Allahabad HC reduces penalty from Rs. 19 crore to Rs. 10000 as it quashes confiscation order
Books of accounts maintenance and retaining of supporting / relevant records are highly essential for proper control of the business operations. This will facilitate the correct receipt and payment of cash and other transactions encoded by the company. Every registered person under GST is required to keep and maintain all specified Accounts and records at his principal place of business. Section 35 of the CGST Act, 2017 has cast the responsibility on the owner or operator of warehouse or godown or any other place used for storage of goods and on every transporter to maintain specified records.
According to Section 35(1), every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of:
- production or manufacture of goods
- inward and outward supply of goods or services or both
- stock of goods
- input tax credit availed
- output tax payable and paid; and
- such other particulars as may be prescribed:
However, where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business. The registered person may keep and maintain such accounts and other particulars in electronic form in such manner as may be prescribed.
According to Section 35(6), subject to the provisions of section 17(5)(h), where the registered person fails to account for the goods or services or both in accordance with the provisions of sub-section (1), the proper officer shall determine the amount of tax payable on the goods, services or both that are not accounted for, as if such goods or services or both had been supplied by such person and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of such tax.
What will be the consequences for not maintaining proper books of accounts under GST?
According to Section 122(1), where a taxable person who:
- fails to keep, maintain or retain books of account and other documents in accordance with the provisions of this Act or the rules made thereunder
- fails to furnish information or documents called for by an officer in accordance with the provisions of this Act or the rules made thereunder or furnishes false information or documents during any proceedings under this Act;
shall be liable to pay a penalty of Rs 10,000 or an amount equivalent to the tax evaded or the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or tax not collected under section 52 or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.
According to Section 130(1) of the CGST Act, if any person-
- supplies or receives any goods in contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or
- does not account for any goods on which he is liable to pay tax under this Act; or
- supplies any goods liable to tax under this Act without having applied for registration; or
- contravenes any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or
- uses any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made thereunder unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance,
then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to penalty under section 122.
Let us refer to the case of M/S Metenere Ltd. v. Union of India and another where the primary dispute pertained to non-maintenance of records.
Facts of the Case:
- M/S Metenere Ltd. (Petitioner) was engaged in manufacture of lead ingots falling under GST Tariff Chapter Heading No. 7804.
- The Anti Evasion Department of GST, visited the factory premises of the Petitioner for verification of the records.
- Later another team from the same department visited the factory premises and passed an order of detention detaining 12,979 metric tonnes of entire stock of the Petitioner valued at Rs 1,07,99,43,351, which included the stock manufactured prior to enforcement of GST.
- The Petitioner produced all the records however, the records of GST were not available in the factory premises as the same were kept at head office of the Petitioner, which were subsequently produced.
- Despite production of the records, as sought for, an order was passed seizing the goods which were detained.
- The Petitioner was served with a Show Cause Notice (SCN), wherein the Petitioner was called upon to show cause as to why the goods which were seized, should not be confiscated and penalty should not be imposed.
- The Petitioner filed its reply to the SCN denying the charges and that any verification of the stock was conducted, also denied its liability and requested for dropping of the SCN and proposed penalty.
- Further, the Petitioner also preferred a Writ Petition before the High Court, Allahabad, which was disposed of directing the Additional Commissioner, GST & Central Excise Commissionerate (Respondent) to decide the issue within 3 weeks in accordance with law.
- In pursuance to the direction issued by the High Court, the Respondent heard the matter and passed an order confiscating the entire seized goods, however, the Petitioner was given an option of redeeming the confiscated goods on payment of redemption fine amounting to Rs 12 crores in terms of the provisions of Section 130(2) of the CGST Act along with penalty of Rs 19,43,89,804 under Section 122(1)(xvi) & (xvii) of the CGST Act, and penalty amounting to Rs 50,000 was imposed on the Managing Director under Section 122(3) of the CGST Act.
- Aggrieved by the order, Writ Petition was preferred by the Petitioner before the High Court.
Issues presented before the High Court:
- Whether the Respondents were justified in recording that the Petitioner has failed to maintain the records as required to be maintained under Section 35(1) of the CGST Act read with Rules 56 and 57 of the CGST Rules?
- Whether the order of confiscation under Section 130 of the CGST Act were justified in facts of the case?
- Whether in the facts and circumstances of the case, the imposition of the penalty was in accordance with Section 122 of the CGST Act?
Observations of the High Court:
- The proper officer was empowered to determine the liability of payment of tax in terms of the powers conferred under Section 35(6) of the CGST Act after resorting to the procedure as established under Section 74 of the CGST Act.
- A perusal of Section 73 and Section 74 of the CGST Act, made it clear that a SCN was bound to be served prior to determination of the tax leviable on the ‘deemed supply’.
- However, in the present case no such notice was available on record and it was common ground that apart from the said proceedings, no other proceedings were initiated and concluded under Section 73 or Section 74 of the CGST Act.
- Even if it was admitted, for the sake of arguments, that the documents were not maintained at the registered office or the other place of business, there was no finding to the effect that any supply was made with an intent “to evade payment of tax” as is required under Section 130(1)(i) of the CGST Act.
- There was nothing on record to establish that the Petitioner did not account for any goods on which he was liable to pay tax under the CGST Act, as required to attract Section 130(1)(ii) of the CGST Act.
- It was not established that there was any contravention of any provision or any Rules with an “intent to evade payment of tax”.
- None of the ingredients which were required for confiscation existed in the present case and thus, the confiscation itself was wholly arbitrary and illegal.
- A perusal of Section 67 of the CGST Act made it clear that proper officer should have had “reasons to believe” that there was any suppression of any transaction relating to supply of goods by the taxable person or had claimed input tax credit in respect of entitlement or had indulged in contravention of the provisions of the CGST Act or the Rules made there under to evade tax under the CGST Act, or such person was keeping his accounts or goods in such a manner as is likely to cause evasion of tax payable under the CGST Act.
- However, in the present case, the Petitioner had not challenged the seizure order therefore, the Court did not consider the same in the absence of any pleadings or the arguments advanced or document produced in respect of the same.
- The amount of penalty imposable was provided under Section 122(1), which provided that the quantum of penalty imposable was Rs 10,000 or an amount equivalent to tax evaded or tax not deducted under Section 51 of the CGST Act (TDS) or short deducted or deducted but not paid to the Government or tax not calculated under Section 52 of the CGST Act (TCS) or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.
Therefore, the HC held that, even if the allegations of the department were accepted to be true, the offence committed by the Petitioner would fall under Section 122(1), for following reasons:
- The only allegations were that the Petitioner had not maintained the Book of Accounts as were required under the CGST Act and the Rules
- The penalty was imposed holding the Petitioner’s conduct in violation of Section 122(1)(xvi) and (xvii) of CGST Act where the penalty could be Rs 10,000 only as there is no question of tax evasion
- Also, no exercise for quantification of the tax evaded was done in pursuance to the powers conferred under Section 35(6) read with Section 73 or 74 of the CGST Act, as such.
Hence, HC held that in consideration of the violations alleged and established against the Petitioner, the maximum penalty that could be imposed was Rs 10,000.