2025 (6) TMI 1662 - HC - GST

Challenge to SCN issued u/s 122 (1)(xviii) read with Section 35(6) of the WBGST/CGST Act 2017 - authority of proper officer under the WBGST/CGST Act 2017 to seize goods and documents during inspection without recording satisfaction or reasons as required under Section 67 of the said Act - HELD THAT - Noting that the petitioner no.1 is exclusively involved in the supply of goods to the Ministry of Defence which are required by the Indian Army and further taking into consideration that there are subsisting work order by the Ministry of Defence for supply of diverse items having regard to the suggestion made by the petitioners the petitioner no.1 shall be at liberty to seek release of the goods subject to the petitioner no.1 securing 20 per cent of the penalty amount as proposed in the show cause notice dated 27th May 2025 by way of a bank guarantee. In the event the petitioner no.1 approaches the proper officer with a written application enclosing therewith a bank guarantee aggregating 20 per cent of the proposed demand in terms of the show cause dated 27th May 2025 issued under Section 122 of the said Act the proper officer shall forthwith take steps for release of the goods and shall release the same as expeditiously as possible but not later than three (3) working days from the date of filing of such application. Since prima facie it appears that the aforesaid show cause has been issued under Section 122 read with Section 35(6) of the said Act and noting that as per Section 35(6) of the said Act the respondents were obliged to proceed under Section 73 or 74 of the said Act though hearing of the show cause may proceed further but the final decision in this regard shall not be communicated to the petitioner without leave of this Court - List this matter for further consideration under the same heading in the Combined Monthly List of July 2025.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter include:

• Whether the proper officer was authorized under the WBGST/CGST Act, 2017 (the "said Act") to seize goods and documents during inspection without recording satisfaction or reasons as required under Section 67 of the said Act;
• Whether the issuance of the show cause notice dated 27th May, 2025 under Section 122(1)(xviii) read with Section 35(6) of the said Act was legally valid, particularly in the context of search and seizure proceedings;
• Whether the goods seized are liable for confiscation under the provisions of the said Act, including Section 130;
• The procedural propriety of issuing a show cause notice under Section 122 during or following search and seizure operations, considering the mandate of Section 35(6) which requires proceedings under Sections 73 or 74;
• The conditions under which the seized goods may be released, including the role of bank guarantees as security for penalty amounts;
• The question of whether the final decision on the show cause notice can be communicated without prior leave of the Court;
• The separate issue concerning blocking of the electronic credit ledger, which was deferred for separate hearing.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Authority and Procedure for Seizure under Section 67 of the said Act

Legal Framework and Precedents: Section 67 of the WBGST/CGST Act, 2017 empowers the proper officer to seize goods, documents, or books during inspection if the officer has recorded reasons to believe that such goods are liable for confiscation or that the documents are relevant to any proceeding under the Act. The requirement to record satisfaction is a safeguard against arbitrary seizure.

Court's Interpretation and Reasoning: The Court noted the petitioner's submission that the proper officer failed to record any satisfaction or reasons in the seizure memo/report. This procedural lapse was highlighted as a significant defect because the statutory mandate under Section 67 requires such recording to justify the seizure.

Key Evidence and Findings: The report prepared by the Deputy Commissioner of Revenue, State Tax, West Bengal, Park Street Charge, was scrutinized. It was found that the proper officer did not record the requisite satisfaction or reasons for seizure.

Application of Law to Facts: The Court observed that the absence of recorded reasons undermines the legality of the seizure. The statutory framework mandates that seizure must be backed by recorded satisfaction to prevent misuse of power.

Treatment of Competing Arguments: The respondents contended that the goods and secreted books of accounts were relevant and hence rightly seized. However, the Court emphasized that relevance alone does not dispense with the requirement of recording satisfaction.

Conclusion: The Court implicitly found procedural irregularity in the seizure process due to the non-recording of satisfaction, thereby questioning the validity of the seizure.

Issue 2: Validity of Show Cause Notice Issued under Section 122 read with Section 35(6)

Legal Framework and Precedents: Section 122 of the said Act deals with penalties for certain offences, while Section 35(6) mandates that proceedings following search and seizure should be under Sections 73 or 74, which relate to determination of tax not paid or wrongly claimed input tax credit. The interplay between these provisions governs the procedural correctness of issuing show cause notices post search and seizure.

Court's Interpretation and Reasoning: The Court considered the petitioner's argument that the show cause notice under Section 122 was not authorized in the context of search and seizure, given the procedural direction in Section 35(6). The Court observed that while the hearing on the show cause notice may continue, the final decision on the penalty demand under Section 122 should not be communicated without Court's leave, reflecting judicial caution in procedural compliance.

Key Evidence and Findings: The show cause notice dated 27th May, 2025 was scrutinized, and it was noted that it was issued under Section 122 in conjunction with Section 35(6), which the petitioner challenged as impermissible.

Application of Law to Facts: The Court held that the respondents were obliged to proceed under Sections 73 or 74 as per Section 35(6) following search and seizure, and the issuance of a Section 122 notice at this stage was premature or procedurally flawed.

Treatment of Competing Arguments: The respondents maintained that the goods were liable for confiscation under Section 130 and thus the Section 122 notice was justified. The Court, however, distinguished the procedural route mandated by Section 35(6) from the confiscation proceedings under Section 130, suggesting that the penalty proceedings under Section 122 should await the outcome of Sections 73 or 74 proceedings.

Conclusion: The Court restrained the final communication of the show cause notice under Section 122 without its leave, thereby upholding procedural safeguards and emphasizing adherence to statutory procedure.

Issue 3: Liability of Goods for Confiscation and Release Conditions

Legal Framework and Precedents: Section 130 of the said Act provides for confiscation of goods and conveyances used in offences under the Act. The proper officer's authority to seize and confiscate is subject to procedural safeguards and judicial oversight.

Court's Interpretation and Reasoning: The Court acknowledged the respondents' submission that the goods were liable for confiscation. Nonetheless, considering the petitioner's involvement in supplying goods to the Ministry of Defence and the existence of subsisting work orders, the Court exercised discretion to permit release of goods subject to security.

Key Evidence and Findings: The petitioner's representation regarding the critical nature of the goods for defence supplies was taken into account, highlighting the public interest and operational necessity.

Application of Law to Facts: The Court directed that the petitioner may seek release of goods by furnishing a bank guarantee amounting to 20% of the penalty proposed in the show cause notice. Upon such application and guarantee, the proper officer was mandated to release the goods within three working days.

Treatment of Competing Arguments: While the respondents argued for retention of goods due to confiscation liability, the Court balanced this against the petitioner's operational requirements and the need for prompt resolution.

Conclusion: The Court granted conditional relief for release of goods subject to bank guarantee security, ensuring protection of revenue interests while