2025 (5) TMI 1894 - HC - GST

Initiation of proceedings u/s 130 of the GST Act against the petitioner for excess stock found during a survey or whether proceedings u/s 73/74 of the GST Act were the proper course - HELD THAT - It is not in dispute that survey was conducted at the business premises of the petitioner on 4.5.2022. It is also not in dispute that excess stock was found which triggered the initiation of the present proceedings against the petitioner. On various occasions this Court has held that if excess stock is found then proceedings under sections 73/74 of the GST Act should be pressed in service and not proceedings under section 130 of the GST Act read with rule 120 of the Rules framed under the Act. This Court in S/s Dinesh Kumar Pradeep Kumar 2024 (8) TMI 71 - ALLAHABAD HIGH COURT has held that this Court has specifically held that even if excess stock is found the proceedings under section 130 of the UPGST Act cannot be initiated. The law is clear on the subject that the proceedings under section 130 of the GST Act cannot be put to service if excess stock is found at the time of survey. The impugned orders dated 16.5.2024 and 26.9.2022 cannot be sustained in the eyes of law and same are hereby quashed - Petition allowed.

Summary

The core legal questions considered by the Court are:

1. Whether proceedings under Section 130 of the GST Act could be initiated against the petitioner for excess stock found during a survey, or whether proceedings under Sections 73/74 of the GST Act were the proper course.

2. Whether the penalty and tax demand raised under Section 130 of the GST Act, read with Section 122, were sustainable in the facts of the case.

3. The applicability of precedents, particularly the decision in S/s Dinesh Kumar Pradeep Kumar and related judgments, on the procedural and substantive correctness of initiating proceedings under Section 130 for excess stock found.

4. Whether the valuation and quantification of tax and penalty based on survey findings without following the prescribed procedure under Sections 73/74 were legally valid.

Issue-wise Detailed Analysis:

Issue 1: Proper legal provision for proceedings when excess stock is found during survey

The relevant legal framework includes Sections 73, 74, 130, and 122 of the CGST/UPGST Act, along with Rules framed thereunder. Section 130 deals with confiscation and penalty for certain offences, including evasion of tax, while Sections 73 and 74 provide the procedure for determination of tax not paid or short paid, or input tax credit wrongly availed, including due process of notice and opportunity.

Precedent: The Court relied heavily on the decision in S/s Dinesh Kumar Pradeep Kumar, which was affirmed by the Apex Court, holding that where excess stock is found, the proper procedure is to initiate proceedings under Sections 73/74, not Section 130. The Court cited detailed reasoning from Metenere Limited, which clarified the statutory scheme: Section 35(6) empowers the officer to determine tax payable on unaccounted goods, but such determination must follow the procedure in Sections 73 or 74.

The Court emphasized that Section 130 is not intended for assessment or determination of tax liability arising from excess stock but is meant for penal consequences in cases of fraud or wilful misstatement. The time of supply and liability to pay tax arise as per Section 12 and Section 9, and the tax liability must be quantified through the due process under Sections 73/74.

Application of law to facts: The petitioner's excess stock found during the survey triggered the proceedings under Section 130, which the Court found improper. The Court held that the initiation of proceedings under Section 130 was contrary to the statutory scheme and judicial precedent.

The competing argument by the State that the impugned orders were valid under Section 130 was rejected, as the Court found no justification for bypassing Sections 73/74.

Conclusion: Proceedings under Section 130 cannot be initiated solely on the basis of excess stock found in a survey; Sections 73/74 are the exclusive remedy for tax determination in such cases.

Issue 2: Validity of penalty and tax demand raised under Section 130

The Court examined whether penalty and tax demand could be levied under Section 130 for the facts at hand. The petitioner contended that penalty and tax demand under Section 130 were unsustainable because the proper procedure under Sections 73/74 was not followed.

Relevant legal framework: Section 130(1) clauses (ii) and (iv) specify conditions under which penalty and confiscation can be imposed, including cases where a person liable to pay tax does not account for goods or contravenes provisions with intent to evade tax.

Precedent: The Court referred to the judgment in M/s Maa Mahamaya Alloys Pvt. Ltd., which held that penalty and tax demand can only be raised under Sections 73/74 and not under Section 130 where excess stock is found. The Court noted that even assuming excess stock was present, liability arises at the time of supply, and Section 130 penalties require proof of intent to evade tax.

Key findings: The Court found no allegation or evidence of intent to evade tax or contravention of the Act or Rules with such intent. The show cause notice and orders lacked such allegations, making invocation of Section 130(1)(iv) unjustified.

Application of law: The Court held that penalty under Section 130 is not applicable merely because excess stock was found. The penalty under Section 130 can only be levied when the department establishes contravention coupled with intent to evade tax, which was absent here.

Competing arguments from the State that penalty and tax demand under Section 130 were justified were dismissed on the basis that the procedure and substantive requirements under the Act were not met.

Conclusion: The penalty and tax demand raised under Section 130 were unsustainable and could not be sustained in law.

Issue 3: Validity of valuation and assessment based on survey and estimation methods

The Court briefly touched upon whether valuation of goods and tax demand could be based on eye estimation, production capacity, or electricity consumption, as argued in the precedents.

Precedent: The Maa Mahamaya Alloys judgment questioned the validity of valuation solely on such bases without following the prescribed procedure under Sections 73/74.

The Court implied that such valuation methods without adherence to statutory procedure and opportunity to the assessee are not valid.

Conclusion: Valuation and tax demand must be made following the statutory procedure, not solely on survey-based estimation.

Issue 4: Compliance with procedural requirements such as service of notice

The Court noted that the service of notice must comply with Section 169 of the GST Act, which was also considered in Maa Mahamaya Alloys. The petitioner challenged the validity of the notice issued under Section 130.

The Court found that the procedural requirements for notice and opportunity were not adequately fulfilled in the impugned orders, further undermining their validity.

Conclusion: The impugned orders failed to comply with procedural safeguards, rendering them unsustainable.

Significant Holdings:

"If excess stock is found, then proceedings under sections 73/74 of the GST Act should be pressed in service and not proceedings under section 130 of the GST Act, read with rule 120 of the Rules framed under the Act."

"A perusal of the said section 35(6) makes it clear that proper officer is empowered to determine the taxes payable and while determining the said tax payable he is bound to determine the same in accordance with the provisions of Sections 73 & 74 of the Act."

"The entire exercise resorted to under Section 130 of the GST Act for assessment/ determination of the tax and the penalty is neither stipulated under the Act, nor can be done in the manner in which it has been done."

"On a plain reading, the scope of Clause (ii) of sub-section (1) of Section 130 is that any assessee who is liable to pay tax and does not account for such goods, after the time of supply is occasioned, would be liable to penalty under Clause (ii)."

"An invocation of Clause (iv) of sub-section (1) of Section 130 would require the department to establish contravention of the Act and Rules coupled with the intent to evade payment of tax. There is no such allegation in the present case."

Final determination: The impugned orders dated 16.5.2024 and 26.9.2022, passed under Section 130 of the GST Act for tax demand and penalty on account of excess stock found during survey, are quashed as unsustainable in law. The proper course is to initiate proceedings under Sections 73/74, following due process. Any amount deposited by the petitioner shall be refunded in accordance with law.