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July 15, 2021
All Articles by: Mr.M. GOVINDARAJAN       View Profile
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Power of inspection

Section 67(1) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) gives powers to the Joint Commissioner for inspection of premises of the registered person. He may authorize in writing any other officer of central tax.   If the 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.

Power of search and seizure

Section 67(2) of the Act provides that if the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) 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

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.   The documents or books or things so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceedings under this Act.

Ingredients of section 67

Section 67 is suggestive of the fact that the proper officer not below the rank of Joint Commissioner had reasons to believe that a taxable person had indulged in contravention of the provisions of the Act to evade tax.  The proper officer had reasons to believe that the goods were liable to confiscation and such goods were likely to be secreted at a particular place

In M/S GOLDEN COTTON INDUSTRIES VERSUS UNION OF INDIA [2019 (7) TMI 471 - GUJARAT HIGH COURT] the petitioner is engaged in processing of raw cotton.  The petitioner is procuring raw cotton from the market either directly or through visiting traders who visited the premises of the petitioner.  The office of the Commissioner of State Tax (Enforcement) issued notice in Form GST INS – 1, dated 03.12.2018 authorizing the Assistant Commissioner of State tax to inspect and carryout the search under section 67 of the Act. Departmental officers visited the premises of the petitioner on 04.12.2018.  The officers investigated the premises and impounded some documents like purchase invoices.  The investigation continued up to 05.12.2018.  

The officers also recorded statement of one of the partner.  The said partner explained that they have purchased material from the dealers and have made payment through banking system only.  All the purchases are duly accounted in the stock register maintained in the computer.  It was further clarified that all the purchases are on FOR basis and the responsibility of the transportation of material is always on supplier and hence they were not in possession of lorry receipt.

The Departmental Officer determined the liability and issued order prohibiting he petitioner from dealing with the goods lying in stock worth of ₹ 2.50 crores, vide his order dated 05.12.2018.   Further the goods as well as he book and other documents have been seized.  Being aggrieved by this order the petitioner filed the present writ petition before the Gujarat High Court.

The petitioner submitted before the High Court the following-

  • The impugned prohibitory order is in violation of the principles of Natural Justice and contrary to the powers conferred under Section 67(2) of the Act.
  • The order is premature as the department has neither determined any liability in any adjudication proceedings nor any assessment order has been passed determining any liability contemplated in law.
  • In the order there is no reference with regard to the details of goods seized.
  • Therefore it can be inferred as there is no valid seizure and therefore there could not be prohibitory order.
  • The conditions in section 67(2) of the Act have not been fulfilled for seizure and therefore there cannot be any seizure.
  • There is nothing on record to indicate that the goods were secreted to any place.
  • Neither the books of accounts nor the goods could be said to have been secreted at some unknown place with the intention to hide or conceal them.
  • The stock available as on 05.12.2018 which stands covered by the impugned order is duly accounted for and the duty payable also stands discharged either by the respective dealer or by the petitioner under Reverse Charge mechanism.

The petitioner, therefore, prayed to quash the impugned order.

The Department submitted the following before the High Court-

  • The order of seizure is absolutely in accordance with law.
  • There is no error of law committed by the authority concerned in passing the order of prohibition.
  • Rule 139(4) provides that where it is not practicable to seize any goods, the proper officer may service an order of prohibition in Form GST INS – 3 that he shall not remove, part with or otherwise deal with the goods except with the previous permission of such officer.  The said order is issued to the petitioner.
  • The goods seized are in the nature of cotton, cotton seed and bales worth of ₹ 2.50 crores.
  • The petitioner was also served a notice in Form GST DRC- 01, dated 05.12.2018 showing as to cause the petitioner did not produce related documents of purchase like lorry receipt, delivery challan, gate pass, weight receipt.
  • The petitioner has replied to the show cause notice on 22.01.2019.
  • The proceedings under section 73 and section 74 are under adjudication and if the petitioner is aggrieved against the order passed, the petitioner has efficacious alternative remedy under section 107 which provides for appeal and revision before the Appellate Authority.
  • The proceedings for confiscation of the seized goods are in progress.

The High Court heard the submissions of both the petitioner and the Department.  The High Court decided the question for consideration in this case is – whether the authority concerned committed any error in passing the order of seizure and also the order of prohibition.  The High Court analyzed the provisions of section 67 and various judgments in this regard.

The High Court observed that the words ‘where the proper officer has reasons to believe’ in section 67of the Act suggest that the belief must be that of an honest and reasonable person based upon the relevant materials and circumstances.  The satisfaction has to be of the Proper Officer not below the rank of Joint Commissioner. The Proper Officer should have reasons to believe that a taxable person has suppressed any transaction relating to a supply of goods or services or both.

If the information leads the proper officer to believe that the articles of search are secreted in a place, he may thereby have reasons to believe as contemplated in section 67 of the Act.  He may authorize in writing any other officer to search and seize such goods.  All that the Court can consider is, whether there is ground which prima facie justifies the reasonable belief.

The statutory requirement of reasonable belief, rooted in the information in possession of proper officer is to safeguard the citizen from vexatious proceedings.  The term ‘belief’ is a mental operation of accepting a fact as true, so, without any fact, no belief can be formed.  It is not necessary for the proper officer ton record reasons for his belief.  But if his decision is challenged that he had no reasons to believe, then he must disclose the materials upon which his belief was formed.   The Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court.

The High Court also observed that in the present case there is no challenge with regard to the reasons of belief as well as the legality and validity of the authorization.  The challenge is confined only to the improper exercise of the proper officer with regard to search and seizure as authorized by the proper officer.

The High Court did not accept the contention of the petitioner that the order of prohibition is not in accordance with section 67 of the Ac, as there is nothing to indicate even prima facie that the goods were secreted.  In this regard the High Court relied on the Supreme Court judgment in GIAN CHAND AND OTHERS VERSUS STATE OF PUNJAB [1961 (11) TMI 1 - SUPREME COURT].  The Supreme Court considered the meaning of the word ‘secreted’ within the meaning of section 105 of the Customs Act.  The Supreme Court held that it cannot be said that the documents have not been ‘secreted’ within the meaning of Section 105 of the Customs act unless they are hidden or concealed.  In the context of the section the word means ‘documents which are not kept in the normal or usual place’ or it may even mean ‘documents or things which are likely to be secreted’; in other words documents or things which a person is likely to keep out of the way or to put in a place where the officer of the law cannot find it.  The Supreme Court further held that before this power is exercised the preliminary conditions require by the section must be strictly satisfied that is, the officer concerned must have reason to believe that any documents or things which in his opinion are relevant for any proceedings under the Act are secreted in the place searched.

The High Court concurred with the views of the Supreme Court as held in the above case law.  The High Court also did not accept the contention of the petitioner that pending the confiscation proceedings, there could not have been any seizure or prohibition of goods or documents or books of accounts or other things.  The arguments of the petitioner are contrary to the scheme of the Act.  Even if the authority has reason to believe that the goods are liable to be confiscated are likely to be secreted, the authority will have the power to pass an order of prohibition pursuance to the order of seizure.  The whole object is to preserve and protect the goods or books or documents pending the determination of the tax liability.

The High Court found something very unusual in the order passed by the Assistant Commissioner in Form GST INS – 02 since the order of seizure and prohibition is issued and duly signed by the Assistant Commissioner.  The Assistant Commissioner is the person who has been authorized by the proper officer under section 67 to carry out the search and seizure.  The Joint Commissioner is to have the reasonable belief that the goods were liable to confiscation and are secreted.  The Assistant Commissioner is only the authorized officer to carry out the instructions of the Proper Officer i.e., the Joint Commissioner.  The High Court held that the orders of prohibition and seizure in Form GST INS – 02 as well as in Form GST INS – 03 is defective.

The High Court further advised the petitioner to invoke section 67(6) of the Act and prefer an appropriate application before the appropriate authority for release of the seized goods on provisional basis upon execution of a bond and furnishing a security to the satisfaction of the concerned authority.  The High Court directed the proper officer that if such an application is filed, the same shall be considered expeditiously on its own merits in accordance with the law.


By: Mr.M. GOVINDARAJAN - July 15, 2021



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