Complete and detailed analysis of Inspection, Search & Seizure under GST

Introduction:-

The implementation of the Goods and Services Tax (GST) marks a significant shift towards a self-assessment-based tax regime, where taxpayers are entrusted with the responsibility of assessing and reporting their tax liabilities. This paradigm shift underscores the importance of legislative precision and parliamentary consent in any provision that potentially intrudes upon the self-assessment regime. GST is a self-assessment based tax regime. Any provision that appears to enter into the self assessment regime, needs the express consent of the Parliament. Any proceeding that invokes such authority must be tested for its validity before applying the same as it is an exceptional power contained in section 67 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act or Central GST Act).

Inspection is not search; these are two different proceedings and the subtility of the differences must be appreciated from the law itself. Inspection is a permitted method to access a taxpayer’s premises, but only as an antievasion measure as laid down in the law in the form of ‘pre-requisites’ to invoke the exceptional powers allowed.

While ‘evasion of tax’ is the touchstone for ‘inspection’, articles being ‘secreted’ is the bedrock of ‘search-cum-seizure’.

‘Inspection’ is permitted under section 67(1) where ‘reasons to believe’ must be that of the Joint Commissioner (or higher rank Officer) who will then grant authorization to ‘any other’ Officer as the Authorized Officer to inspect the specific premises listed in Form GST INS-01.

Inspection does not allow opening up of cupboards and so on; that is permitted only in search proceedings.

‘Search’ is permitted under section 67(2) where ‘new or additional’ reasons to believe must be or become available to the Joint Commissioner (or higher rank Officer) to ‘further authorize’ the (same or another) Officer, who was granted authorization under section 67(1) himself, to act as Authorized Officer and conduct search-cum-seizure proceedings under section 67(2).

That seizure is permitted in only search proceedings and not in inspection proceedings. New or additional reasons to authorize search-cum-seizure must also pre-exist at the time of grant of authorisation in Form GST INS-01

Search-cum-seizure is limited to ‘secreted articles’, only

Form GST INS01 may be issued in Part-A or Part-B to conduct inspection as well as in Part-C to conduct search-cum-seizure.

Authorization is specific to Specific officer (no sub-delegation allowed), at specified places (precise and exhaustive, not vague and inclusive) & Within specified time to carry out (day and date stated on it).

Reasons to believe, must be about ‘contraventions’ listed in section 67 that apply to ‘taxable person’. Places specified in Form GST INS-01 alone may be inspected. This authorization should not be vague. Authorized Officer will not travel beyond the places specified in Form GST INS-01 .

‘Reasons to believe’ is less than ‘evidence in possession’ (unlike the one referred to in section 64) but more than ‘suspicion’ about potential tax evasion. Powers under section 67 cannot be exercised routinely even if there is suspicion but one that can be regarded as ‘reasons to believe’ that evasion of tax has occurred. Reasons to believe, need not be disclosed to the taxpayer in the first instance, but must be the outcome of objective examination of facts that arouse suspicion and after further consideration leads to compelling conclusion that become ‘reasons to believe’ sufficient to invoke exceptional powers under section 67 to gather additional evidence about the evasion of tax.

Reasons must pre-exist and pre-date the grant of authorization.

Question about valid ‘reasons to believe’ touches ‘jurisdiction’ exercised by Joint Commissioner and all consequent actions taken by Authorized Officer in executing the authorization granted. Where there was no jurisdiction to authorize inspection, inspection will be illegal and jurisdiction to authorize inspection but not inspection-cum-search and consequent seizure, will also be illegal and any discovery from such illegal seizure will also be tainted.

Authorization issued to inspect under section 67, being extraordinary power, must be exercised with great restraint and principles of natural justice that cannot be followed ‘prior’ to exercise of powers in law, can be adhered to ‘subsequently’. If Joint Commissioner is unable to justify ‘reasons to believe’, when called into question, then no demand will sustain out of such tainted proceedings. Without jurisdiction, even if there are any legitimate dues, it cannot be exacted.

Inspection is a very specific and emergency power as it contains various in built safeguards in the form of prior authorization by Joint Commissioner (or higher rank Officer) for ‘good and sufficient’ reasons to believe and for other additional reasons emerging or validated after inspection to justify escalation of the proceedings from ‘inspection to search’.

Secreted articles discovered during search can only be seized.

Authorization is not a carte blanche permission i.e., not a full authority to inspect or search any place or premises because two different processes in this law

No recovery of tax can be made ‘on the spot’. The due process prescribed in the law is that the taxpayer must be ‘put at notice’ first. Demand for tax is required to be made by issuing a notice to the taxpayer under section 73, 74 or even 76, howsoever ‘open and shut’ the liability may appear to be.

The Proper Officer has to protect the interests of the Revenue in the manner intended by the Parliament and Parliament has chosen to rely on taxpayer to carry out self-assessment. As to what is correct determination of tax liability is not left to one’s opinion but to application of the GST law. Rules of law is where all concerned – taxpayer and tax administrator – must permit the law to take centre stage and not their own convictions or compulsions.

Section 160(2) needs special mention where Parliament saves orders traceable to invalid notices or proceedings that have been acted upon by taxpayer and even omitted to question their validity at the earliest opportunity, from the vice of being void ab initio and be struck down. The principle of acquiescence is baked into this provision where taxpayer’s failure to question validity of any notice, order, or communication, preserves what possibly could have become an invalid proceeding.

‘Fair play in action’ is the underlying promise in a rule-of-law and this is referred to in Common Law as principles of natural justice (although stated earlier in a different context where it was necessary). Nemo judex in causa sua which means, no person shall be a judge in his own cause; and Audi alteram partem which means, to hear the other Party.

“the rule of law means the absolute supremacy or predominance of the regular law as opposed to the influence of arbitrary power and excludes the existence of arbitrariness or even of wide discretionary authority on the part of the government.”

Article 21 provides a further check against arbitrary executive action by stating that no person shall be deprived of his life or liberty except in accordance with the procedure established by law.

Statutory Porvisions:- Section 67 Power of inspection, search and seizure.

(1) Where the proper officer, not below the rank of Joint Commissioner, has reasons to believe that-

(a) 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 thereunder to evade tax under this Act; or

(b) 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 authorise 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.

(2) Where 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 authorise 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:

Provided that where it is not practicable to seize any such goods, the proper officer, or any officer authorised 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:

Provided further that 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.

(3) The documents, books or things referred to in sub-section (2) or any other documents, books or things produced by a taxable person or any other person, which have not been relied upon for the issue of notice under this Act or the rules made thereunder, shall be returned to such person

within a period not exceeding thirty days of the issue of the said notice.

(4) The officer authorised under sub-section (2) shall have the power to seal or break open the door of any premises or to break open any almirah, electronic devices, box, receptacle in which any goods, accounts, registers or documents of the person are suspected to be concealed, where access to such premises, almirah, electronic devices, box or receptacle is denied.

(5) The person from whose custody any documents are seized under subsection (2) shall be entitled to make copies thereof or take extracts therefrom in the presence of an authorised officer at such place and time as such officer may indicate in this behalf except where making such copies or taking such extracts may, in the opinion of the proper officer, prejudicially affect the investigation.

(6) The goods so seized under sub-section (2) shall be released, on a provisional basis, upon execution of a bond and furnishing of a security, in such manner and of such quantum, respectively, as may be prescribed or on payment of applicable tax, interest and penalty payable, as the case may be.

(7) Where any goods are seized under sub-section (2) and no notice in respect thereof is given within six months of the seizure of the goods, the goods shall be returned to the person from whose possession they were seized:

Provided that the period of six months may, on sufficient cause being shown, be extended by the proper officer for a further period not exceeding six months.

(8) The Government may, having regard to the perishable or hazardous nature of any goods, depreciation in the value of the goods with the passage of time, constraints of storage space for the goods or any other relevant considerations, by notification, specify the goods or class of goods which shall, as soon as may be after its seizure under sub-section (2), be disposed of by the proper officer in such manner as may be prescribed.

(9) Where any goods, being goods specified under sub-section (8), have been seized by a proper officer, or any officer authorised by him under sub-section (2), he shall prepare an inventory of such goods in such manner as may be prescribed.

(10) The provisions of the Code of Criminal Procedure, 1973, relating to search and seizure, shall,so far as may be, apply to search and seizure under this section subject to the modification that sub-section (5) of section 165 of the said Code shall have effect as if for the word “Magistrate”, wherever it occurs, the word “Commissioner” were substituted.

(11) Where the proper officer has reasons to believe that any person has evaded or is attempting to evade the payment of any tax, he may, for reasons to be recorded in writing, seize the accounts, registers or documents of such person produced before him and shall grant a receipt for the same, and shall retain the same for so long as may be necessary in connection with any proceedings under this Act or the rules made thereunder for prosecution.

(12) The Commissioner or an officer authorised by him may cause purchase of any goods or services or both by any person authorised by him from the business premises of any taxable person, to check the issue of tax invoices or bills of supply by such taxable person, and on return of goods so purchased by such officer, such taxable person or any person in charge of the business premises shall refund the amount so paid towards the goods after cancelling any tax invoice or bill of supply issued earlier

Inspection of Premises section 67

Overview of the steps involved during Inspection, Search & Seizure

Based on the provisions of law, steps involved that one may anticipate being carried out by departmental officers and discharge their statutory duties validly and in accordance with the requirements of law:

Step 1:

Any officer may gather intelligence from sources within the law or from proceedings under the law such as scrutiny or audit or from third-party sources such as persons liable to maintain and disclose transaction-level data such as CBDT, Sub-registrar, RERA, etc.

which justifies inspection of the premise of

(i) taxable person or

(ii) other person(s).

Step 2:

The officer would then file a note to the Joint Commissioner (or higher rank Officer) for the grant of authorization in Form GST INS-01 along with details of intelligence gathered.

[file must contain notes as the nature of examination (of those records), deliberation carried out and the satisfaction reached that forms the ‘reasons to believe’;]

If the Joint Commissioner is satisfied after examining the material on record then for such ‘reasons to believe’ as are taken on record, issue authorization to inspect specified premises of the ‘taxable person’ or ‘any (other) person’.

Form GST INS-01 must be specific as to the following whether:

➢ Only inspection to be carried out – name of location and specific articles to be inspected.

Part A or B of Form GST INS-01 is referred; or

➢ Both inspection and search to be carried out – suspicion about

(i) goods liable to confiscation or

(ii) documents, books, or things, found to be ‘secreted’ at specified location and duly noted on file. Part C of Form GST INS-01 is referred.

Pre-condition to any intrusive action

There are very fundamental and essential ‘ingredients’ that must be shown to exist prior to grant of authorization by Joint Commissioner to any other officer, who will be empowered to discharge duties as the ‘Authorized Officer’ for inspection of the premises or goods.

Inspection under section 67 is preauthorized by Circular No. 3/3/2018-GST dated 5th Jul 2017.

Reference may be had to rule 139 where Form GST INS-01 is prescribed as the format of authorization to be granted by Joint Commissioner. This format shows the specific ‘contraventions’ potentially involved, that support the request for authorization.

Reasons to believe, must be about ‘contraventions’ listed in section 67 that apply to ‘taxable person’:

➢ ‘suppressed’ any transaction of supply;

➢ ‘suppressed’ stock of goods;

➢ claimed input tax credit ‘in excess’ of entitlement; and

➢ indulged in ‘contravention to evade payment of tax’.

And those that apply to ‘any person’ being

(i) transporter or

(ii) warehousekeeper, are:

➢ transporting goods which have escaped payment of tax;

➢ storing goods which have escaped payment of tax;

➢ keeping accounts or keeping goods, in a manner as is likely to cause evasion of tax payable.

A close review of the ‘ingredients’ in each of the instances reveals the onerous task on Joint Commissioner to give careful consideration to the facts and suspicion presented before issuing authorization to reach a conclusion that invoking powers under section 67 is justified.

Mere possibility that evasion may be involved without material facts taken on record, does not provide sufficient basis for the grant of authorization.

Jurisprudence is well developed in the context of other laws such as Income-tax, Customs and Sales tax, to state that:

➢ suspicion is not sufficient to warrant inspection or search;

➢ authorization cannot be granted without ‘reasons to believe’ that fall within those listed in the statute;

➢ authorization granted must be based on material taken on record;

➢ file must contain notes as the nature of examination (of those records), deliberation carried out and the satisfaction reached that forms the ‘reasons to believe’; and

➢ that except by undertaking this exercise alone which is justified and warranted, no other proceeding under the law will be equally efficacious in the facts and circumstances of the case.

No power to question persons

There is nothing in section 67 that empowers ‘questioning’ persons present at the places of inspection or search. Power to question any person resides in section 70 by issuing summons.

Taxpayers must extend full cooperation and support in the discharge of duties by the Authorized Officer.

Any objections regarding validity, purpose and manner of discharge of duties by Authorized Officer must not be raised during inspection if Form GST INS-01 has been shown by the Authorized Officer.

Objections, if any, may be raised after issuance but before replying to notice issued on conclusion of these proceedings.

Questions posed and replies submitted may be retracted and doubted in later proceedings and the Authorized Officer will not be able to rely on such information secured.

Places NOT to be inspected

Access to ‘place of business’ under section 71 does not apply to inspection or search under section 67.

That is, the places to be accessed under section 71 are limited to places of business of ‘registered person’ but section 67 travels beyond places of business of taxable person and extends to the places of transport or storage of goods or accounts or any other place are also permitted to be inspected, unlike section 71.

Places specified in Form GST INS-01 alone may be inspected. This authorization should not be vague like ‘at Gurugram or in Haryana’ or inclusive like ‘all known places of business activity’.

Authorized Officer will not travel beyond the places specified in Form GST INS-01 .That inspection of unauthorized places renders any real discovery at such unauthorized places to be considered illegal and the inspection without jurisdiction if the same is objected in later proceedings .

Time (date or dates) to inspect must also be specified in Form GST INS-01 and not issued without an ‘end date’ .

Since authorization is exhausted by exercise or Authorized Officer exiting the place of inspection or even by lapse of time (date or dates) permitted.

To confirm the validity of inspection carried out care must be taken to verify the actual date or dates of inspection

Inspection versus Search

In choosing the sub-section under which this authorization is given Care must be taken .

Authorization is not a carte blanche permission i.e., not a full authority to inspect or search any place or premises because two different processes in this law

(i) inspection and

(ii) search,

‘Inspection’ is permitted under section 67(1) where ‘reasons to believe’ must be that of the Joint Commissioner (or higher rank Officer) who will then grant authorization to ‘any other’ Officer as the Authorized Officer to inspect the specific premises listed in Form GST INS-01.

Inspection does not allow opening up of cupboards and so on; that is permitted only in search proceedings.

‘Search’ is permitted under section 67(2) where ‘new or additional’ reasons to believe must be or become available to the Joint Commissioner (or higher rank Officer) to ‘further authorize’ the (same or another) Officer, who was granted authorization under section 67(1) himself, to act as Authorized Officer and conduct search-cum-seizure proceedings under section 67(2).

That seizure is permitted in only search proceedings and not in inspection proceedings, it is important to discuss whether ‘reasons to believe’ that provide reasons to grant authorization for ‘inspection’ are sufficient to conduct ‘search-cum-seizure’ or ‘new or additional’ reasons are required.

Further, whether these new or additional reasons to authorize search-cum-seizure must also pre-exist at the time of grant of authorisation in Form GST INS-01 or whether they can be discovered during inspection to support extending the proceedings to ‘search-cum-seizure’.

While ‘evasion of tax’ is the touchstone for ‘inspection’, articles being ‘secreted’ is the bedrock of ‘search-cum-seizure’.

Form GST INS01 may be issued in Part-A or Part-B to conduct inspection as well as in PartC to conduct search-cum-seizure.

> Reasons to believe that are sufficient just to ‘inspect’ the place(s) of business justifies grant of authorization and this satisfaction must be ensured by Joint Commissioner (or higher rank Officer).

> Based on this authorization, ‘any other’ Officer as the Authorized Officer will execute Inspection of Premises (Section 67) the authorization and report back (no format prescribed) of outcome of such inspection proceedings;

Form GST INS-01 in Part-A or Part-B will only be issued to conduct inspection and any discovery during inspection will then be relied upon to support reasons to issue another Form GST INS-01 in Part-C to proceed with search-cum-seizure proceedings.

> New or additional reasons to believe must become available or be already available which are validated by discovery during inspection, to support a further authorization to ‘search’ all or any of the place(s) of business that were inspected and this satisfaction must also be ensured by the Joint Commissioner (or higher rank Officer).

Questions that arise are :-

Whether these ‘two instances’ where reasons to believe were established should pre-exist before Form GST INS-01 or

Only one may exist before Form GST INS-01 and another emerge out of discovery in inspection. Perusal of Form GST INS-01 brings out the following aspects:

➢ Form GST INS-01 is the form of authorization for ‘inspection’ and is also the prescribed form for authorization of ‘search-cum-seizure’;

➢ Form GST INS-01 Part A – taxable person and place(s) to be inspected; or

➢ Form GST INS-01 Part B – other persons and place(s) to be inspected; or

➢ Form GST INS-01 Part C – specified location believed to contain secreted articles;

➢ Authorization:

-To another Authorized Officer to ‘inspect’; or

-To another Authorized Officer to ‘search’ and if offending articles (goods or documents) are found to ‘seize’ and produce before Joint Commissioner.

From the above it is clear that there are ‘two instances’ where all these reasons to believe must pre-exist at the time of authorization.

Form GST INS-01 must be for ‘inspection only’ or ‘inspection and search’ when it is granted to the Authorized Officer(s) and

There can be two Forms GST INS01, where one is for ‘inspection only’ (based on certain reasons to believe) granted to one Officer and another for ‘search’ (based on additional reasons to believe) granted to same or different Officer.

It is reasonable to expect ‘combined authorization’ careful examination of these pre-existing reasons is essential to determine whether they were sufficient to support only inspection (but not search) or both inspection as well as search-cum-seizure.

It may be noted that any discovery during inspection (suspected to have already been in the knowledge of Joint Commissioner at the time of grant of authorization in Form GST INS-01) cannot be used to automatically extend inspection to search-cum-seizure proceedings if these new or additional reasons are not placed on record in Form GST INS-01 that is issued. This is key to challenge the validity of proceedings under section 67.

Search-cum-seizure is limited to ‘secreted articles’, only:

• Goods liable to confiscation which are found to be ‘secreted’; or
• Documents or books or things, useful or relevant to any proceedings, which are found to be ‘secreted’ in any place.

The scope and limitations of what can and cannot be done under ‘under section 67(1) or under section 67(2)’ are laid down in those provisions and vastly differ from each other.

Form GST INS-01, inspection + search + seizure is in one Form and the selection of each Part in this Form must be carefully examined as to whether the grant of authorization is for

One (inspection),

Two (search and seizure) or

All three aspects in a manner that it will stand up to judicial scrutiny later.

Considering the intricate nature of these processes that any slip in Form GST INS-01 procedure will taint the entire proceedings and legitimate discovery could be annulled due to the process adopted being tainted and bad in law.

Multiple authorizations for same investigation

Form GST INS-01 is issued at a certain time ‘x’ duly supported by reason to believe that such an ‘inspection’ is justified, it must be examined carefully if (although not impossible), that at that same time ‘x’, ‘new or additional’ reasons to believe that ‘search-cum-seizure’ is also justified were already available for Joint Commissioner to grant a comprehensive authorization; or

After carrying out inspection, certain new material may be discovered that was unknown at the time of grant of authorization which may now justify extending the proceedings to search-cum-seizure, but the authorization originally granted being insufficient to proceed with these extended proceedings, it will render the search-cum-seizure illegal as the necessary (new or additional) reasons to believe cannot be an ‘after discovery’ (that is, discovery after search was conducted).

In all such instances, it is to be examined if the Authorized Officer

(i) either concluded the inspection and after making necessary notes of additional matters or

(ii) continued the inspection without exiting the premises but requested the Joint Commissioner to issue another authorization in Form GST INS1-Part C to lawfully extend the proceedings to cover inspection-and search-cum-seizure to ensure due compliance with procedures established in the law.

There is no bar in law that only one (1) authorization in Form GST INS-01 must be granted in respect of a given investigation.

As such, there may be multiple Form GST INS01s issued and all reasons to believe and the material in support thereof be duly noted on the file when they are called in question in an application under section 67(10) or in judicial review by Courts, if any.

Step 3:

Based on Form GST INS-01, the Authorized Officer (not below the rank of Assistant Commissioner of State or Senior Intelligence Officer of Centre) is then authorized to conduct inspection or inspection-cum-search of the identified location along with witnesses (panchas).

Lady Officer to be present in case premise is a residence or such other place likely to be occupied by ladies and children.

Preparations prior to inspection

Owing to the significant scope available and the inherent urgency involved in these proceedings, it is possible that actions by Proper Officer and Authorized Officer are open to be called in question on the ground of administrative excess, if any, as a first step but in later proceedings or may even be taken up for judicial review by Courts.

CBIC Instruction 1/2020-21 (F.No.GST/INV/DGOV Reference/20-21) dated 2nd Feb 2021 may be referred to for detailed guidance about preparations and process of conducting inspection-cum-search under section 67 of the CGST Act which would mutatis mutandis apply to proceedings under State/UTGST Act.

Some important aspects are:

➢ Personal search of officers be permitted before inspection;

➢ Acknowledgment of party on Form GST INS-01 be collected and retained on file;

➢ Presence of lady Officer if women and children present on location;

➢ Witnesses (panchas) must be independent persons;

➢ Spot recovery not permissible.

➢ Videography to be considered in case of sensitive premises.

INSTRUCTIONS / GUIDELINES REGARDING PROCEDURES TO BE FOLLOWED DURING SEARCH OPERATION Dated: 02.02.2021 Instructions No. 01/2020-21 issued by CBIC in this regard. [GST-INVESTIGATION] F.No. CST/INV/DGOV Reference/20-21

Step 4:

The Authorized Officers, on arriving at the location, must disclose their identity and offer their personal search before commencement of inspection after establishing correctness of location authorized in Form GST INS-01 with location reached by officers and obtain signature of the party on Form GST INS-01 as to these matters.

Step 5:

Conduct inspection limited to the areas connected with the ‘reasons to believe’ specified in Form GST INS-01 without carrying away anything, not even copies of books of accounts.

Inspection is permitted under section 67(1) of the CGST Act.

Inspection should not be aggressive but polite and courteous.

Proceedings to be commenced and concluded during working hours unless extended .

There is nothing in section 67 that empowers ‘questioning’ persons present at the places of inspection or search. Power to question any person resides in section 70 by issuing summons. Taxpayers must extend full cooperation and support in the discharge of duties by the Authorized Officer.

Any objections regarding validity, purpose and manner of discharge of duties by Authorized Officer must not be raised during inspection. Objections, if any, may be raised after issuance but before replying to notice issued on conclusion of these proceedings. Questions posed and replies submitted may be retracted and doubted in later proceedings and the Authorized Officer will not be able to rely on such information secured.

Step 6:

When ‘reasons to believe’ (in Form GST INS-01) are validated during inspection to the satisfaction of the Authorized Officer (conducting the inspection),he should seek further authorization in Part C (of Form GST INS01) to extend ‘inspection’ to ‘search’ as permitted under section 67(2) of the CGST Act.

It is this satisfaction that (with the ‘reasons to believe’) is open to judicial scrutiny later and must be carefully complied to establish this ‘suspicion’ that incriminating articles ‘secreted’ have been searched.

Only the Authorized Officer (conducting the search) enjoys jurisdiction to proceed with the exercise of the power of search conferred in law.

Challenge to ‘reasons to believe’

‘Reasons to believe’ is less than ‘evidence in possession’ (unlike the one referred to in section 64) but more than ‘suspicion’ about potential tax evasion.

Reasons to believe, need not be disclosed to the taxpayer in the first instance, but must be the outcome of objective examination of facts that arouse suspicion and after further consideration leads to compelling conclusion that become ‘reasons to believe’ sufficient to invoke exceptional powers under section 67 to gather additional evidence about the evasion of tax.

For these reasons, powers under section 67 cannot be exercised routinely even if there is suspicion but one that can be regarded as ‘reasons to believe’ that evasion of tax has occurred. Care must be taken that

(i) existence

(ii) validity

(iii) sufficiency and

(iv) documentation of relevant material on files, in support of these reasons to believe will be called into question in the application to be filed under section 67(10) before replying to the show cause notice .

While ‘reasons to believe’ are not disclosed at the outset, they are necessarily open for taxpayer to call them into question in later proceedings to challenge the validity of the exercise of these exceptional powers in section 67. Even a court may call and examine the file noting that show the material taken on record and the consideration given to them, where the exercise of these exceptional powers are questioned by a taxpayer. Absence of reasons or existence of frivolous and implausible reasons, will certainly rob proceedings of lawful jurisdiction.

‘Justiciable’ is whether the issue can be challenged before a Court. Whether there were ‘reasons to believe’ that were reasonable or were whimsical is justiciable. Most recently, the Apex Court has laid down nine principles in PDIT v. Laljibhai Kanjibhai Mandalia [CA 4081/2022] after surveying various earlier authorities in this regard.

Just because something was discovered during inspection, does not justify grant of authorization to conduct search under section 67. It must be demonstrated that prior to discovery in inspection and on the basis of material placed on record (before inspection), ‘reasons to believe’ can be supported. Reasons cannot be discovered after exercising these powers.

Reasons must pre-exist and pre-date the grant of authorization.

Where ‘reasons to believe’ justify only inspection, search is not permissible and where ‘reasons to believe’ justify both inspection and search then, combined authorization is permissible. If, however, reasons to believe cannot support search proceedings (without including anything discovered in inspection), authorization granted to search will be rendered unlawful and consequently taint the discovery.

Improper proceedings must be questioned by taxpayer under section 160(2) at the earliest point of time in the proceedings but if the nature of inspection and the measures that follow any discovery, do not allow an opportunity for taxpayer to question or acquiesce to the inspection proceedings then the taxpayer is free to question the existence of ‘reason to believe’ at any time later – up to the time of responding to show cause notice issued demanding tax under section 74 or imposing penalty under section 130.

Question about valid ‘reasons to believe’ touches ‘jurisdiction’ exercised by Joint Commissioner and all consequent actions taken by Authorized Officer in executing the authorization granted. Where there was no jurisdiction to authorize inspection, inspection will be illegal and jurisdiction to authorize inspection but not inspection-cum-search and consequent seizure, will also be illegal and any discovery from such illegal seizure will also be tainted.

Authorization issued to inspect under section 67, being extraordinary power, must be exercised with great restraint and principles of natural justice that cannot be followed ‘prior’ to exercise of powers in law, can be adhered to ‘subsequently’ as held in the case of Menaka Gandhi v. UoI AIR 1978 SC 547. If Joint Commissioner is unable to justify ‘reasons to believe’, when called into question, then no demand will sustain out of such tainted proceedings. Without jurisdiction, even if there are any legitimate dues, it cannot be exacted.

In case of Nazir Ahmad v. King Emperor AIR 1936 PC 253, the Privy Council has stated that “Where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all.”

Tainted discovery cannot be acted upon, and GST allows a getaway by taxpayers’ consent in section 160(2), but illegality by way of ‘lack of jurisdiction’ is so profound that not even section 160(2) can come to the rescue of the demand consequent to such tainted discovery. But the Apex Court has held in the case of Pooran Mal Etc. v. DIIT, AIR 1974 SC 348 that evidence collected in illegally conducted search can still be relied upon and used in demand and prosecution proceedings; it is, therefore, imperative that taxpayer attends to only valid proceedings and objects lawfully where proceedings are illegal.

Step 7:

Search under section 67(2) must be limited to

(i) goods liable for confiscation or

(ii) documents, books or things, that are ‘secreted’ at location which was inspected and searched.

Circumstances when articles ‘are secreted’

Secreted articles (not defined in the Act but referred in this discussion) refer to the two types of articles, namely,

(i) goods liable to confiscation and

(ii) documents, books, or things, when they are ‘secreted’ and discovered to be so during search, are liable to ‘seizure’.

In other words, unless these articles ‘are secreted’, they cannot be seized. The word ‘secreted’ not only qualifies ‘documents, books or things’ but also qualifies ‘goods liable to confiscation’ as they are placed between two ‘commas’ in section 67(2) and this aspect is important to appreciate that articles liable to seizure are only those that ‘are secreted’ and if they are ‘not secreted’ then, the Authorized Officer will be unable to seize them within the scope of this provision.

‘Secreted’ does not merely refer to the fact that certain articles were lying around but refers to those that were lying around coupled with the use of some ‘device’ that makes their detection impossible. And except by removing or uncovering, by employing any means of uncovering such device (designed to conceal their existence), that they would go undetected. Device for concealment or to secret these articles may not only be an undisclosed place of storage but also a method of storage that makes them undetectable. Such methods may be by employing a manner of describing them on a document that would be misleading and successful in concealing but also deliberate mis-presentation to appear to be something else including with the use of electronic methods like passwords, cloud storage, ghost files/folders, etc. and anything else that ensures their concealment.

‘Secreted’ includes articles openly kept but in an undisclosed location in a manner that make them go undetected, which would tantamount to being secreted.

Secreted also includes non-accounting of goods where the concealment comes not from the physical location / storage but from the omission to document their possession (receipt and holding of unaccounted stocks for making supplies).

Further, goods (capital goods and inventory) that are not liable to confiscation cannot be subject to seizure and as well as all other articles (being documents, books, or things) that are not useful or relevant in any proceedings. This is a subjective test and that too, to be determined during the rush of search proceedings.

But the Authorized Officer’s use of discretion in identifying secreted articles to the place under seizure must be palpable,as this exercise of determination (not mere exercise of discretion) will need to stand judicial scrutiny later.

➢ “secreted articles” means goods and other articles which are secreted in place of search;

➢ “seized articles” means secreted articles which comprise of

(i) goods liable to confiscation and

(ii) documents, books or things and are seized by Authorized Officer against GST INS-02; and

➢ “offending articles” means goods liable to confiscation, whether seized or not, including conveyance used in committing offence under the Act.

Non-secreted circumstances

Seizure of ‘secreted articles’ under section 67(2) is legally permissible only if the said articles are ‘secreted’. In other words, if the said articles are not secreted, then proceedings under section 67 are questionable in later proceedings.

In this regard, section 35(6) prescribes as under:

“(6) ……………..where the registered person fails to account for the goods or services or both in accordance with the provisions of subsection (1), the Proper Officer shall determine the amount of tax payable on the goods or services or both that are not accounted for, as if such goods or services or both had been supplied by such person and the provisions of section 73 or 74, as the case may be, shall, mutatis mutandis, apply for determination of such tax.”

Where articles are not secreted, revenue that can be demanded will only be limited to tax, interest and penalty under section 122.

Confiscation or fine-in lieu of confiscation under section 130(2) will require such goods

(i) to be secreted and

(ii) detected in search proceedings (or in-transit interception) and these proceedings will be in addition to demand of tax, interest, and penalty under section 122.

The term ‘secreted’ extends not only to holding stock of goods at a secret location or but also to any omission to account for goods although they may not be physically secreted or even omitting to register the place where goods are stocked (as additional place of business).

Where additional places of business are not added to the registration and business may continue at such places in plain view and openly along with display of GSTIN of the principal place of business, it would prima facie neither be a case coming within section 67(2) nor be liable to confiscation under any of the five (5) clauses to section 130(1).

However, it is often seen that such additional places of business are ‘treated’ to be a secreted location along with all goods in such premises. As long as no ‘device’ is shown to be employed that would make their detection impossible and conduct of taxpayer is in the usual course of business, it does not amount to being ‘secreted’ to attract the consequences of seizure and confiscation.

Specific Authorization/Exhausted by exercise

This is a very important aspect to note that authorization to inspect or search, as the case may be, stands ‘exhausted by exercise’.

In other words, authorization is specific to:

➢ Specific officer (no sub-delegation allowed)

➢ At specified places (precise and exhaustive, not vague and inclusive)

➢ Within specified time to carry out (day and date stated on it)

Authorization must be acted upon by the Authorized Officer and inspection carried out at the specified places and in accordance with the extant instructions of CBIC / State Commissioner with respect to due process for carrying out inspection and/or search, within the specified time permitted or not at all and once it has been executed and duly conducted and Authorized Officer exits the said premises, the given authorization expires.

Authorization may expire even after lapse of time (specified therein) by which the inspection could not be conducted for any reason. But one authorization granted cannot be used for multiple visits to the premises. It is for this reason that ‘multiple Form GST INS-01’ may be granted so that there is no failure in following ‘due process’ established by law.

If inspection was carried out in the first instance, unless ‘new or additional’ reasons to extend inspection to search proceedings pre-existed at the time of first authorization and duly recorded on the files to be able to issue Part-C of Form GST INS-01, routine extension of inspection to conduct search-cumseizure will be illegal for want of jurisdiction and hence, unauthorized.

officers are welcome to secure another authorization by way of a second (and subsequent) Form GST INS-01s in order to validly extend the inspection into search proceedings.

No Endorsement/No ‘follow up’ correspondence

Once an authorization granted in one specific Form GST INS-01 is exhausted by exercise of the powers (discussed above) and the Authorized Officers exit the premises, there is no provision in law to issue ‘endorsement’ or ‘letters’ calling for explanation from the taxable person (or other person) on any matter by way of “follow up correspondence”.

There is no provision in the CGST Act authorizing such interaction, whether by correspondence or inperson. Authorized Officer is free to issue summons under section 70, summons cannot be issued in a routine manner.

Even if the taxable person were to reply to any such ‘endorsement’, the same is open to retraction or challenge at the time of adjudication.

Section 160(2) must be taken into consideration, while responding to such endorsement. It is important to verify whether proceedings under section 67 have been discharged strictly in accordance with law and any attempt to extend the ‘terms of reference’ of inspection beyond ‘evasion of tax’ into routine matters akin to “reassessment” or “audit” are not permitted under this section.

The Authorized Officer must interpret the information contained in the seized articles (documents, books or things) and reach certain conclusions relevant for the investigation, without depending on the inputs or explanation from taxable person (or other person).

If the seized articles are insufficient to reach any definitive finding of leakage of revenue, the Authorized Officer must conclude the proceedings and refer the case and the extent of evidence, if any, gathered in these proceedings to be taken up for detailed audit under section 65. But the proceedings under section 67 must be brought to a conclusion. Investigation under section 67 cannot continue indefinitely as there is a time limit in section 67(7).

Step 8:

During search, if the party is not co-operating and access is denied, section 67(4) of the CGST Act permits breaking open “any almirah, electronic devices, box, receptacle in which any goods, accounts, registers or documents of the person are suspected to be concealed”.

If access can be secured from the party, these additional powers should not be exercised.

Step 9:

Once ‘inspection’ is extended to ‘search’ and there is a discovery of ‘secreted articles’ then the Authorized Officer proceeds with ‘seizure’ either (i) to commence confiscation proceedings in respect of goods liable to confiscation were found to be secreted or

(ii) further investigation of documents, books or things were found to be secreted.

Once the Officers exit from the location, the authorization granted in Form GST INS-01 stands extinguished or exhausted. Section 67 of the CGST Act contemplates continuous proceedings until completion.

Inspection is conducted during working hours but, when the Authorized Officer is satisfied that the premises is to be ‘searched’ then proceedings must not be stopped or interrupted.

Care must be taken to ensure that proceedings are swiftly completed. Since ‘spot recovery’ is not admissible, it is important that any voluntary payment in Form GST DRC-03 is suitably documented by Form GST DRC-01A (issued under section 74(5) on the Common Portal).

Any involuntary payment via Form GST DRC-03 without Form GST DRC-01A leaves option open to claim refund by filing Form GST RFD-01 on Common Portal under ‘other payments’.

Step 10:

Order of seizure in Form GST INS-02 must be drawn up containing

(i) Purpose of proceedings under section 67(2) based on Form GST INS-01

(ii) Details of search conducted such as date, location, persons present (both sides), duration of search and details of discovery

(iii) Description of discovery – suspected, secreted or accidental – including condition in which they were found and effort involved to extricate, cooperation received / not received, process of breakage carried out (physical or electronic)

(iv) details of witnesses (panchas) and time of conclusion.

Seizure is to ‘secure and identify the specific’

All secreted articles (discussed above) are liable for seizure. Seizure is to ‘take physical custody’ of the said documents or goods or things. Seizure is a necessary requirement to ‘secure’ the specific ‘goods and documents, books,or things’ and to ‘identify’ them in later proceedings.

Seizure does not imply ‘transfer of property’ in those goods and documents, books, or things would be ‘confiscation’,).

Seizure is a good test as to whether inspection under section 67(1) led to the discovery of any incriminating material for certain on ‘new or additional’ reasons to believe that justified search proceedings. If there is no seizure, inspection will be complete, and no further proceeding remains to be carried out under section 67.

Rule 139 has prescribed Form GST INS-02 as the format of order of seizure and from a careful reading of this form, it is clear that there is no requirement that the seized articles must be carried away by the Authorized Officer.

After seizure, they may be handed back for safekeeping. But it is important that Form GST INS-02 must be drawn-up and two witnesses (or panchas) must attest Form GST INS-02. It is important to note that Form GST INS-02 is the basis to identify what was discovered in search proceedings and to refer in later proceedings or for their return eventually. After all, the Revenue is not interested in taking the responsibility of safe keeping of seized articles except to the extent they are relevant in raising demand in accordance with law.

Seizure not to ‘prevent access’ by taxpayer

Seizure is not to stop the taxpayer from accessing goods and documents, books, or things, but (as discussed earlier) to ‘secure and identify’ articles that vindicate the ‘new’ reasons to believe for invoking section 67(2) and to support demands to be raised in due course. After notice is issued or other interests of Revenue are secured, the seized articles must be returned to the person from whom they were seized and not retained by the Revenue indefinitely.

Interests of revenue being limited to collection of tax, interest, and penalty, where taxpayers come forward to either discharge or otherwise assure the interests of Revenue, the seized articles may be returned provisionally or finally . But the principle to appreciate is that preventing access by taxpayer to seized articles is not the objective of seizure.

Seizure of ‘cash’

Seizure being merely a requirement of the law to ‘secure and identify’ the documents, books or things ,it would not be remarkable if Authorized Officers were to seize ‘cash’ discovered during search proceedings.

It is important to note that even cash must be ‘secreted’ to qualify for seizure but, more importantly, cash is not ‘goods liable to confiscation’ under section 130(1) but are ‘things’ which are considered “useful or relevant” by the Authorized Officer to carrying out “any further proceedings”.

There is popular, mysterious, and erroneous understanding that ‘cash’ is illicit if discovered in search proceedings. Officers tend to seize cash without even ascertaining to whom it belongs.

There is no presumption in law, that cash seized from premises searched belongs to the person searched, unlike in similar proceedings under The Narcotic Drugs and Psychotropic Substances Act, 1985 or Prevention of Money Laundering Act, 2002.

Any presumption in GST is found in section 144 and is limited to ‘documents’.

‘Cash’ seizure does not directly point to proceeds from unaccounted sales.

That would have been easy but the Legislative wisdom is that

(i) ‘evasion of tax’ is a must for proceedings under section 67 to be with jurisdiction and lawful and

(ii) no presumption flows in favour of the Revenue, especially,

when cash may be treated to be ‘things’ and not ‘consideration from supply’.

After all, ‘things’ seized can only be if they are “useful or relevant” for the Authorized Officer in carrying out “any further proceedings”. Where ‘cash’ is sought to be seized and is properly accounted and reported in Form GST INS-02, the inspected persons need not be anxious that the cash may not be returned. It is also not permissible for this cash to be appropriated towards recovery of any liability determined without issuing a notice. And seized articles are liable to be returned .

Seizure of electronic records

While section 67(2) specifies “documents, books or things are secreted” may be seized, section 145 provides that “micro films, facsimile copies of documents and computer printouts” are to be regarded as “documents”, in terms of Information Technology Act, 2000 read with Evidence Act, 1872.

“document” means any matter expressed or described upon any substance by means of letters, figures or marks, or by more than one of those means, intended to be used, or which may be used, for the purposes of recording that matter.

Illustrations

A writing is a document;

Words printed, lithographed or photographed are documents;

A map or plan is a document;

An inscription on a metal plate or stone is a document;

A caricature is a document.”

““electronic record” means data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche.”

4. Legal recognition of electronic records. – Where any law provides that information or any other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied is such information or matter is–

(a) rendered or made available in an electronic form; and

(b) accessible so as to be usable for a subsequent reference.”

These provisions read together with section 144 makes “electronic documents” not only admissible in seizure proceedings under section 67(2) but also there is a presumption raised as to the reliability of the contents of such electronic documents when they are

(i) produced by any person

(ii) seized from the customer of any person and

(iii) have been received from any place outside India, in any proceedings under Central GST Act or any other law.

Seizure process and report

Seizure is a legal process of establishing the identity of the goods or documents or things . Further, seizure must be conducted in the presence of two witnesses (or panchas) whose presence establishes bona fides of the proceedings including protocol for search and manner of discovery of secreted articles . Absence of panchas, taints the seizure and panchas cannot be officers of Revenue or persons themselves whose premises is subject to search proceedings.

Form GST INS-02 lays down the ‘identity’ of seized articles. But care must be taken to note that

(i) goods liable to confiscation which are secreted and detected during search and

(ii) documents, books or things which are also secreted and detected during search, can only seized’.

These articles are referred to in this discussion as ‘secreted articles’. It is also important to ensure that all the articles included in Form GST INS-02 must meet this standard to be subject to seizure.

Section 67(2) not only confers authority to seize but also specifies the limits to the exercise of this authority.

Articles liable to confiscation are those that are listed in section 130(1) and to the extent of proceedings under section 67 refer to ‘outward or inward supplies carried out

(i) in contravention of law

(ii) with intent to evade payment of tax’.

There are specific ‘ingredients’ listed for the article to be ‘liable to confiscation’.

The fact that ‘articles discovered’ were secreted and discovered during search proceedings, it raises a presumption against the taxpayer and justifies ‘seizure’.

‘Presumption’ is about likely evasion, which is a ‘rebuttable presumption’ and cannot be an ‘assumption’ to justify any irreversible action by Revenue such as ‘final confiscation’ or ‘disposal’ without issuing show cause notice.

Rebuttable presumption is also subject to the process of determination of questions of fact in accordance with due process of law by adjudication.

That is, whether the goods were liable to confiscation, whether the secreted articles were secreted, in what manner were they secreted, what were the means employed to discover the secreted articles, could those secreted articles have been found without the use of means employed by the Authorized Officer, etc. are all matters which are open to examination in appeal or judicial review and cannot be admitted with finality based on the opinion of the Authorized Officers. There are several questions of facts to be established here, namely:

➢ Contravention of law; and

➢ Intent to evade payment of tax.

Irreversible actions such as final confiscation or disposal is not permitted straightaway because if the taxpayer were to be successful in rebutting this presumption (in appellate proceedings later), the benefit of this effort in successfully proving that search-cum-seizure ought not to have been carried out at all, would be rendered a mere ‘relief on paper’ if (wrongfully) seized articles are not available to be restored to the taxpayer due to premature confiscation or disposal. Since seizure secures the interests of Revenue only, seizure is permitted by law at the end of search proceedings so that the rest of the due process of law is allowed to run its course before any final action may be taken up.

To read Form GST INS02 carefully to examine if all requirements of law (discussed above) are present and complied with in these proceedings.

Right to ‘seal or break’

Where the offending articles are suspected to be stored in a locked-room or in any almirah, electronic devices, box or receptacle, and access, if, not provided by person-in-charge of premises being searched then and only then (to be duly recorded in proceedings on file) that the Authorized Officer may:

➢ ‘seal’ the door of any premises so as to prevent access by the taxpayer after access is gained to secreted articles in such premises liable for seizure; or

➢ ‘break open’ the almirah, electronic device, box or receptacle so as to gain access and seize.

As per section 67(4), immovable property cannot be seized. Immovable property can be sealed, and the Authorized Officer can ‘break’ open the door to such premises where access to such premises is denied. Procedures under the Code of Criminal Procedures, 1908 (hereinafter referred to as

“Cr.PC”) are made applicable under section 67(10) where pre-trial disclosure of all documents and records of the investigative process is mandated with Commissioner being designated to exercise the powers vested with Magistrate under section 165(5) of Cr.PC .

Movable property such as almirah, box or receptacle may be broken open to gain access.

This authority must only be exercised if there is noncooperation by taxpayer in allowing access to Authorized Officer. It is not possible for the Authorized Officer to vacate the premises and return on another occasion to gain access as the authorization to inspect would have expired on exiting from premises.

Breaking open to gain access (to secreted articles) must be understood suitably when considering electronic records as they are not to be physically broken but employing a commensurate technological method that is akin to breaking physically and to gain access to the contents. Again, this step is permitted here only if the taxpayer does not provide access or share passwords, etc. To this end, suitable technical experts may be involved with search party or taxpayer’s staff may be directed to break open password(s) or other security protocols to access records suspected to be secreted in electronic devices.

Step 11:

Order of prohibition in Form GST INS-03 must be drawn up where goods liable for confiscation are

(i) not in a position practically to be seized or

(ii) lying with third parties lawfully such as job-worker or customer on approval or warehouse-keeper, etc.

Prohibition orders

As seizure not only refers to the process of ‘taking away’ secreted articles, it is possible that instead of seizing them, the Authorized Officer may place

Inspection of Premises (Section 67)those offending articles under an order of prohibition in Form GST INS-03 which is akin to order of seizure in Form GST INS-02 but served on third party.

In both, legal ownership remains with the taxpayer and physical custody too may be left with taxpayer. But in prohibition, physical custody is always with taxpayer. Therefore, prohibition is generally with respect of secreted articles in custody of an innocent third-party such as warehouse-keeper or common carrier or customer holding goods-on-approval or job-worker holding goods (capital goods or inputs) for job-work or other holder-in-trust.

Reference may be had to the terms ‘owner or custodian’ in rule 139(4). Seizure may also be made from the person not being the taxpayer against whom cause-of-action lies for contravention of the law.

Step 12:

Order of provisional release in Form GST INS-04 is permitted under rule 140 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the CGST Rules), upon execution of a bond for the value of the goods in Form GST INS-04 and furnishing of a security in the form of a bank guarantee equivalent to the amount of applicable tax, interest and penalty payable, where request is made for such release and Authorized Officer is satisfied that provisional release will not prejudicially affect the proceedings.

Provisional release does not sanction appropriation by party by sale, consumption, or any other mode, but mere holding of custody with undertaking to produce the said articles whenever directed.

Provisional release

Conclusion of search proceedings is a prerequisite for provisional release because after search proceedings are concluded, Form GST INS-02 will be issued containing list of seized articles. It is to secure access to (but not use of) such seized articles; the taxpayer may apply for provisional release under section 67(6).

Provisional release is against own assurance that the seized goods will be produced when called for by the Authorized Officer. As such, taxpayer cannot use (consume or dispose) seized goods provisionally released and be in a position to produce them before the Authorized Officer.

No format is prescribed for seeking provisional release, taxpayers may submit a plain-paper request in writing for provisional release along with execution of bond for the value of goods in Form GST INS-04 and furnishing of a security in the form of bank guarantee equivalent to the amount of tax, interest, and penalty.

Application for provisional release applies even to ‘cash’, if the same has been seized as ‘things’ discovered in search proceedings.

Considering that the interest of Revenue is to collect tax, interest and penalty including penalty by way of confiscation, it is permissible for the Authorized Officer to ‘provisionally’ release seized goods under section 67(6).

There is hardly any reason for the Authorized Officer to turn down an application for provisional release. And this shows clearly that seizure is to ‘secure and identify’ details of all secreted articles and not a form of recovery of liability under the Act. Where suitable security is offered (to safeguard interests of Revenue), there is no ostensible reason to refuse provisional release.

Rule 140 brings out the following ‘primary requirements’ for provisional release of the seized goods:

➢ Execution of bond for the value of goods in Form GST INS-04

➢ Furnishing security in the form of bank guarantee for the amount of tax, interest and penalty applicable.

If these primary requirements are not complied then the seized articles continue to remain under order of seizure in Form GST INS-02 or order of prohibition in Form GST INS-03. Form GST INS-04 brings out these ‘additional requirement’ applicable to seized goods which are conditions subsequent that must be pre-agreed in order to secure provisional release, namely:

➢ Seized goods to be produced when called for by Authorized Officer; or

➢ Security given may be encashed in the event of failure by consumption or disposal so as not to be able to produce the same when called for by Authorized Officer.

From the above, it is evident that provisional release does not allow the taxpayer to continue the business with seized goods (especially capital goods and inventory) as they continue to be under the control of the Authorized Officer, even though, physically available with taxpayer.

The taxpayer (or other person from whose custody seizure has been made) is encouraged to make an application ‘in writing’ to the Authorized Officer to provisionally release the seized goods upon execution of bond and furnishing of security. It is also important to note that once provisional release is permitted and if the said goods are not collected within one month by the taxpayer, the provisions of rule 141 (Entry 17 to Notification No. 27/2018-Central Tax dated 13th June 2018) will be attracted, whereby those goods can be disposed-off.

However, seized documents, books or things shall be retained by the officer only for so long as he may consider necessary for the examination and for inquiry or proceedings under the GST Act.

Leaving custody with Authorized Officer involves responsibility of adequate care and protection over those articles.

However, the Authorized Officer,retaining custody of goods liable to confiscation, may be required to ensure adequate care and protection until (i) show cause notice is issued for their confiscation and

(ii) taxpayer has opted in writing to pay redemption fine in lieu of confiscation.

Retaining other seized articles – documents, books, or things – will not involve any significant burden to revenue as there is no requirement for any unusual amount of care for their safe-keeping.

However, taxpayer may still request for their release so as to deny any non-essential retention of private Inspection of Premises (Section 67) records after the purposes for which they were seized have been served and the copies of ‘documents’ seized may be collected from Authorized Officer where a plain-paper application is made under section 67(5) including taking extracts of those documents.

Refusal of provisional release, non-appealable

Among other matters, section 121(b) makes it clear that the decision of

(i) seizure and

(ii) retention, are not appealable.

Therefore, decision of Authorized Officer to seize books of account, register and other documents which were found to be secreted, is not appealable. Further, refusal to permit provisional release is also not appealable.

However, care must be taken that the bar in section 121 does not preclude

(i) calling into question the validity of seizure itself in adjudication proceedings or

(ii) in judicial review.

If the seized articles were not secreted, then there is no jurisdiction to seize them and to even include them in confiscation proceedings under section 130 .

If the seized articles include books of account, register and other documents, their seizure as well as retention (meaning, refusal to grant provisional release) are not appealable.

Care must be taken that the bar in section 121(b) specifically refers to

(i) books of account,

(ii) register and

(iii) other documents.

The difference in expressions used in sections 67(2) and 121(b) are visible and distinct.

Without repeating the expressions used, it suffices to state that “things” seized, do not come within the bar in section 121(b). As seen from the discussion above on seizure of cash, which may be seized for being “things”,

The bar in section 121(b) does not apply to “things” and for this reason, when the purpose for which cash is seized has been served, there is no occasion to refuse release of cash seized and such refusal does not operate within the bar in section 121(b) which applies only to

(i) books of account,

(ii) register and

(iii) other documents.

Omission to seize

There is no mandate that all secreted articles must be seized although it is uncommon that some of the secreted articles may be omitted from Form GST INS-02 or Form GST INS-03.

But articles that are not secreted cannot be seized and this would be a significant aspect later in questioning of jurisdiction of seizure proceedings and if offending articles are omitted from being seized, it may impair confiscation proceedings. Whether such omission will be fatal to those proceedings or not is a different matter but, seizure being a factual position where tax authorities need to ‘secure and identify’ secreted articles, Form GST INS-02 must contain only those articles that are offending albeit in the realm of suspicion but not those that do not bear any suspicion.

Merely to exert undue influence, non-secreted articles, or articles unconnected with the proceedings may be placed under seizure but this would be illegal and will taint the integrity of these proceedings.

For example, inspection of job-workers premises cannot result in seizure of moulds and dies issued by other principals. Capital goods belonging to job-worker cannot be seized if capital goods are not in any way involved in the suspected offence.

Seizure NOT a form of ‘recovery’

Section 79 provides wide powers of recovery including but not limited to disposal of (movable and immovable) property of taxpayer-in-default and such property need not be involved in the offence in any way.

While recovery is allowed in respect of all properties of the taxpayer-in-default, seizure must be limited to offending articles that are suspected to be involved in the contravention of law.

As stated earlier, immovable property cannot be seized under section 67 nor can movable property, that are not involved in the contravention of law. When these cannot be seized, they cannot even be included in confiscation proceedings

Step 13:

Certain articles may also be disposed ad interim in Form GST INS05 proceedings under rule 141; such articles are specified in Notification No. 27/2018-Central Tax dated 13th Jun 2018 .

Articles of special nature and special circumstances

The Government may notify ‘class of goods’ which must be disposed-off immediately after seizure. As discussed earlier, seizure is not a final determination of all questions of fact and law but the start of those proceedings. Section 67(8) empowers the Government to authorize Authorized Officer to ‘dispose-off’ certain class of goods (being goods liable to confiscation and discovered during search and placed under seizure) as are notified by the Government and requires a careful consideration of the nature of such goods, namely:

➢ Perishable or hazardous nature of goods;

➢ Depreciable goods;

➢ Constraints of storage space; or

➢ Any other relevant consideration.

The Government is authorized to notify such goods and those that are notified must meet the criteria in law and in order to notify them, such goods must meet any of the criteria listed above.

When goods that are notified are involved in any search proceedings (which are discovered to be secreted and placed under seizure), the Authorized

Officer is required to dispose-off such goods, ‘as soon as may be’, after issuing Form GST INS-02 even without allowing provisional release in Form GST INS-04.

Rule 141 selects one out of the above four classes of goods listed as perishable or hazardous nature which are seized and permits taxable person to pay lower of (i) market price of said goods or (ii) tax, interest and penalty that ‘may’ become applicable on the said goods and on payment of said amount, such goods involved may be released. The Authorized Officer is required to pass an order in Form GST INS-05 demanding the said amount.

Failure to pay this amount after it is determined vide Form GST INS-05 will authorize disposal of said goods by the Authorized Officer and apply the proceeds towards the liability of the taxpayer that ‘may’ arise on conclusion of adjudication (and appellate) proceedings.

Considering that these are extreme powers conferred on Authorized Officer, the same must be exercised judiciously and with care and when goods involved are notified under section 67(8), all parties involved must be aware of the extraneous nature of proceedings that could ensue. It is important to note that cooperation extended during search-cum-seizure proceedings can escalate into a demand in Form GST INS-05 if the goods seized are those listed in Notification No. 27/2018-Central Tax dated 13th Jun 2018 .

Articles not listed in the said notification cannot be subject to Form GST INS05 proceedings and must be entertained under section 67(6) to be released provisionally against Form GST INS-04. In other words, if the goods listed in said notification are involved in seizure proceedings, care must be taken to verify that soon after Form GST INS-02 is issued, application is quickly submitted requesting provisional release in Form GSTINS-04.

While there is no requirement as to the time by when orders in Form GST INS-05 must be passed or that option for provisional release must necessarily be rejected, if taxpayer is willing to execute bond and furnish security, even goods covered by this notification are to be released. There is no provision that compels the Authorized Officer to bypass provisionalrelease in Form GST INS-04 to a willing taxpayer and go ahead to pass orders in Form GST INS-05. Further, when provisional release is ordered in Form GST INS-04, the taxpayer must document his willingness to take custody not later than one month to save from the rigours of orders in Form

GST INS-05. Refer Entry 17 in this notification which applies to non-perishable goods too, which have been ordered for provisional release but left uncollected with Authorized Officer

Step 14: Based on the discovery during search proceedings, Officers must bring it to a conclusion either by (i) demanding tax/credit by issuing a show cause notice under section 74 or (ii) dropping proceedings. Seized articles, which are not relied upon for issue of show cause notice, must be returned within thirty (30) days of the show cause notice and where no show cause notice is issued, within six (6) months (may be extended by further six months) from date of order of seizure.

Show cause notice

After inspection and search, demand for tax, interest and penalty requires that provisions of section 74 read with section 122 and / or section 130 must follow.

Show cause notice imposing penalty in respect of offending articles must be issued under section 74 (and 76) and not under section 73. Issuance of notice under section 73 after proceedings under section 67 are contradictory because proceedings under section 67 relates only to ‘evasion of tax’ and notice issued section 73 admits that ‘no evasion’ is involved in the demand.

This show cause notice not only requires all the special circumstances under section 74 to be alleged and evidence adduced to discharge burden of proof but also the special ingredients necessary to support the allegation under section 122 and / or section 130 to be brought home.

The taxpayer is not liable to prove his innocence, even if provisional release in Form GST INS-04 is secured or payment is made under proceedings in Form GST INS-05.

The presumption about offending articles is a rebuttable presumption and a closer look at the list of offending articles highlights the approach taxpayer has to follow in responding to the show cause notice.

As stated earlier, secreted articles refer to:

➢ Goods liable to confiscation which were ‘secreted’; or

➢ Documents or books or things, useful or relevant to any proceedings which were ‘secreted’ in any place.

It is important to note that goods liable to confiscation involve allegation of offence against taxpayer and discussion under section 130 may be referred. Suffice to mention that the ‘burden of proof’ rests on Revenue although proceedings under section 67 may have been initiated based on ‘reasons to believe’. Reasons to believe that existed prior to authorization of inspection may not always be confirmed after inspection to justify ‘new’ reasons to believe that seizure is necessary so as to initiate confiscation in respect of taxable goods included in the list of seized articles. While there may have been sufficient reasons to believe for authorization in Form GST INS-01 to be granted by Joint Commissioner (or higher rank officer), that was examined (and recorded on the file) by Joint Commissioner, it is not beyond challenge in adjudication proceedings and unless found to be satisfactory, even legitimate demands will be tainted and fail as malicious inspection will be illegal and void ab initio.

Failure to raise objections as to the legitimacy of Form GST INS-01 proceedings, carries with it the risk of acquiescence under section 160(2) as questions about the legality of any notice must be raised at the earliest opportunity and without this question being satisfactorily resolved, entertaining such notices (passively by replying on merits) procures validity to such notice and belated realization cannot be agitated later in appeal or judicial review after having acquiesced already.

As regards documents, books or things secreted, it is important to refer to section 67(2) where the ones considered ‘useful or relevant’ in search proceedings must be included in Form GST INS-02 or be the ones that are submitted later to Revenue authorities ( ‘spot seizure’).

All those documents, books or things that are ‘not relied upon’ in the show cause notice are required to be returned to taxpayer within 30 days from date of notice.

The relevance of such documents, books or things, depends on

(i) extent of reliance placed on them in the notice

(ii) extent of evidentiary value they carry in relation to the allegations in the notice and

(iii) approach followed by taxpayer in responding to the allegation in the notice.

As such, taxpayer should not rush to address questions of merits even when a show cause notice is issued since GST is a self-assessment-based tax under section 59 and except for input tax credit under section 155, burden of proof in respect of all other demands for tax or penalty under section 122 and / or section 130 remains on revenue.

The taxpayer must be allowed all the safeguards available in section 75 and that would be available only if the show cause notice were issued under sections 73 or 74.

That show cause notice cannot be directly issued under sections 122-130 as only the requirement that opportunity of hearing be granted is contained in section 122-130 but none of the safeguards such as section 75(7) or section 75(10) are available in section 122-130.

It is important to note that amendment to rule 142(1A), by replacing ‘shall’ with ‘may’, alters the requirement to undertake pre-notice consultations in all cases.

Pre-notice consultations are mandatory in all cases in view of the mandate in sections 73(5) and 74(5).

However, in cases involving fictitious supplies and credit racketeering, mandate in rule 142(1A) operated as a bar against proceeding with notice to persons involved in these cases. With the relaxation of the requirements in the rule, the Revenue is able to proceed with issuing notices to offenders, denying them the defence of omission to undertake pre-notice consultations.

In all other cases, even when they qualify for notices to be issued under section 74, pre-notice consultations are mandatory as it flows from a large number of decisions which recognized the Government’s position in the National Litigation Policy that efforts will be made to resolve potential disputes by engaging in such consultations.

Omission to follow pre-notice consultations have resulted in notices being quashed and parties relegated to pre-notice stage to undertake necessary consultations.

Where a notice is issued under section 73, it amounts to admission by the Authorized Officer that nothing in the nature of ‘evasion of tax’ has been unearthed in the proceedings under section 67.

Where there is admission of non-evasion, proceedings under section 67 must be concluded and not continued to raise demands on routine matters which are left to the Proper Officer under sections 61 or 65 to take up. Just because some material is stumbled upon relating to, say, error in computation of credit reversal or doubts about applicability of exemption, etc. that does not permit the Authorized Officer to travel beyond the four corners of section 67(1)(a) against the taxable person or section 67(1)(b) against other person, to issue demands. That would also be lacking jurisdiction.

Inspection is an exceptional power which cannot be exercised to carry out routine verification of compliance. Information so gathered may be passed on to Proper Officer for necessary action in accordance with law.

Show cause notice pursuant to proceedings under section 67 must be issued under section 74 (and / or section 76) but not under section 73, and the demand cannot travel beyond the scope of ‘matters arising in inspection’ .,It is not permissible for notice pursuant to proceedings under section 67 to ‘also’ cover matters that are not related to evasion of tax merely because Authorized Officer has accessed books. There is no such thing as comprehensive notice on all matters of GST compliance when only very specific areas of investigation were authorized.

Demands on these matters where the taxpayer responds on merits ‘without prejudice’ to objections on jurisdiction are likely to be saved if the Adjudicating or Appellate Authority were to reach a finding for Revenue.

Notwithstanding rule 121, a taxpayer must be sure of the validity of proceedings before proceeding to respond on merits. After all, without jurisdiction, nothing remains in the said proceedings. This is a matter of opinion and each taxpayer may take counseling before embarking on the long journey ahead once a notice is issued in these proceedings .

While the issues raised in notice may not be exactly aligned with the ‘reasons to believe’ that inspection is warranted, they also cannot travel so far away from these reasons as to be an ‘after discovery’. That would cause trespass of proceedings under section 67 into the territory occupied by section 65.

It is to protect interests of Revenue, is not acceptable for the reasons stated in Nazir Ahmed v. King Emperor (ibid).Allegations in the notice must touch ‘reasons to believe’ contained in file noting for grant of authorization. And to know this, safeguards for taxpayer are provided in section 67(10) where application as applicable under section 165(5) of Cr.PC is made appliable to proceedings under this law.

Release of seized articles

Show cause notice is issued, all seized articles which are not relied upon for issue of such SCN, are to be released to taxpayer within thirty days from date of show cause notice as per section 67(3) and

Where show cause notice is not issued, within six months from date of Form GST INS-02 as per section 67(7).

Where the inquiry cannot be concluded within the time permitted, extension may be sought by the Authorized Officer for a further period not exceeding six months. There is no requirement that the entire duration allowed for extension must be allowed at once. But failure to complete inquiry within twelve months will result in frustration of the entire proceedings.

The taxpayer is free to object to reasons for (seeking and grant of) extension or fatal delay in concluding proceedings, in an application under section 67(1) and it will be open to challenge in later proceedings. Indefinite extensions are not permitted in GST.

Therefore, all proceedings initiated under section 67(1) in Form GST INS-01 and proceeded under section 67(2) resulting in seizure in Form GST INS-02 or prohibition in Form GST INS-03, must conclude in any of the following ways:

➢ show cause notice under section 74 read with section 122 and / or 130; or

➢ release of seized articles within 6 months from date of Form GST INS02/ Form GST INS-03.

Payment in Form GST INS-05 does not authorize conclusion to proceedings under section 67. It is only an emergency provision to protect the goods and the interests of Revenue in case of perishable or hazardous articles. Notice for payment of tax, interest and penalty must still be issued in these cases and amount collected being available for appropriation against dues finally determined.

Duty of Magistrate to be exercised by Commissioner

Not only the taxable person is entitled to collect

(i) copies of seized articles under section 67(5) or

(ii) secure their release provisionally under section 67(6), but he must be furnished with copies of all

(i) authorizations granted in the said proceedings

(ii) copies of file noting and

(iii) any other related records, which form the basis of the show cause notice in terms of a short but significant reference made in section 67(10).

This sub-section refers to section 165 of Cr.PC and the Commissioner is substituted for Magistrate under Cr.PC. As required in Cr.PC, the taxpayer who is served with a notice under section 74, 76 or 130, at the end of proceedings under section 67 must consider making an application to the ‘Commissioner’ to discharge duties cast on a Magistrate under section 165(5) of Cr.PC .

This application cannot be denied merely because show cause notice is already issued. After all, in terms of CBIC Circular No. 31/05/2018-GST dated 9th Feb 2018 amended by Circular No. 169/01/2022-GST dated 12th Mar 2022, in amended Para-6 states that Officers of Audit and Intelligence Commissionerate are permitted to carry out their audit or investigations and issue show cause notice.

But for purposes of adjudication, the file and the notice must be transferred to Proper Officer (subject to pecuniary limits) in the Executive Commissionerate to hear the noticee and adjudicate. In keeping with this requirement, documents must be kept ready in order to prevent any allegation of denial of justice in adjudication proceedings. This provision is for taxpayer safeguard and to ensure justice is done.

Decisions of the Apex Court that are relevant are:

(i) State of Rajasthan v. Rahman AIR 1960 SC 210 which held that:

“The power of search given under this chapter is incidental to the conduct of investigation the police officer is authorized by law to make.

Under section 165 four conditions are imposed:

(i) the police officer must have reasonable ground for believing that anything necessary for the purposes of an investigation of an offence cannot, in his opinion, be obtained otherwise than by making a search, without undue delay;

(ii) he should record in writing is to be made;

(iii) be must conduct the search, if practicable, in person; and

(iv) if it is not practicable to make the search himself, he must record in writing the reasons for not himself making the search and shall authorize a subordinate officer to make the search after specifying in writing the place to be searched, and, so far as possible, the thing for which search is to be made, as search is a process exceedingly arbitrary in character, stringent statutory conditions are imposed on the exercise of the power.”

(ii) RS Jhaver & Ors AIR 1968 SC 59 which held that:

“We are therefore of opinion that safeguards provided in section165 also apply to searches made under sub-section (2).

These safeguards are –

(i) the empowered officer must have reasonable grounds for believing that anything necessary for the purpose of recovery of tax may be found in any place within the jurisdiction,

(ii) he must be of the opinion that such thing cannot be otherwise got without undue delay,

(iii) he (sic) must record in writing the grounds of his belief, and

(iv) he must specify in writing so far as possible the thing for which search is to be made. After he has done these things, he can make the search.

These safeguards, which in our opinion apply (to, sic) searches under sub-section (2) also clearly show that the power to search under subsection (2) is not arbitrary.”

No burden to prove innocence in GST

Previously, the taxpayer was expected to prove the innocence or demonstrate the correctness of tax position (levy, classification, valuation, credit, etc.) adopted and Revenue would merely question its correctness.

But in GST, given that every administrative proceeding is laid down with a clear ‘due process’.

That the provisions of section 59 read with section 155 of the CGST Act, makes it abundantly clear that the taxpayer does not bear the initial burden to prove that the self-assessment carried out is accurate.

In GST the law has placed the burden on the Revenue in case of dissatisfaction over the self-assessment carried out by any registered person.

Burden in case of ‘tax evasion’

Where a taxpayer is answerable to a notice demanding tax, involving evasion of tax and once the Revenue makes out a prima facie case on facts, it raises a presumption against such taxpayer. Now, it becomes imperative for the taxpayer to either rebut that presumption or to affirm that presumption due to failure of rebuttal.

There is a difference between ‘burden’ and ‘onus’ under the Evidence law where the burden always remains on the person whom the law states to bear it, but when new material is introduced, in rebuttal or otherwise, then the onus to prove all the requirements of its admissibility shifts to the person introducing such material.

In Narayan Bhagwantrao Gosavi Balajiwale v. Gopal Vinayak Gosavi & Ors. AIR 1960 SC 100, the Apex Court has held that when both sides introduce evidence, the question of ‘burden of proof’ becomes academic.

In a self-assessment based tax regime, the Revenue must show that a prima facie case exists against the taxpayer’s determination of liability and it does not suffice to put forward an alternate interpretation and leave the taxpayer to prove the correctness of the self-assessment carried out. To do so would be violative of the mandate contained in section 59 of the CGST Act

Applicability of the principles of Indian Evidence Act to GST

When it comes to demanding tax, that has already been self-assessed, it is not sufficient to merely doubt its correctness and leave the taxpayer to run around to get the notices set aside. Any statement should be made responsibly.

The standard of care in establishing facts cannot be anything short of the standards laid down in the Indian Evidence Act.

While the rigorous rules of procedure contained in Indian Evidence Act are applicable only to matters before a Court, the Apex Court in the case of Chuharmal, Etc. v. UoI & Ors AIR 1988 SC 1384, has stated that since equitable principles of common law are contained in Indian Evidence Act, their applicability to taxation matters is not barred and must be admitted to establish facts for the purpose of determination of question of law which relies on established facts.

Inspection is a very specific and emergency power as it contains various in built safeguards in the form of prior authorization by Joint Commissioner (or higher rank Officer) for ‘good and sufficient’ reasons to believe and for other additional reasons emerging or validated after inspection to justify escalation of the proceedings from ‘inspection to search’.

Secreted articles discovered during search can only be seized.

Inspection is limited to transactions involving

1. ‘suppression of stock or

2. supplies’ or

3. ‘availment of disentitled input tax credit’ or

4. ‘other contravention with intent to evade tax’.

Search is an aggravated form of evasion where some device is employed by taxpayer to conceal the evasion.

Exceptional misadventures demand exceptional powers.

Exceptional powers need flexibility and section 67 allows flexibility but needs to be overseen by Joint Commissioner (or higher rank Officer). And proceedings initiated under section 67 must conclude with either ‘no finding’ or a show cause notice under section 74 read with section 130 (penalty under 122 may be in addition to it).

Intelligence needed to invoke exceptional powers

Taxpayers must be mindful that intelligence (about ‘evasion of tax’) cannot be collected from taxpayer by issuing summons or other non-descript letters and correspondence. Taxpayer is well within the rights, remedies and safeguards provided in the law to object any communication as to its validity by calling the same into question .

It is important to be aware that intelligence must be gathered by Revenue to secure necessary authorization and invoke exceptional powers in section 67.

Suspicion is neither sufficient nor is doubt about possible evasion. Intelligence must be gathered before invoking the powers under this sectionand not after invoking these powers. Lack of intelligence (about ‘evasion of tax’) amounts to misapplication of these exceptional powers and a ‘fishing expedition’ which demands active disobedience, must be duly and politely communicated.

Now a question may arise as to how would the Revenue gather this intelligence without conducting detailed examination of accounts and records of the taxpayer?

When the Legislature has stated that GST is a self assessment-based tax regime, all other provisions of the law must be interpreted and administered in harmony with section 59 and not in derogation of it.

Therefore, ‘intelligence gathering’ must be in a non-intrusive manner. Hence the traditional approach of calling for books of accounts and verification of bills, vouchers and contracts, is no longer acceptable in GST and analytical and insightful approach must be followed by the Revenue.

The Parliament believes that it is possible now in this connected world where nearly no transaction escapes without leaving an online trail that can be picked up to expose potential evasion. Use of data analytics, validation with third-party data and other methods are available for Revenue to gather necessary intelligence before reaching out to the taxpayer, exercising these exceptional powers.

That proceedings under section 67 cannot trespass into routine matters of ‘verification of correctness’ of compliances as expressed in section 2(13) for purposes of audit under section 65.

It is also important to note that during inspection, even if other routine matters come to light, Authorized Officer is barred from expanding scope of proceedings unless these matters

(i) tantamount to evasion of tax and

(ii) contained within the authorization granted.

In these early years since introduction of GST, it is noted that investigations initiated are not concluded when evasion of tax is not detected but expanded to cover routine matters in order to have some finding and issue some notice.

Taxpayers equally fail to object to ‘inquiry’ becoming an ‘enquiry’ into these routine areas by failing to question the validity of proceedings that are otherwise invalid for want of jurisdiction. This is referred as ‘acquiescence’ by taxpayer.

Section 160(2) of the CGST Act prohibits a taxpayer from ‘questioning invalid proceedings’ as responding to matters contained in an invalid notice (order or communication) tant amounts to entertaining such proceeding indirectly. This provision may be understood as taxpayer giving validity to an otherwise invalid proceeding by

(i) failing to question its validity or

(ii) attending to it on merits before examining its validity.

This is also called ‘acquiescence’, which means ‘admitting its validity by omission or submission’ to requirements in such notice, order, or communication.

Where a proceeding is found to be invalid and does not explicitly disclose theprovisions of law under which it is being initiated, the taxpayer cannot legally be found at fault for disobedience in such proceedings.

Only after the Proper Officer is ‘put at notice’ that the proposed action is not in accordance with the mandate in law and in spite of this notice, the Proper Officer proceeds, then the High Court will entertain a complaint (or petition) to interfere and put a stop to such deviation. This is referred as duty of the person who seeks redressal to first ‘demand justice’ from the person (who is to be complained against), before making it clear that a complaint (or petition) is justified and maintainable. Very often, by demanding justice, the injustice that would have ensued by incorrect administrative actions will be readily redressed by the same person.

Where the taxpayer suffers an unjust notice (or proceeding) and submits to those proceedings, then such taxpayer cannot be seen objecting to that which has been acquiesced (or consented). Vigilantibus non dormientibus jura subveniunt is a latin maxim which means, the law will not help those who sleep on their rights. If a taxpayer wishes that rights, remedies, and safeguards provided by Legislature be followed, then its abuse must be actively contested not by ignoring it but by politely ‘putting at notice’ the Proper Officer who will be willing to reconsider the proposed action when the illegality is brought to his attention. There is no need for a taxpayer to presume that the Proper Officer is acting deliberately in a mala fide manner.

Summary Conclusions:-

Pre-condition to any intrusive action There are very fundamental and essential ‘ingredients’ that must be shown to exist prior to grant of authorization by Joint Commissioner to any other officer, who will be empowered to discharge duties as the ‘Authorized Officer’ for inspection of the premises or goods. Inspection under section 67 is preauthorized by Circular No. 3/3/2018-GST dated 5th Jul 2017.

Reference may be had to rule 139 where Form GST INS-01 is prescribed as the format of authorization to be granted by Joint Commissioner. This format shows the specific ‘contraventions’ potentially involved, that support the request for authorization.

Reasons to believe, must be about ‘contraventions’ listed in section 67 that apply to ‘taxable person’:

➢ ‘suppressed’ any transaction of supply;

➢ ‘suppressed’ stock of goods;

➢ claimed input tax credit ‘in excess’ of entitlement; and

➢ indulged in ‘contravention to evade payment of tax’.

While allegations made later (in notice) may vary but cannot be used to raise demands in respect of matters that are not traceable to the above ‘contraventions’. This is to avoid ‘full scale audit’ being conducted after securing authorization for one or other contravention involving ‘evasion of tax’.

And those that apply to ‘any person’ being (i) transporter or (ii) warehousekeeper, are:

➢ transporting goods which have escaped payment of tax;

➢ storing goods which have escaped payment of tax;

➢ keeping accounts or keeping goods, in a manner as is likely to cause evasion of tax payable.

A close review of the ‘ingredients’ in each of the instances reveals the onerous task on Joint Commissioner to give careful consideration to the facts and suspicion presented before issuing authorization to reach a conclusion that invoking powers under section 67 is justified. Mere possibility that Inspection of Premises (Section 67) 17 evasion may be involved without material facts taken on record, does not provide sufficient basis for the grant of authorization. Jurisprudence is well developed in the context of other laws such as Income-tax, Customs and Sales tax, to state that:

➢ suspicion is not sufficient to warrant inspection or search;

➢ authorization cannot be granted without ‘reasons to believe’ that fall within those listed in the statute;

➢ authorization granted must be based on material taken on record;

➢ file must contain notes as the nature of examination (of those records), deliberation carried out and the satisfaction reached that forms the ‘reasons to believe’; and

➢ that except by undertaking this exercise alone which is justified and warranted, no other proceeding under the law will be equally efficacious in the facts and circumstances of the case.

Preparations prior to inspection

Owing to the significant scope available and the inherent urgency involved in these proceedings, it is possible that actions by Proper Officer and Authorized Officer are open to be called in question on the ground of administrative excess, if any, as a first step but in later proceedings (discussed later) or may even be taken up for judicial review by Courts.

CBIC Instruction 1/2020-21 (F.No.GST/INV/DGOV Reference/20-21) dated 2 Feb 2021 may be referred to for detailed guidance about preparations and process of conducting inspection-cum-search under section 67 of the CGST Act which would mutatis mutandis apply to proceedings under State/UTGST Act.

Some important aspects are:

➢ Personal search of officers be permitted before inspection;

➢ Acknowledgment of party on Form GST INS-01 be collected and retained on file;

➢ Presence of lady Officer if women and children present on location;

➢ Witnesses (panchas) must be independent persons;

➢ Spot recovery not permissible.

➢ Videography to be considered in case of sensitive premises. Instructions No. 01/2020-21 issued by CBIC in this regard are contained in Annexure.

Inspection versus Search Care must be taken in choosing the sub-section under which this authorization is given. Authorization is not a carte blanche permission i.e., not a full authority to inspect or search any place or premises because (i) inspection and (ii) search, are two different processes in this law.

‘Inspection’ is permitted under section 67(1) where ‘reasons to believe’ must be that of the Joint Commissioner (or higher rank Officer) who will then grant authorization to ‘any other’ Officer as the Authorized Officer to inspect the specific premises listed in Form GST INS-01.

Inspection does not allow opening up of cupboards and so on; that is permitted only in search proceedings.

‘Search’ is permitted under section 67(2) where ‘new or additional’ reasons to believe must be or become available to the Joint Commissioner (or higher rank Officer) to ‘further authorize’ the (same or another) Officer, who was granted authorization under section 67(1) himself, to act as Authorized Officer and conduct search-cum-seizure proceedings under section 67(2).

Considering that seizure is permitted in only search proceedings and not in inspection proceedings, it is important to discuss whether ‘reasons to believe’ that provide reasons to grant authorization for ‘inspection’ are sufficient to conduct ‘search-cum-seizure’ or ‘new or additional’ reasons are required. Further, it is important to consider whether these new or additional reasons to authorize search-cum-seizure must also pre-exist at the time of grant of authorisation in Form GST INS-01 or whether they can be discovered during inspection to support extending the proceedings to ‘search-cum-seizure’.

While ‘evasion of tax’ is the touchstone for ‘inspection’, articles being ‘secreted’ is the bedrock of ‘search-cum-seizure’. If both these dissimilar reasons are known prior to inspection, then comprehensive Form GST INS01 may be issued in Part-A or Part-B to conduct inspection as well as in PartC to conduct search-cum-seizure. If not, then Form GST INS-01 in Part-A or Part-B will only be issued to conduct inspection and any discovery during inspection will then be relied upon to support reasons to issue another Form GST INS-01 in Part-C to proceed with search-cum-seizure proceedings.

On a careful reading of the two sub-sections, it appears that:

➢ Reasons to believe that are sufficient just to ‘inspect’ the place(s) of business justifies grant of authorization and this satisfaction must be ensured by Joint Commissioner (or higher rank Officer). Based on this authorization, ‘any other’ Officer as the Authorized Officer will execute

the authorization and report back (no format prescribed) of outcome of such inspection proceedings;

➢ New or additional reasons to believe must become available or be already available which are validated by discovery during inspection, to support a further authorization to ‘search’ all or any of the place(s) of business that were inspected and this satisfaction must also be ensured by the Joint Commissioner (or higher rank Officer).

Questions that arise are whether these ‘two instances’ where reasons to believe were established should pre-exist before Form GST INS-01 or only one may exist before Form GST INS-01 and another emerge out of discovery in inspection. Perusal of Form GST INS-01 brings out the following aspects:

➢ Form GST INS-01 is the form of authorization for ‘inspection’ and is also the prescribed form for authorization of ‘search-cum-seizure’;

➢ Form GST INS-01 Part A – taxable person and place(s) to be inspected; or ➢ Form GST INS-01 Part B – other persons and place(s) to be inspected; or ➢ Form GST INS-01 Part C – specified location believed to contain secreted articles;

➢ Authorization:

– To another Authorized Officer to ‘inspect’; or

– To another Authorized Officer to ‘search’ and if offending articles (goods or documents) are found to ‘seize’ and produce before Joint Commissioner.

From the above it is clear that there are ‘two instances’ where all these reasons to believe must pre-exist at the time of authorization. As such, Form GST INS-01 must be for ‘inspection only’ or ‘inspection and search’ when it is granted to the Authorized Officer(s) and there can be two Forms GST INS01, where one is for ‘inspection only’ (based on certain reasons to believe) granted to one Officer and another for ‘search’ (based on additional reasons to believe) granted to same or different Officer.

It is reasonable to expect ‘combined authorization’ for being more practical and for this reason, careful examination of these pre-existing reasons is essential to determine whether they were sufficient to support only inspection (but not search) or both inspection as well as search-cum-seizure. It may be noted that any discovery during inspection (suspected to have already been in the knowledge of Joint Commissioner at the time of grant of authorization in Form GST INS-01) cannot be used to automatically extend inspection to search-cum-seizure proceedings if these new or additional reasons are not placed on record in Form GST INS-01 that is issued. This is key to challenge the validity of proceedings under section 67. Search-cum-seizure is limited to ‘secreted articles’, that too, comprising only of the following:

➢ Goods liable to confiscation which are found to be ‘secreted’; or

➢ Documents or books or things, useful or relevant to any proceedings, which are found to be ‘secreted’ in any place.

It is therefore important to consider whether proceedings are carried out ‘under section 67(1) or under section 67(2)’. The scope and limitations of what can and cannot be done under each sub-section are laid down in those provisions and vastly differ from each other.

It is very interesting to note that the format in Form GST INS-01, inspection + search + seizure is in one Form and the selection of each Part in this Form must be carefully examined as to whether the grant of authorization is for one (inspection), two (search and seizure) or all three aspects in a manner that it will stand up to judicial scrutiny later. Considering the intricate nature of these processes that any slip in this 3-step procedure will taint the entire proceedings and legitimate discovery could be annulled due to the process adopted being tainted and bad in law.

The most powerful provision in the entire CGST Act, section 59 would take the top spot.

The registered person to be the only one with authority to conduct ‘assessment’ of tax payable under the Act (and under IGST and Cess Acts). When the law appoints the registered person to carry out assessment of tax payable, the Proper Officer cannot seek to carryout assessment.

And once self-assessment has been made and the Proper Officer is dissatisfied with the outcome of such self-assessment then it is the responsibility of the Proper Officer to produce material to question the validity of the self assessment carried out by the registered person and demand tax, in accordance with the procedures established in this law.

Section 155 of the CGST Act places the ‘burden of proof’ upon the registered person only in respect of ‘eligibility to input tax credit’ and therefore, by implication of this provision, the burden of proof on ‘all other aspects’ of assessment carried out, lies on the Proper Officer.

This is evident from the provisions of section 75(7) of the CGST Act, which only makes it necessary that show cause notice issued should contain specific ‘grounds’ which support the demand and also requires the Adjudicating Authority to confine the order confirming demand, if any, to be based on those ‘grounds’ and no other.

Steps Taxpayers attending the proceeding may Consider:-

Based on experience under earlier laws and some new experience under GST law, following chart depicts the essential steps a taxpayer may consider in attending to proceedings under section 67:

Step-1 – Where officers arrive at POB for “inspection’ ask and view INS01 and, if permitted copy of INS01

↓

Step-2 – Also ask for

(i) identification and

(ii) personal search, of Officers conducting ‘inspection’

↓

Step-3 – Extend cooperation. Do not call for presence of CA or other Consultant

↓

Step-4- Permit Officers to carry out proceedings without interruptions

↓

Step-5 – Where any articles are to be seized, ask for INS02 and confirm

(i) correctness

(ii) Completeness and

(iii) Independent (pancha) witnesses attest

↓

Step-6 – DO NOT make any ‘spot payment of any liability discovered and informed by officers

↓

Step-7 – DO NOT assume any ‘concessional treatment’ will be allowed in later proceedings. Officers will strictly follow the law and allow concession, if available in law.

↓

Step-8 – Without summons, DO NOT record any statement in writing, if compelled, obey instructions and review later.

↓

Step-9 – Make written request for provisional release of seized articles (in writing) and follow up for written response

↓

Step-10 – Await SCN with DRC01 (after completing DRC01A procedure)

↓

Step-11 – DO NOT OMIT to make 67(10) application to Joint Commissioner (and not to Adjudicating Authority)

↓

Step-12- Await

(i) reply to 67(10) application

(ii) Conduct cross-examination, if requested and

(iii) confirm copes of all documents issued

↓

Step-13 – Reply to SCN before Adjudicating Authority (who will be independent of the investigating officer)

Conclusions Section 67

Steps to be followed during inspection and search leading to seizure must be taken note of to understand the ‘powers and obligations’ bestowed on the Authorized Officer as well as the ‘rights and remedies’ allowed to taxpayer.

A quick overview is provided in the chart below:

Step-1 JC or any higher rank officer with ‘reasons to believe’ authorizes PO in INS01 to “inspect” place of business (specified places(s) on specified dates by specified PO

↓

Step-2 PO inspect POB of taxable person for

(i) suppressed supply or stocks

(ii) credit in excess of entitlement

(iii) contravene law to evade tax

↓

Step-3 PO inspects POB of other person(s) who

(i) store offending goods or

(ii) keep accounts or goods in “manner likely to cause evasion”

↓

Step-4 PO for JCs ‘new reasons to believe ‘(liable to be called into question in later proceedings) upgrades ‘inspection’ to ‘search’

↓

Step-5 Seizure of

(i) offending goods secreted or

(ii) documents, goods or things secreted , in INS02 (authorization exhausts on exercise or vacating POB

↓

Step-6 Prohibition in INS03 by PO to third party holding offending goods ( to retain and not forego custody)

↓

Step-7 Provisional release in INS04 WITH BG for estimated tax+ interest +penalty (request be documented)

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Step-8 Special articles (27/2018-CT) liable to disposal, released if tax of FMV (lower) paid in INS05

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Step-9 Released seized articles not relied upon for issue of SCN (I) 30 days after SCN or (ii) 6 months (+ 6 months) if SCN not issued

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Step-10 Spot seizure ( with reasons to believe evasion past or future) of documents produced

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Step-11 Test Purchase (check authorization from Commissioner) for issue-of-invoice (and no other verification)

Conclusion

Understanding the nuances between GST inspection and search is imperative for both taxpayers and authorities. Adhering to procedural requirements safeguards against legal challenges and ensures fair implementation of tax laws.

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