil Gupta was not present at the time of search, however, he was called and was manhandled and pressurized to admit large scale tax evasion.
It is alleged that he was asked to sign on some blank papers on 13.3.2018, which were used for drawing the Panchnama on 14.3.2018.The signature of Sri Sunil Gupta, on blank papers, was used by exercising duress, thus, the said Panchnama has no legal sanctity.
Stocks of the raw-materials and finished goods were not weighed by the respondents despite the insistence of Sri Sunil Gupta.
The search party was informed that the raw-materials were duly covered by the tax invoices and E-way bills and they were fully reflected in the books of accounts.
Factory premises with computerized weigh bridge installed. However, the respondents did not weigh the raw-materials as well as the finished products and recorded highly exaggerated figures on the basis of assumptions in the Panchnama.
List attached to the Panchanama is based on mere physical verification and eye estimation and the entries recorded therein are arbitrary.
The two witnesses of the search, namely, G.C. Sharma Ankur Bhatt were brought by the search party from Kanpur as the addresses of the said witnesses recorded in the Panchnama itself shows. The said two persons are fake persons as they are not resident on the addresses mentioned in the Panchnama. The non-mentioning of the correct address itself clouds the entire exercise as arbitrary and mala fide as also an abuse of the process of law.
List attached to the Panchnama clearly shows that there is an overwriting while recording the stocks and it has also been argued that assuming for the sake of arguments to be correct, it was impossible for the respondent authorities to have weighed the goods referred to in the list attached to the Panchnama within such a short span of time.
A complaint was made by Sri Sunil Gupta on 15.3.2018 before the Commissioner U.P. GST, Lucknow along with his affidavit regarding the highhanded manner in which the search was carried out and further requested that the stocks may be re-verified under the supervision of the District Magistrate.
It is thus argued that the entire exercise of wrongly recording the goods in an arbitrary and mala fide manner was only to saddle the company with heavy duty and penalty.
The petitioner argued that Section 67 of the U.P.GST confers the power of inspection, search and seizure on the proper officer, who has ‘reasons to believe’ that a taxable person has suppressed any transaction relating to supply of goods and service or the person aggrieved has kept the goods at a place which has escaped the payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act.
It is also argued that the entire search and seizure was done in complete disregard to the mandatory provisions of Section 67(10), Section 100 and Section 165 of the Cr.P.C. and that ”reasons to believe” are mandatory before authority exercises its powers under Section 67 of the UPGST Act.
All the returns were filed on a monthly basis along with the records of the goods of raw-materials and the finished products with the petitioner and there was no basis or material available with the respondent authorities to form a ‘reason to believe’ thus the powers have been exercised without there being any foundation or ‘reasons to believe’.
It is argued that the ‘reasons to believe’ should be based upon tangible material and should not be based upon fanciful consideration as the exercise of powers of search and seizure is an exception to the fundamental right of the petitioner guaranteed under Article 19(1)(g) of the Constitution of India and this should be exercised strictly within the parameter prescribed for its exercises as any violation thereof would negate the rights of the petitioner guaranteed under Article 19 of the Constitution of India.

Relief Requested by Petitioner

issue a suitable writ, order or direction calling for the records of the case and to quash the impugned Seizure Order and Panchnama
issue a suitable writ, order or direction restraining the respondents from taking any action on the basis of the impugned Seizure Order and Panchnama
issue a suitable writ, order or direction commanding the respondents to release/return all the documents and goods seized vide the impugned Seizure Order and Panchnama
issue a suitable writ order or direction directing the respondents, to return back the sale and purchase invoices which are yet to be incorporated in the stock register, seized during the course of search, to find out actual figure of purchases and sales

Counter Affidavit Filed by Respondent

The respondents filed counter affidavit denying the allegations made in the writ petition. Following points are stated in the counter affidavit

Petitioner provided steel billets to its sister concern for manufacturing of S.S. Patra and S.S. Wire Rod and after getting job work some goods are sold from premises of the factory and some goods are received back by the petitioner.
At the time of scrutiny of the monthly returns for June 2017, it was found that the petitioner has sold raw materials to Juhi Alloys Limited worth Rs. 55.10 crores from 267 bills and from 166 bills a sale of Rs. 29.63 crores was done to another sister concern namely Rimjhim Stainless Steel Limited.
There is another sister concern of the petitioner namely Vandana Steel Private Limited and that Juhi Alloys Limited and M/s. Rimjhim Stainless Steel Limited has sold all the raw-materials to M/s. Vandana Steel Private Limited in the month of June itself.
M/s Vandana Steel Private Limited in the month of June 2007, has shown the sale goods valued at Rs. 6.49 crores and in the month of July, 2017 a sale of Rs. 41.40 crores to the petitioner.
Three sisters concern and the petitioner are working in the same premises and they have used invoices of different series which is against the provision of section 22 of the U.P. Value Added Tax Act 2008 read with Rule 44(10) of the U.P. Value Added Tax Rules as well as under the provisions of UPGST Act.
The Department found that the said transactions were doubtful and, thus, the premises of the petitioner were inspected together.
Information was received by the Department that M/s. Rimjhim Stainless Steel Limited is involved in tax evasion and hence a proper watch was being kept on the transaction of M/s. Rimjhim Stainless Steel Limited and a confidential report was obtained wherein it was found that the petitioner is involved in tax evasion.
Mobile Squad Unit-7, Commercial Tax, Kanpur checked the truck of the petitioner carrying the goods on 11.3.2018 at about 1.00 P.M. wherein the E-way bill was found to be suspicious making it clear that the same goods are being sold and transported again. As regards irregularities during search, it is stated that the inspection was carried out continuously for 30 hours and the stock of the goods upto 14.3.2018 and goods as disclosed in the stock register were inspected.
It is further stated that the search was conducted in accordance with the provisions of Section 67 of the U.P. GST Act and were conducted under the supervision of respondent.
The respondents denied that the signature of Sri Sunil Gupta were obtained on blank papers and further states that no report in this regard has been given to the police authorities.
As regards the overwriting it has been stated that the entries were recorded by mistake and were thus corrected and the corrected sheet was also signed by nominated persons of the petitioner.
As regards the witnesses it is stated that the factory premises of the petitioner is situated at industrial area and in the near about vicinity, there is no residential area and the witnesses were present and were ready to sign as witness and their addresses were mentioned by the said witnesses and it was not possible to verify their addresses at that point of time. To establish the genuineness of those persons a copy of I.D. proof was received.
It has been further denied that the weight was not done properly and, in fact, the said weight sheets were duly signed by authorized representative of the petitioner-company, who has never questioned the same till today.

Dual Invoices by Petitioner

The petitioner was using two series of tax invoices, one series of tax being in relation to the goods manufactured on which excise duty was payable and the other series of tax invoices was in relation to trading activity carried out by the petitioner.
It has also been stated that two series of tax invoices were used during the period prior of enforcement of U.P. GST Act and in the returns filed these facts were well disclosed and were never objected to by the respondents.
This practice of maintaining two sets of invoices, one for manufacture goods and one for drawing goods was the accepted norm prior to U.P. GST Act coming into force.
It was stated that there is no material in the counter affidavit to justify the allegations that the department has ‘reasons to believe’ that the petitioner was indulging in large scale taxes evasion. Thus, the ‘reasons to believe’ even if any were based upon no material.
The petitioner has also stated that the entire exercise of physical verification of the goods is to find out the correct goods quantum of goods, finished, semi-finished and raw-material laying in the premises and to tally the same with the entries maintained in the books of accounts and that no actual weight of actual goods was done. The entire exercise is wholly arbitrary and illegal.

Order of the Court

The petitioner submitted that the power of inspection, search and seizure on the proper officer has been conferred when he has ‘reasons to believe’ that a taxable person has suppressed any transaction relating to supply of goods and service or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under the UPGST Act, 2017.
Hence, the entire search and seizure was done in complete disregard of the provisions of search under the UPGST Act, 2017.
The Court observed that, it is essential that the officer authorized to carry out the search should have ‘reasons to believe ‘which should be based on reasonable material and should not be arbitrary.
However, the reasons may or may not be communicated but the same should exist on record.
The officers concerned had recorded their ‘reason to believe’ which were based upon information received by the Department fortified by interception of the goods of the petitioner wherein the e-way bill was found to be suspicious which led to the search.
The High Court held that ‘reason to believe’ did not appear to be arbitrary and it could not go into the question of validity of the reasons

Therefore, the writ was to be dismissed.

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