ARREST BEFORE ASSESSMENT?

[Mr. M. GOVINDARAJAN]

Section 39 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides that a registered person is to file returns in the prescribed form.  These returns constitute a self assessment by the assessee under Section 59 of the Act in regard to its turnover.  The returns may either be accepted by the Assessing Authority under Section 60 or if the officer is of the view that further verification and scrutiny is required, notice may be issued under section 61(1) of the Act calling upon the assessee to appear and make its submissions in support of the returns.  If the Assessing Authority accepts the explanation given by the assessee, the assessee shall be informed accordingly in terms of section 61(2) and no further action shall be taken in this regard.  If the Assessing Authority does not satisfy on the explanations offered by the assessee, the Assessing Authority is empowered to pass an order of assessment to the best of his judgment, after scrutiny and verification of the available materials on record under section 61(3) of the Act.

Section 73 of the Act provides for the recovery of tax by the Revenue.  The said section provides that an assessment in circumstances where a determination of tax is either not paid, short paid, erroneously refunded or input tax credit has been wrongly availed or utilized, is to be completed within three years.  In cases where the Assessing Authority believes that there has been under assessment by virtue of fraud, willful misstatement or suppression of facts,  the extended period of limitation can be invoked under section 74(10) of the Act.

Section 67 of the Act gives powers for the Authorities to inspect the premises of the assessee, search and seize the documents that are required to be used for investigation and also take statements from the persons concerned. 

Section 132(1) of the Act provides the offences that are cognizable and non bailable and also non cognizable and bailable offences.  Section 69(1) of the Act provides the procedure for arrest of any person who has committed a cognizable offence under section 132(1).  Section 69(3) provides the procedure to handle the arrested person in respect of non cognizable and bailable offences.

The issue to be discussed in this article whether a registered person can be arrested before the completion of the assessment with reference to decided case law in ‘Jayachandran Alloys (P) Limited v. Superintendent of Central Excise, Salem’ – 2019 (5) TMI 895 - MADRAS HIGH COURT.

In the above said case an investigation was initiated by the Department in the premises of the petitioner.  The officials seized voluminous documents and records.  Statements have been recorded from various persons including the Managing Director of the petitioner company on various dates in the course of the proceedings.  In the meanwhile the petitioners sought copies of the statements recorded from it as well as other materials seized to grant opportunity to the petitioners and to pass an order assessment in accordance with the law.  There was no response from the department at this request. 

The petitioner filed the present writ petition before the High Court seeking the grant of an interim injunction restraining the respondents from proceeding coercively against the petitioner and their staff including arresting them by invoking the provisions of section 69 of the Act, pending disposal of the writ petition.

The High Court framed the following issues to be considered in disposing of the present petition-

• Whether the petitioner is entitled to a mandamus as prayed for in regard to supply of the documents and statement sought for by it in the light of the provisions of the Act?
• Whether the interim protection sought for to prevent the respondents from invoking the powers under section 69 of the Act read with section 132 thereof I respect of the petitioner is liable to be granted?
• Whether the petitioner’s request for a direction to the respondents to complete adjudication and make an assessment after following the due process of law is liable to be accepted?

The petitioner submitted the following before the High Court-

• The proceedings for inspection in their case have resulted in untold harassment.
• The officials of the Department have intimidated the petitioner, its Managing Director and staff.
• The Statements recorded as well as the materials seized have not been furnished to them despite repeated requests, thus constraining the petitioner to approach the High Court for the same.
• There has been no proper compliance with the requirements of the statute.
• The Managing Director was threatened that he would be arrested I the light of provisions of section 69(1) of the Act and he was coerced into signing the statements admitting various liabilities and provided for a schedule of payments to the Department.
• The power of arrest and prosecution would arise only if the Department is in possession of evidence to prove that the Assessee has indulged in fraud or had intended to defraud the revenue. 
• The circulars address specifically habitual offenders but in this case the petitioner is a sterling assessee that has made substantial payments of taxes over the years.

The Department submitted the following before the High Court-

• The petitioner has availed input tax credit substantially in excess of what it is entitled to, of an extent of ₹ 18.99 crores.
• Incriminating records and evidences have been found in the course of investigation based on which additions were made because they were suppressed by the petitioner.
• The eligibility and conditions for availing input tax credit have not been complied with in this case since movement and delivery and remittance of tax has not been established.
• The Department is categorical that the petitioner is a defaulter.
• Various lapses on the part of the petitioner have been tabulated and the petitioner has signed the same conceding to the lapses and agreed to pay the tax arising there from amounting to a sum of ₹ 18.99 crores. 
• The petitioner did not co-operate with the proceedings of the Department.
• A person from whose custody the documents have been seized shall be entitled to receive  copies thereof or take extracts only in cases where, in the opinion of the proper officer such supply of copies will not prejudicially affect the ongoing investigation.

The High Court heard the arguments of both sides.  It observed that the Act provides for an assessment to be made after notice is issued to the assessee.  The petitioner has been filing returns regularly.  The Department apprehended that the petitioner was engaging in bill trading activities and launched an investigation in the premises to verify the business activities of the petitioner and its compliance with the provisions of the Act.   Various documents were seized.  Statements were recorded from the officials including the Managing Director.

The High Court rejected the contentions of the Department that the petitioner did not co-operate in the investigation.  On an appreciation of the details furnished in the counter, the allegation regarding lack of co-operation and response on the part of the petitioners appears contrary to the fact.

The High Court also rejected the contention of the Department that the copies of documents could be supplied only in the opinion of the proper officer that such supply of copies will not prejudicially affect the ongoing investigation.  However there is no averment in the counter filed by the Department.  In the absence of such averment the Court is to only conclude that there is no apprehension in the mind of the Department and therefore the prayer of the petitioner for the copies of document is liable to be accepted.  The High Court directed the Revenue to furnish the copies of the documents as required by the petitioner within two weeks of the receipt of the order.

Section 132 of the Act imposes a punishment upon the assessee ‘commits’ an offence.  The High Court held that there is no dispute whatsoever that the offences set out under section 132(1)(a) to (d), that constitute matters of assessment and would form part of an order of assessment to be passed after the process of adjudication is complete.  The use of words ‘commits’ make it more than amply clear that the act of committal of an offence is to be fixed before punishment is imposed. 

The High Court then looked into the allegations that the petitioner availed of excess input tax credit in so far as there has been no movement of the goods against the supplier and the petitioner.  The manner of recovery of credit in case of excess distribution of the same is set out in section 21 of the Act, which provides that where the input service distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients, the excess credit so distributed shall be recovered  from such recipients along with interest and the provisions of section 73 or section 74 shall, mutatis mutandis,  apply for determination of amount to be recovered.

Thus ‘determination’ of the excess credit by way of the procedure set out in section 73 or 74 may be is a pre-requisite for the recovery thereof.  Section 73 and 74 deal with assessments and as such it is clear and unambiguous that such recovery can only be initiated once the amount of excess credit has been quantified and determined in an assessment.  When recovery is made subject to ‘determination’ in an assessment the argument of the Department that the punishment for the offence alleged can be imposed even prior to such assessment, is clearly incorrect and amounts to putting the cart before the horse.  The High Court held that the that an assessee has ‘committed’ an offence that has to necessarily be post-determination of the demand due from the assessee, that itself has to necessarily follow the process of an assessment.

The Revenue contended that the petitioner was willing to pay ₹ 5 crores as first installment and the balance amount in second installment.    The Revenue prayed the court to direct the petitioner to remit a sum of ₹ 5 crores as a security for the demand as confirmed by the Managing Director.  The High Court did not accept this prayer.  The High Court held that the statement is no substitute for an assessment.  The value of the statement and the retraction thereof will be considered by the assessing authority while framing the order of assessment and nothing stating in this order shall be considered to be a fetter upon the powers of the assessing authority to do so.  However, in the absence of a statutory provision that enables such imposition of a condition even prior to determination of the violations by an assessee and quantification of the consequent demands this argument is rejected.

In ‘P.V. Ramana Reddy v. Union of India’ – 22019 (4) TMI 1320 - TELANGANA AND ANDHRA PRADESH HIGH COURT the High Court held that the contention of the petitioners that even a prosecution cannot be launched without an assessment and therefore, there is no question of any arrest.   The High Court held that this goes contrary to section 132 of the Act.  The list of offences included in section 132(1) of the Act has no co-relation to assessment.  The prosecution for the offences under section 132(1)(b) and (c) do not depend upon the completion of the assessment.   

The petitioners filed a special leave petition before the Supreme Court against the judgment of Telengana High Court.  The Supreme Court has dismissed a plea challenging Telangana High Court judgment that held that a person can be arrested by the competent authority in cases of Goods and Service Tax (GST) evasion. 

Since the order of Telangana High Court has not been stayed by the Supreme Court, it is the law of the land until the three-judge bench takes a contrary view.