PROVISIONAL ATTACHMENT – POWERS OF OFFICERS UNDER GST

[Mr. M. GOVINDARAJAN]

Inspection, search and seizure

Section 67 of the Central Good and Services Tax Act, 2017 (‘Act’ for short) gives powers to the proper officer to cause inspection of the premises of a registered person.  The said section provides that where the proper officer, not below the rank of Joint Commissioner has reasons to believe that-

• a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand or has claimed input tax credit in excess of his entitlement or has indulged in contravention of any of the provisions of the Act or the rules made there under to evade the tax under the Act; or
• 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 manner as is likely to cause evasion of tax payable under the Act

he may authorize in writing any other officer of State 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.

This section further provides that where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out 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 the relevant to any proceedings under the Act, are secreted in any place, he may authorize in writing any officer of State tax to search and seize or may himself search and seize such documents or books or things.

Provisional attachment

Section 83 of the Act provides that where during the pendency of any proceedings under-

• section 62 – Assessment of non filers of returns; or
• section 63 – assessment of unregistered persons; or
• section 64 – summary assessment in certain special cases; or
• section 67 – inspection, search and seizure; or
• section 73 –  determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful misstatement or suppression of facts; or
• section 74 – determination of tax not paid or short paid or erroneously refunded or input tax credit wrong availed or utilized by reason of fraud or any willful misstatement or suppression of facts.

the Commissioner is of the opinion that for the purpose of protecting the interests 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 one year from the date of the order made.

The subjective satisfaction that for the purpose of protecting the interest of the Government revenue, it is necessary that the goods should be provisionally attached should be of that the Commissioner, who has been given power to pass an order in writing for the purpose of attaching provisionally any property including the bank account belonging to the taxable person. 

Case law

In ‘Valerius Industries v. Union of India’ – 2019 (9) TMI 618 - GUJARAT HIGH COURT  the petitioner is engaged in the business of purchasing and selling the material of copper whereby the scrap material of copper is purchased and the being is melted and converted into the copper pipes before selling it into the market.  The petitioner made payments for the purchases to the tune of ₹ 2.60 crores by RTGS/ cheque mode to the companies into their bank account.  The tax under the GST laws was credited by the sellers into their GST/GSTR2A and the same is reflected in it but the said companies did not pay the tax.

On 23.11.2018 a raid has been conducted in the premises of the petitioner.  The Revenue was of the view that there was a huge conspiracy and creation of bogus bills by the sellers and therefore the Revenue was to investigate the entire case.  The State Tax Officer issued the provisional attachment of the bank accounts of the petitioner and the properties.  Again on 27.11.2018 the raid was conducted in the premises of the petitioner and seized the sales and purchase register and files and bank/RTGS files.  On the same day the petitioner was issued with summons under section 70 of the CGST Act whereby the legal representative of the petitioner was directed to remain present on 18.12.2018.  The legal representative was not allowed to explain anything to the officers.  The Revenue informed that the petitioner would receive show cause notice to give the petitioner an opportunity of bearing heard.

On 13.02.2019 the legal representative received an email from the Department in which it was informed that the input tax credit to the tune of ₹ 30,55,680/- has been blocked.   On 17.06.2019 the Commercial Tax Officer issued an order confirming the demand of ₹ 1.60 crores including tax, interest and penalty.  The petitioner challenged the said order, the blockage of the input tax credit and attachment of bank accounts before the High Court.

The petitioner submitted the following before the High Court-

• The order of provisional attachment of property and under section 83 is without jurisdiction and not tenable in law.
• The power to order provisional attachment with a view to protect the interest of revenue under section 83 has been conferred upon the Commissioner.
• The action on the part of the Department in blocking the credit balance of ₹ 30,55,680/- by a computer entry could also be absolutely illegal and not tenable in law.
• The order passed by the Department on 17.06.2019 is also illegal, arbitrary, unjust and contrary to the provisions of section 74 of the Act.
• The impugned order dated 17.06.2019 has been passed without affording an opportunity of hearing to the petitioner, which is violative of the principles of natural justice.

The Revenue submitted the following before the High Court-

• No error, not to speak of any error of law could be said to have been committed by the Departmental Officers in passing the impugned orders.
• Section 83 of the Act undoubtedly provides that during the pendency of any proceedings under section 62, 63, 64, 67 and 73 or section 74, the Commissioner has the power to pass an order of provisional attachment if he is of the opinion that it is necessary to do so for the purpose of protecting the interest of the government revenue.
• The Commissioner has delegated his powers under Section 83 of the Act to the Deputy Commissioner, Assistant Commissioner and Sales Tax Officer.
• In view of the above said order the State Tax Office is empowered to pass the impugned order of provisional attachment of property under section 83 of the Act.
• It cannot be argued that the impugned order of provisional assessment passed by the State Tax Officer is without jurisdiction.
• The State Tax Officer is also empowered to order provisional attachment of the bank accounts.
• During the inspection it has been found that the petitioner did not maintain any books of account for the details of raw material or service used in manufacture and quantitative details of the goods etc.,
• The petitioner has not received any physical goods as per the invoices and the petitioner had availed the input tax credit fraudulently.
• The transactions shown in the books of account and returns filed were fictitious and only billing activities/papers trails without entering into physical transactions of goods has been undertaken.
• On enquiry the petitioner could not able to answer for the fictitious transactions affirmatively.
• There is subjective satisfaction on behalf of the respondent authorities to believe that the said transaction was fictitious transactions and with an intention to evade payment of tax as well as with an intention to fraudulently avail input tax credit.
• One dealer deposed that the petitioner is one of the fictitious entities/dealer.
• The order passed under DRC-07 has attained finality and the petitioner has alternative statutory remedy and the petitioner may be relegated to prefer appeal under section 107 of the Act.

The High Court heard the submissions made by both the parties.   The only question that falls for the consideration of the High Court is whether the State Tax Officer -1, Unit 44, Vadodara could have exercised powers under section 83 of the Act for the purpose of provisional attachment of the property owned by the petitioner.

Delegation of powers

The High Court perused the order passed by the Commissioner of State Tax delegating his power of provisional attachment under section 83 of the Act to Deputy Commissioner, Assistant Commissioner and State Commissioner vide No. GSL/S.5(1)/S.83/B.14, dated 15.01.2018.  The High Court questioned whether the Commissioner is having power to the officers noted in the said order under section 83. 

The Revenue relied on section 5(3) of the Act which provides that the Commissioner may, subject to such conditions and limitations as may be specified in this behalf by him, delegate his powers to any other officer who is subordinate to him.  The Revenue contended that the Commissioner is empowered to delegate his power to any other officer who is sub ordinate to him.  The Revenue also contended that the Commissioner is having power to delegate his power to his subordinate officer under section 167 and section 168 of the Gujarat Goods and Services Tax Act.

The High Court analyzed the definition for the term ‘Commissioner’ and the expression ‘Commissioner in the Board’.  Section 2(24) of the Act defines the term ‘Commissioner’ as the Commissioner of State tax appointed under section 3 and includes Chief Commissioner or Principal Commissioner of State tax appointed under section 3.  Section 2(25) of the Act defines the expression ‘Commissioner in the Board’ as the Commissioner referred to in section 168.  Section 168(2) of the Act clarified that the Commissioner specified in section 5(3) shall mean a Commissioner or Joint Secretary posted in the Board and such Commissioner or Joint Secretary shall exercise the powers specified in the said section with the approval of the Board. 

As far as the CGST Act is concerned, the power of delegation under section 5(3) is with the Commissioner in the Board and not the Commissioner of Central tax.  As far as section 5(3) of the State GST is concerned, the Commissioner would be the Commissioner of State tax.  If the provisions of the Act would have been applicable to the facts of the present case, the High Court held that there would have been no difficulty at all in quashing the order passed by the Commissioner of the State tax delegating his power of section 83 to his subordinate officers on the ground that the same is w ithout jurisdiction.

Provisional attachment order

Next the High Court took into consideration on the order of provisional attachment passed by the Revenue.  The Revenue contended that if, ultimately, the entire exercise of inspection, search and seizure is undertaken by an authorized person, then such authorized person can always be delegated with the power to pass an order of provisional attachment under section 83 if the authorized officer who is of the opinion that it is necessary so to do for the purpose of protecting the interest of the government revenue.  The High Court did not accept this argument made by the Revenue.

The High Court analyzed the provisions of section 67 and 83.  The High Court observed that even for the purpose of section 67, the satisfaction has to be of the proper officer, not below the rank of Joint Commissioner.  If the proper office not below the rank of Joint Commissioner has reasons to believe that a taxable person has indulged in contravention of any of the provisions of the Act or the rules, then in such circumstances, he may authorize in writing any other officer to carry out the inspection, search and seizure.  Therefore when an authorized officer carries out an inspection, search and seizure, the same is merely on the basis of satisfaction recorded or arrive at by the proper officer not below the rank of the Joint Commissioner.   The authorized officer is merely executing or implementing the order that may be passed by the proper officer not below the rank of the Joint Commissioner.

The High Court, on analysis of section 83, observed that the said section makes it clear that it is the Commissioner’s opinion which is relevant.  The Legislature has thought fit to confer this power upon the Commissioner.  The High Court is of in the negative opinion for the question as to whether the power conferred upon the Commissioner could have been delegated to the three subordinate officers by virtue of the order dated 15.01.2018.  Despite there is no specific challenge by the petitioner, the High Court was of the opinion that the impugned order of provisional attachment could not be defended.

Section 83 talks about the opinion which is necessary to be formed for the purpose of protecting the interest of the government revenue.  Any opinion of the authority to be formed is not subject to objective test.  The language leaves no room for the relevance of an official examination as to the sufficiency of the ground on which the authority could form its opinion.  But at the same time there must be material based on which alone the authority could form its opinion that it has become necessary to order provisional attachment of the goods or the bank account to protect the interest of the government revenue.  The existence of relevant material is a pre condition to the formation of the opinion.  Therefore the opinion to be formed by the Commissioner or take case by the delegated authority cannot be imaginary ground, wishful thinking, howsoever laudable that may be.  Such a course is impermissible in law.

 The High Court further held that the statutory requirement of ‘reasonable belief’ is to safeguard the citizen from vexatious proceedings.  ‘Belief’ is a mental operation of accepting a fact as true, so without any fact, no belief can be formed.  It is not required that the Authority is to state reasons for its belief.   But if it is challenged that he had no reasons to believe, in that case, he must disclose the materials upon which belief was formed.

In the absence of any cogent or credible material, if the subject satisfaction is arrived at by the authority concerned for the purpose of passing an order of provisional attachment, then such action amounts to malice in law. i.e., doing of a wrongful act intentionally but without just cause or excuse or for want of reasonable or probably cause.  The High Court held that any use of discretionary power exercised for an unauthorized purpose amounts to malice in law.  It is immaterial whether the authority acted in good faith or not.  Just because a search has been undertaken resulting in seizure of goods by itself may not be sufficient to arrive at the subjective satisfaction that it is necessary to pass an order of provisional attachment to protect the government revenue.

The High Court held that the power conferred upon the authority under Section 83 of the Act for provisional attachment could be termed as a very drastic and far-reaching power.  Such power should be used sparingly and only on substantive weight grounds and reasons.  This power should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.

The High Court further held that the attachment of bank account and trading assets should be resorted to only as a last resort or measure.  The provisional attachment under section 83 of the Act should not be equated with the attachment in the course of the necessary proceedings.

Assessment order

The next point taken into consideration by the High Court is on the assessment order passed by the Revenue vide order dated 17.06.2019.  The High Court analyzed the provisions of section 74 of the Act.  Section 74 provides for determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of fact. 

The High Court observed that in the present case without issue of show cause notice the liability was determined under section 74 of the Act.  Section 74 makes it clear that the defaulter should be called upon to show cause as to why he should not be paid the amount specified in the notice along with the interest payable thereon.  There could not have been any assessment under section 74 of the Act without giving any opportunity of hearing to the petitioner.  Therefore the order is not tenable in law and deserves to be quashed and set aside.

Blocking of input tax credit

The High Court expressed its anguish on what basis the input tax credit had been blocked by way of computer entry.  At the most the same could have been ordered to be provisionally attached but how the same have been blocked.   The High Court held that such action is also not sustainable in law.

 Order

The High Court held that the Authorities under the Act have not acted in accordance with law.  The High Court set aside-

• the order of provisional attachment of the stock of goods amounting to ₹ 1.60 crores dated 27.11.2018;
• the provisional attachment of the bank account at the Bank of Baroda, Vadodara, dated 20.11.2018;
• the blockage of the input tax credit dated 13.02.2019; and
• the assessment order dated 17.06.2019.