Whether collection of cheques during Inspection by Enforcement Authorities (CT) is legal?

Introduction: In Commercial Taxes Department, the Assessment Wing and Enforcement Wing function under the control of the Commissioner of Commercial Taxes. According to the administrative policy of the Tamilnadu State Government, Commercial Taxes Check posts are static locations where inter-State movement of vehicles are monitored. In order to monitor movement of goods within the State, Roving Squads have been established across the State and they are provided with modern gadgets like Hand-held Terminals to view the profile and status of dealers who are transporting the goods. In addition, there are groups available under each Deputy Commissioner (Enforcement) to carry out surprise inspection of the place of business to detect evasion of tax. The same group officers also carry out the annual audit in the business premises after prior intimation to the dealer. The Inter-State Investigation Cell which is headed by a Joint Commissioner mainly coordinates with the officers of other States to control evasion of tax on inter State transactions and exchanges data with them for further processing to arrest tax evasion.  During such inspection or Audit, the officials find defects in the books of accounts, sale Bills, availment of ITC, or filing of incorrect VAT or CST returns or in Form WW or non filing of statutory forms etc., and uses their power to collect Cheques for the defects noticed forcibly and without knowing the legal provisions the assessees are accepting their defects, whether correct or not, and handover cheques. In some cases, the Department without waiting for the assessment to complete freeze the bank account of the Assessee for non-cooperation. Whether such collection of payment from the dealer during inspection is maintainable? Or freezing the bank account is legal? The questions are to be answered.

Court Decision: In the recent decision, the Hon’ble High Court of Madras while disposing the W.P in the case of Mr. B. Manoharn Vs The Commercial Tax Officer (Enforcement) Group-I, W.P.(MD) No.723 of 2015 reported in (2015) 56 taxmann.com 4 (Madras HC) held that without assessment order or without giving an opportunity of personal hearing, there cannot be collection of tax, at the time of inspection and that without any assessment order or without any demand, there cannot be a forcible collection of tax, especially, when the petitioner challenged even the issuance of cheques. Therefore, this Court also directs the authorities concerned to de-freeze the account of the petitioner immediately.

Legal provisions: TNVAT Act, 2006 Section 65 deals with power of the enforcement officials and as per this section they have got powers to inspect the books, accounts and other records. Section 72 deals with composition of offences. Section 45 deals with mode of recovery. The extracts of the three relevant sections are as under:

Powers of entry, inspection etc.,

Sec 65. (1) Any officer prescribed by the Government in this behalf may, for the purposes of this Act, require any dealer to produce before him the accounts, registers, records and other documents, and to furnish any other information relating to his business.

(2) All accounts, registers, records and other documents maintained by a dealer in the course of his business, the goods in his possession, and his offices, shops, godowns, vessels or vehicles shall be open to inspection, at all reasonable times, by such officer:

Provided that no residential accommodation not being a place of business-cum-residence shall be entered into and searched by such officer except on the authority of a search warrant issued by a Magistrate having jurisdiction over the area, and all searches under this sub-section shall, so far as may be, be made in accordance with the provisions of the Code of Criminal Procedure, 1973.

(3) If any such officer has reason to suspect that any dealer is attempting to evade the payment of any tax, fee or other amount due from him under this Act, he may, for reasons to be recorded in writing, seize such accounts, registers, records or other documents of the dealer as he may consider necessary, and shall give the dealer a receipt for the same. The accounts, registers, records and documents so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceeding under this Act.

(4) Any such officer shall, for the purposes of sub-section (2) or sub-section (3), also have power to enter and search any office, shop, godown, vessel, vehicle, building or place belonging to any other dealer or any other person, if such officer has reason to believe that a dealer keeps, or is keeping any of his goods, accounts, registers, records or other documents in such office, shop, godown, vessel, vehicle, building or place.

Explanation.- It shall be open to the Government to prescribe different classes of officers for the purpose of taking action under sub-sections (1), (2) and (3).

Composition of offences:

Sec 72. (1) The prescribed authority may, whether on application made to it in this behalf or otherwise, give any person, who has committed or is reasonably suspected of having committed an offence under this Act, option to pay within a specified period, by way of composition of such offence –

(a) where the offence consists of failure to pay, or attempt to evade or evasion of, any tax payable under this Act, in addition to the tax so payable, a sum of money not exceeding rupees two thousand or double the amount of the tax payable, whichever is greater, and

(b) in other cases, a sum of money not exceeding rupees two thousand.

(2) On payment of such sum of money and the tax, if any, payable under this Act, no prosecution for an offence under this Act shall be instituted in respect of the same facts on which a composition has been allowed under this section.

(3) Where the prescribed authority, on application made under sub- section (1), passes an order refusing to allow composition under this section, it shall record in writing the reasons therefor and furnish to the applicant on request a brief statement of the same unless in any case the prescribed authority is of the opinion that it will not be in the public interest to furnish such statement.

Further mode of recovery

Sec 45,:- (1) The assessing authority may, at any time or from time to time, by notice in writing a copy of which shall be forwarded to the dealer at his last address known to the assessing authority require –

(a) any person from whom money is due or may become due to the dealer, or to any person who has become liable to pay any amount due under this Act ; or

(b) any person who holds or may subsequently hold money for, or on account of the dealer or other person who has become liable to pay any amount due under this Act, (2) … .. …

(3) … .. …

(4) … .. …

(5) … .. …

(6) Any amount which a person required to pay to the assessing authority or for which he is personally liable to the assessing authority under this Section shall, if it remains unpaid, be a charge on the properties of the said person and may be recovered as if it were an arrear of land revenue.

Explanation :- For the purposes of this Section, the amount due to a dealer or money held for or on account of a dealer by any person shall be computed after taking into account such claims, if any, as may have fallen due for payment of such dealer to such person and as may be lawfully subsisting. “

It is therefore concluded that only power to conduct an inspection has been postulated under Section 65 of the T.N.V.A.T. Act, 2006 which clearly defines the power to order production of accounts, power of entry, inspection, etc. and in the Section cited above, it is nowhere stated that the inspecting officials have powers to forcibly collect the cheques from the petitioner at the time of inspection. The following case laws support that the enforcement wing officials have no jurisdiction to collect the tax even before the assessment order is passed by the Assessing Authority and therefore, the action of the Inspecting officials is highly arbitrary and illegal and the action of the officials in attaching the bank account pending assessment is totally unwarranted. In the case of Astek Electricals, the Hon’ble High Court has observed and held that without due assessment, the authorities had straight away written to the bank attaching petitioner’s bank account which, under no stretch of imagination, can be sustained and this action of the authorities is in complete violation of the principles of natural justice. In some of the cases, the Hon’ble High Court has directed the authorities to return the cheques forcibly collected to the assessee.

• M/S. HOTEL BLUE NILE Vs. STATE OF TAMIL NADU (MAD.) (1992) 87 STC 513).
• M/S.KUMAR COMMERCIAL AGENCIES Vs. DEPUTY COMMERCIAL TAX OFFICER (1993(4) M.T.C.R.563).
• M/S.OUTDOOR ADVERTISING SERVICES, REP. BY ITS PROPRIETOR R.MURALI Vs. THE DEPUTY COMMERCIAL TAX OFFICER (ENFORCEMENT) AND ANOTHER (W.P.NO.29341 OF 2005, DATED 10.9.2009)
• M/S.KEERAN BUILDERS PRIVATE LIMITED REP. BY ITS MANAGING DIRECTOR E.NAKKEERAN Vs. THE ASSESSMENT COMMISSIONER (CT) (ENFT), AND ANOTHER (W.P.NO.212 OF 2011, DATED 25.1.2011)
• M/S Mura Gents Vs The Commercial Tax Officer P.No.21544 of 2010,
• M/S. Astek Electricals And … Vs The Assistant Commissioner (CT) Writ Petition No: 6672 of 2013.

Conclusion: In the author’s opinion, though the authorities are vested with ample powers to take action for the recovery of the tax due, such action must be preceded by issuance of a notice demanding such tax following a due assessment by the Assessing Authorities. The inspection authorities will have to submit the audit paras and reports or inspection notes to the jurisdictional Assessing Authority who will assess by issuing notice and demand must be done in accordance with law namely, after giving an opportunity to the assessee to put forth their defence / explanation for the queries raised, more particularly, in a case of surprise inspection / search. Hence collection of cheques during inspection out of coercion is legally in correct, unwarranted and bad in law.

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