Section 87 Recovery proceedings can be initiated only after completion of adjudication process

Homestead Projects And Developers (P) LTD. Vs. Commissioner of Central Tax and Central Excise (Kerala High Court)

The present petition is filed by the petitioner for requesting to quashing the notices issued by the  Commissioner for levying tax alongwith interest and attaching bank account of the petitioner.

High Court states that, in the present case the an audit conducted by the internal audit team of commissioner, has detected non-payment of service tax. According to the respondents, the dues from the respondents were due to the failure of the petitioner in carrying forward opening balance of CENVAT credit and filing proper returns. The petitioner cannot therefore raise any grievance. Be that as it may, the petitioner has been issued with show-cause notice invoking Section 73(1) of the Finance Act, 1994 read with Section 174(2) of CGST Act, 2017. The petitioner has the opportunity to explain its stand and position before the respondent. Before adjudicating the issues raised in show-cause notice, if the respondents proceed under Section 87(b) of the Finance Act and Section 79(1)(c)(i) of the Act read with Section 142(8)(a) of the CGST Act, 2017, the petitioner will indeed be put to hardship. Such proceedings are ordinarily to be initiated only after adjudication process is over. Hence, in the circumstances, the writ petition is disposed of directing the respondent to give opportunity to the petitioner to adduce such evidence before the respondent in order to explain the deficiencies pointed out in show cause notice. After considering the reply given by the petitioner to show-cause notice and after considering the materials adduced by the petitioner, the respondent shall pass appropriate orders in accordance with law, within a period of one month.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

The petitioner, a Private Limited Company, seeks to set aside Exts.P11, P12 and P13 notices issued by the 3rd respondent. A further order is sought to direct the 3rd respondent not to initiate any proceedings against the petitioner under the Finance Act, 1994 for the period till June, 2017 pending adjudication of Ext.P8 show-cause notice.

2. The petitioner, who has registered with the Service Tax Department under the category ‘Construction of Residential Complex Service’, has been regularly discharging its service tax liability, filing applicable returns. The 2nd respondent conducted service tax audit of the petitioner for the period from 01.04.2015 to 30.06.2017, in the year 2019. There were audit objections. The petitioner filed reply to the objections. However, the petitioner was served with Ext.P8 show-cause notice dated 16.03.2020 invoking Section 73(1) of the Finance Act, 1994 read with Section 174(2) of the CGST Act, 2017. The petitioner was required to produce all the evidences upon which they intend to rely in support of their defence.

3. The petitioner was preparing to respond to Ext.P8 show-cause notice. While so, the petitioner received Ext.P9 notice dated 11.03.2020 directing the petitioner to pay ₹8,62,397/- along with interest. The petitioner filed Ext.P10 reply stating that recovery proceedings under Section 87 of the Finance Act, 1994 cannot be initiated without adjudication. However, in spite of submission of Ext.P10 reply, respondents 1 to 4 served notices dated 01.07.2020 on the Bankers of the petitioner invoking Section 87(b) of the Finance Act, 1994 directing the Bankers of the petitioner to debit freeze the current accounts held by the petitioner in their banks. The bankers were instructed to close all other accounts related to the petitioner and to remit the amount available in the accounts, to the government, within 15 days.

4. When this writ petition came up for admission, this Court passed an interim order staying the operation of Exts.P11, P12 and P13 notices addressed to the Banks.

5. Respondents 1 to 4 contested the writ petition filing counter affidavit. The respondents stated that the internal audit party, Palakkad detected that the petitioner had short paid service tax to the tune of ₹8,62,397/- during the period from October, 2016 to February, 2017. The Range Officer was directed to initiate action for recovery of the short payment with interest. The petitioner was required to make good the pay-deficit service tax. It is on the failure of the petitioner to make payment, that Exts.P11 to P13 notices were issued to the bankers of the petitioner. The Standing Counsel for the respondents submitted that there is no arbitrariness in their action. The petitioner is liable to pay the demanded amount.

6. The learned Standing Counsel further pointed out that there was omission on the part of the petitioner and the petitioner could not carry forward the opening balance of CENVAT credit of ₹1,94,892/- in the ST-3 returns for the period from October, 2015 to March, 2016. They also did not avail the CENVAT credit of ₹22,49,049/- during the period from April, 2016 to September, 2016 being the service tax paid by them under the reverse charge mechanism. Once these omissions are rectified, there is no short payment and instead, they are left with unutilised CENVAT credit of ₹25,50,402/-. The petitioner could have revised the returns as provided under Rule 7(b) of Service Tax Rules, 1994, which they have not done. The petitioner has to blame itself for the mess it is in.

7. Heard the learned counsel for the petitioner and learned Standing Counsel for the respondents.

8. Respondents 1 to 4, on an audit conducted by the internal audit team, has detected non-payment of service tax. According to the respondents, the dues from the respondents were due to the failure of the petitioner in carrying forward opening balance of CENVAT credit and filing proper returns. The petitioner cannot therefore raise any grievance.

9. Be that as it may, the petitioner has been issued with Ext.P8 show-cause notice invoking Section 73(1) of the Finance Act, 1994 read with Section 174(2) of CGST Act, 2017. The petitioner has the opportunity to explain its stand and position before the 4^th respondent. Before adjudicating the issues raised in Ext.P8 show-cause notice, if the respondents proceed under Section 87(b) of the Finance Act and Section 79(1)(c)(i) of the Act read with Section 142(8)(a) of the CGST Act, 2017, the petitioner will indeed be put to hardship. Such proceedings are ordinarily to be initiated only after adjudication process is over.

In the circumstances, the writ petition is disposed of directing the 4^th respondent to give opportunity to the petitioner to adduce such evidence before the 4^th respondent in order to explain the deficiencies pointed out in Ext.P8. After considering the reply given by the petitioner to Ext.P8 show-cause notice and after considering the materials adduced by the petitioner, the 4^th respondent shall pass appropriate orders on Ext.P8 in accordance with law, within a period of one month. The interim order passed by this Court on 08.07.2020 will enure to the benefit of the petitioner for the period of one month.