Additional Commissioner Vs . PP Polyplast Pvt. Ltd. (Supreme Court of India)
Excess Stock Found on Estimation Cannot Trigger Confiscation: Courts Rule Correct Procedure Under Sections 73/74; Confiscation Proceedings Invalid When Stock Discrepancy Is Based on Eye Estimation, Hold Courts; GST Authorities Must Use Sections 73/74 for Excess Stock; Section 130 Not Applicable Without Intent to Evade; Survey-Based Excess Stock Cannot Justify Section 130 Action, Supreme Court Declines Interference; Improper Invocation of Section 130 Quashed: Courts Emphasize Mandatory Assessment Framework Under GST; No Confiscation Without Proven Tax Evasion: Courts Reject Section 130 Action for Excess Stock.
Read HC Judgment: Section 130 Proceedings Cannot Be Initiated for Excess Stock Found During Survey: HC
The litigation stemmed from proceedings initiated against a registered manufacturer engaged in producing PP bags and woven sacks, following a search under Section 67 of the GST Act at its premises on 12 June 2018. During the search, the authorities claimed that excess stock had been found, but the assessment relied only on eye estimation and no actual weighment of goods was undertaken. Based on this finding, proceedings were initiated under Section 130 of the GST Act, which deals with confiscation of goods and levy of tax and penalty in cases involving intent to evade tax.
The petitioner challenged the proceedings, arguing before the Allahabad High Court that the authorities should have initiated tax determination proceedings under Sections 73 or 74, which specifically apply when unaccounted goods are treated as “deemed supply” due to improper maintenance of books as per Section 35(6). These sections lay down the statutory mechanism for assessing tax not paid or short paid. The petitioner submitted that Section 130 was wrongly invoked, especially when no evidence of tax evasion or post-supply non-accounting of goods was established. It was further argued that excess stock found on mere estimation cannot form the basis of confiscation proceedings.
The Allahabad High Court examined earlier precedents, including Metenere Limited, M/s Shree Om Steels, M/s Maa Mahamaya Alloys Pvt Ltd, and S/s Dinesh Kumar Pradeep Kumar, all of which consistently held that when excess stock is discovered during a survey or search, the correct statutory path is to conduct tax determination under Sections 73 or 74. The Court reiterated that Section 35(6) expressly directs that tax on unaccounted goods must be assessed by applying Sections 73 or 74. These provisions lay out a detailed procedure: issuance of notice, determination of tax, and levy of penalty, depending on whether fraud or suppression is alleged.
The High Court reaffirmed that Section 130 cannot be used as a substitute assessment mechanism, as the statute does not permit tax determination or penalty under the confiscation provisions for such infractions. Section 130 applies only in limited situations—such as deliberate non-accounting of goods after the point of supply or where authorities can establish a contravention coupled with intent to evade tax. In the present case, there was neither any allegation of intent to evade tax nor any finding that the excess goods were unaccounted after the time of supply. Instead, the foundational assessment itself was based on eye estimation, raising concerns over the reliability of the quantification.
Relying on its prior decisions, the High Court held that the entire exercise undertaken under Section 130 was legally unsustainable. It also clarified that valuation or quantification of goods cannot be done merely through estimation or assumptions based on factors such as production capacity or electricity consumption. The Court concluded that the authorities should have followed the statutory route for determination of tax under Sections 73 or 74.
Accordingly, the Allahabad High Court allowed the writ petition and quashed the impugned orders dated 16 April 2024 (passed by the Appellate Authority) and 8 October 2018 (passed by the original authority). The Court reinforced the legal position that mere discovery of excess stock at the time of survey does not trigger confiscation proceedings under Section 130.
The matter reached the Supreme Court through special leave petitions filed by the department. The Supreme Court, however, refused to interfere with the High Court’s judgment. After condoning the delay, the Court dismissed the special leave petitions, declining to examine the matter further. Importantly, it clarified that dismissal of the petitions would not prevent the petitioners from pursuing any other remedies available in law.
Through this order, the Supreme Court effectively affirmed the principle laid down by the Allahabad High Court and previous decisions: tax authorities cannot invoke confiscation proceedings under Section 130 solely on the ground of excess stock found during a search, particularly when the assessment is based on estimation and there is no evidence of intent to evade tax. Authorities must undertake proper tax determination proceedings under Sections 73 or 74 when stock discrepancies arise.
The judgments collectively reinforce the statutory boundaries governing GST enforcement and ensure that tax assessments are conducted through the proper legal framework rather than through confiscation-based proceedings not intended for this purpose.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
