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October 17, 2020
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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Grounds for inspection

Section 67(1) of the Central Goods and Services Tax Act, 2017 provides the power to the Authorities for inspection.  Section 67(1) 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 under this Act or has indulged in contravention of any of the provisions of this Act or the rules made there under to evade tax under this 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 a manner as is likely to cause evasion of tax payable under this Act,

he may authorize 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.

Search and seizure

Section 67(2) 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 or relevant to any proceedings under this Act, are secreted in any place, he may authorize 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.

Prohibitory order

The first proviso to section 67(2) provides that where it is not practicable to seize any such goods, the proper officer, or any officer authorized by him, may serve on the owner or the custodian of the goods an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer.  Such order is called as prohibitory order.

Such order is to be passed in due compliance of law.  The order should be a reasoned order.  It shall not be prolonged for a long period.  The proper officer is to take proper and adequate steps to bring the case to an end.  Otherwise the order would be liable to the purview of the Court and liable to be set aside.

In ‘Rising International Co. v. The Commissioner of CGST and CE, Madurai, Joint Commissioner, CGST and CE, Madurai, Superintendent (HPU), CGST and CE’ – 2020 (10) TMI 464 – Madras High Court, the petitioner is importing toys from China. It also purchases goods from Delhi-based dealers. The petitioner filed returns till the month of March, 2020 there is no arrears. On account of the lock down restrictions issued in the wake of Covid-19 pandemic, the business was shut down since April 2020. Following the partial lifting of restrictions, the petitioner reopened the business. On 21.08.2020, the Superintendent (HPU), CGST and Central Excise, Madurai inspected and conducted search of the petitioner's place of business. After completion of the search operation, mahazar was also drawn. It was followed by an order of seizure. All the goods set out in the mahazar together with a number of documents were seized. The inspecting official on scrutiny of the books, registers and goods found during the inspection, opined that he has reasons to believe that the goods are liable to confiscation. Hence, the order of prohibition was issued directing the dealer not to remove or part with or otherwise deal with the seized goods. These orders of seizure and prohibition were issued on 21.08.2020 by the third respondent. 

Against the said prohibitory order the petitioner approached the High Court to challenge the prohibition order.  The petitioner submitted the following before the High Court-

  • There was absolutely no reason to believe that the petitioner had indulged in suppression or otherwise contravened any of the provisions of the Act.
  • The respondents had conducted the search without any reasonable basis.
  • It was a fishing enquiry.
  • Mere non-maintenance of the stock register in the place of business cannot be a ground to order seizure of the goods. 
  • The petitioner is ready to fully account the stock position.
  • The impugned action will have calamitous consequences on the petitioner's business which had just restarted after remaining shut down for months due to Covid-19 outbreak.

The respondents submitted the following-

  • The respondents received intelligence inputs that the petitioner has been evading goods and service tax by mis-declaring the China's origin plastic toys as non electric toys and paying 12% IGST on the imported goods in place of 18% IGST leviable on such imported chinese electric toys. 
  • However, the intelligence also indicated that the goods are sold in Indian market by charging 12% IGST in place of 18% IGST thereby evading GST and causing revenue loss to the exchequer. 
  • The search operation was conducted with proper authorization granted under Section 67(2) of the Central Goods and Services Tax Act, 2017.
  • The search conducted on the business premises of the petitioner on 21.08.2020 showed that huge quantity of the Chinese origin toys stocked in the petitioner's premises were found unaccounted.
  • The petitioner did not produce all the documents and soft copies of sales invoices for the previous assessment years. 
  • The petitioner was not able to produce true and correct account of stock of goods.
  •  The petitioner was not maintaining any record relating to the current stock position of the goods. 
  • The actual stock position was physically taken and arrived at by the inspecting officials during the search proceedings on 21.08.2020.
  • As per Section 35 (1) of the Act r/w. Rule 56 of the Rules, the registered dealer is obliged to maintain true and correct account of stock of goods at his principal place of business.   If he fails to account, consequences will follow.
  • The adjudication proceedings will now commence and therefore, the validity of the seizure cannot be challenged.
  • The High Court cannot sit in appeal over the reasonable belief of the proper officer for ordering search.
  • The writ petition has been prematurely filed and prayed the  Court to dismiss the writ petition.

The High Court considered the submissions put forth by both the parties.  The High Court took care of the sufferings by the business people in the pandemic situation.  The High Court analyzed the provisions contained in section 67 of the CGST Act.  The High Court observed that Section 67(1) of the Act employs the expression “has reason to believe”.   The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the officer. It must be held in good faith. It cannot be merely pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the authority in initiating proceedings is open to challenge.  It is true that this Court cannot sit in appeal over the satisfaction of the proper officer. It is equally true as to whether the officer had materials to arrive at a reasonable belief or not before the search was conducted need not be tested under legal microscope.

The High Court observed that bare assertion has been made that the impugned proceedings were initiated based on the intelligence developed by CGST (HPU), Madurai that the petitioner is evading GST by misdeclaring the goods while importing. But not a scrap of material was produced before the court.  The recitals set out in the order of seizure and the order of prohibition indicate that the formation of the requisite belief is predicated on the scrutiny of the books of account, registers and documents found during the search. The High Court was of the opinion  that this is sufficient to invalidate the entire proceedings.  The stock register was not maintained at the petitioner's place of business and therefore the High Court did not want to quash the order of seizure.  However, the order of prohibition has to be necessarily interfered with. 

The search and seizure had taken place on 21.08.2020. Even after the lapse of 40 days no show cause notice has been issued by the respondents. The respondents have made a cool statement that no allegation has been made against the petitioner on the matter under investigation merely by issuing orders of seizure and prohibition and that the matter would be decided by proper officer under CGST Act only after completion of the investigation of the case.  Adjudication proceedings may go on for months. That is why, Section 67(6) provides for provisional release of the detained goods.

The High Court was of the view that the respondents ought to release the goods on provisional basis.  The respondents may take personal bond from the petitioner.  The petitioner offered to deposit ₹ 2 lakhs.  The High Court observed that unless the petitioner is permitted to deal with the goods in question, even if some levy is imposed on the petitioner in future, he will not be able to pay the same. Common sense dictates that the petitioner is allowed to do business.  The High Court directed the respondents to release the goods on taking personal bond from him and on payment of a sum of ₹ 2 lakhs. Even while the order of seizure is sustained, the order of prohibition is modified in the above terms. The respondents are at liberty to conduct adjudication proceedings against the petitioner if he is unable to account for the stock position. The observations made in this order will not have any bearing on the said proceedings.

The High Court partly allowed the petition.


By: Mr. M. GOVINDARAJAN - October 17, 2020



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