Goods and Service Tax (GST) is incorporated with an intention to provide a simple and streamlined tax flow structure. The intention itself provides a legal backing to section 67 to 72 of the Act that allows the enforcement machinery i.e. tax officers to inspect, search and seize records for proper ascertainment of payment of tax and prevent evasion of tax.
The article mainly focuses on two segments i.e. the power of inspection, search & seizure, the manner of its conduct, and the instances where it may adversely affect the Assesse.
Inspection & Search
The power to search and inspect flowing under section 67 of the Act gives the power to the officer authorised by an officer not below the rank of Joint commissioner having reasons to believe. There is often ambiguity raised over the meaning and scope of the term ‘inspection’ and ‘search’ that allows the officer to look, examine any place, books, stock or goods in order to find something that is concealed or is believed to be secreted and that what is liable for confiscation. In tax parlance, search is used when the above action is taken by the officer to derive evidence against the Assesse, however only under proper authority of law under Rule 139(1) by issuing GST INS-01 also known as the “Search Warrant”. Whereas, on contrary inspection gives the power to inspect the books, documents or any place of business of taxable person on the same belief which compared to search is a softer provision and does not allow seizure or confiscation.
Search under the cover of Inspection
The premises can be searched as result of inspection if it is ascertained that goods are liable for confiscation or any document is relevant is hidden in the premises. Search in pursuance, shall be subject to provisions relating to seizure of goods, requirement to draw panchanama (Mahazar) in terms of rule 139 of CGST Rules, 2017.
Inspection at “any place of business” include residential premises
The power to inspect has been restricted to “place of business”. Whereas the term “place of business” has been defined in Section 2(85) to include godown or any other place where a taxable person stores his goods, maintain his books of accounts and place of agent. Accordingly, if books of accounts are being maintained or kept at residence of director or any other key managerial person the same may be treated as place of business and inspection can be carried out there. However, the situation may be obscure but to be kept in mind.
Detention & Seizure
The term seizure though not defined under the Act may be understood as an action of forcefully taking over a thing, object or goods but with the due procedure of law which gives the following rights to the Assesse –
Detention means restricting the owner, access to seized goods by a legal order/notice. However, the ownership and possession shall still lie with the Assesse. Whereas, in seizure, though the ownership is with the Assesse but the possession is actually taken over by the Department only on inquiry that goods are liable for confiscation.
Reasons to Believe
Power to inspect and search under section 67 is contingent on the proper officer having reasons to believe that taxability in a transaction is suppressed or there is a contravention of the provision. Since the requirement to have sufficient reasons to believe for initiating action was never brought in writing in the erstwhile law, there is no wider an interpretation to that effect. However, identical words used in section 132 of the Income Tax Act can be relied on for reference where Hon’ble Supreme Court in ITO Vs. Lakhmani Mewal Das observed that the phrase postulate belief and existence of reasons for that belief which must be held in good faith and cannot be merely pretence. Since the reasons and the belief does not constitute a judicial or a quasi-judicial function and to an extent possible is only an authority’s power of scrutiny and review must not be confused with ‘reasons to suspect or doubt’.
The principle for determining the reason to believe can be summarized as below:
1. The authority must be in possession of information to form an opinion that there is reason to believe.
2. The authorised person must form an opinion whether there is reason to believe or not.
3. The opinion must be based on the material which is available and not on irrelevant material.
4. The court would examine a rational connection between the material before it and the opinion formed.
5. The court cannot go into the question of aptness or sufficiency of the grounds upon which the subjective satisfaction is based.
Allahabad High Court in Rimjhim Ispat Limited Vs. State of UP held that, “it is essential that the officer authorizing the search should have ‘reasons to believe’ based on reasonable material and should not be fanciful or arbitrary. Though the Hon’ble HC goes on record to certify the fairness of the provision but fails to open doors to verify the same. The ruling states that It is also established that this Court in exercise of its powers under Article 226 cannot go into the sufficiency of the reasons and should not sit as an appellate court over the reasons recorded. It is also well established that the reasons may or may not be communicated to the assessee but the same should exist on record,”.
Even when the power to inspect and search without invoking section 67 is treated as an aberration of the established provision of law. There have been numerous interventions of gross abuse of power by GST officers in violation of the procedure established. However, the judiciary is diligent enough to interrupt and bound the officers within the limits prescribed. Gujarat HC in Paresh Nathalal Chauhan Vs. State of Gujarat held that section 67(2) and (4) gives power to search, seal or break to recover goods, documents or accounts that are suspected to be concealed. The section does not empower the officer to stay at Assessee’s premises for 8 days where there are family members staying and record their statement through force and coercion to find out whereabouts of taxable person. Held the entire search was without authority of law and total abuse of power vested under law.
Can attachment of property be made as seizure measure without any pending proceeding?
Gujarat HC in Prakashsinh Hathisinh Udavat Vs. State of Gujarat where assets have been seized by the GST officer for more than six months without following the provisions of section 67 read with rule 139 of the Rules, without even serving a notice u/s 67(7) or any order has been affixed at residential premises for extension of period of seizure. Court observed that Powers to attach the property to protect the interest of the revenue are conferred by section 83 of the Act. However, a condition precedent for exercise of such powers is only when any proceeding should be pending under section 62 or 63 or 64 or 67 or 73 or 74 thereof. Since, no proceeding under any of the above sections is stated to have been pending against the petitioner at the time when the order of seizure came to be made except relating to access to business premises. There is no power warranted to take such action for recovery by usurping the powers under law, the seizure order stands unsustainable.
Levy of tax on goods seized on belief that they are ‘secreted’
The term ‘secreted’ is not defined under the Act, however in general parlance it may be understood to mean anything that is concealed or hidden. Therefore, if documents are not kept in proper place or usual place with an intention to conceal them from the officer will be termed as secreted. Jurisdiction to carry out seizure u/s 67(2) of the Act emerges only when goods/documents are secreted in ‘any other place’ which includes an undisclosed place. Food for thought is whether goods or documents lying at a disclosed place can still be treated as ‘secreted’ and hence liable for seizure.
Allahabad HC in M/s Rajeev Traders Vs. State of UP has on contrary observed that since the Act does not function on the basis of principle of physical verification of goods, if goods are not recorded in the books, a presumption to its secrecy would be constructive. Therefore, it presupposes that the term any other place would include both disclosed and undisclosed places. To Author’s understanding, the grammatical variation of the term should be restricted to the intention of the legislature wrt. seizure of goods that are liable for confiscation and not otherwise.
Search under GST cannot give reasons to believe for search under Income Tax
One possible aftermath of search under GST is that the foundation opens door for a subsequent assessment to be made under Income Tax Act based on records and information already available with the Department. What is pertinent to question is whether a GST search can give sufficient reasons to believe to initiate a re-assessment under the Income Tax. Hon’ble ITAT in Hari Steels & General Industries Ltd. Vs. DCIT observed that information regarding survey by Sales Tax Department has been solely used by the Assessing Officer in letter and spirit for formation of belief of escapement of income without making any enquiry or application of mind, particularly when subsequent proceedings before various authorities of Sales Tax Department were available before issuance of notice u/s. 148 and were got acknowledged to the AO before passing the reassessment order. In presence of these facts, the reasons recorded by the AO cannot, in any way, be said to be proper to form a belief of escapement of income, as the information so received was neither found well founded nor the AO made any efforts to make any verification or application of his mind on the same.
Harmonious interpretation between section 67 and section 129 for detention of goods
Section 129(2) of the GST Acts provides for detention of goods in transit and mentions that provisions of Section 67(6) of the GST Acts shall mutatis mutandis apply to Section 129 as well. Whereas section 67(6) provides for provides for release of goods in case of seizure during search proceedings. Section 67(2) operates in two parts i.e. release of goods on provisional basis or final release on payment of tax, penalty and interest. Therefore, when both the provisions are read harmoniously, goods so detained under section 129 can be released on payment of tax and penalty. However, when the issue was brought before the Hon’ble Gujarat High Court in Synergy Fertichem Pvt. Ltd. Vs. State of Gujaratto decide whether confiscation u/s 130 is valid when similar penal provision is provided u/s 129 of the Act. Therefore, for the same breach, can the law provide for two penalties for the same offence. Provided, when section 67 applies mutatis mutandis to section 129, the same should allow the Assesse to release goods on payment of tax and penalty as prescribed. The Hon’ble Court considered the relevance of ‘intent’ in both the provisions to conclude that section 129 and 130 are mutually exclusive and independent of each other. Therefore, irrespective of when the goods are detained u/s 129, the same is liable to be confiscated under section 130 of the Act. Author believes that such an interpretation devoid of harmonious construction has traversed beyond the scheme of the legislation and is not proper.
Conclusion – When the vital power to search is reportedly being abused, making reasons to believe a pre-condition does no good if there is no machinery or authority that verifies the same. Search being a prominent question of law, when the writ authority itself goes on record to abstain from verifying the reasons, the Assesse is left with no remedy. Also to ask whether not making the proper officer obligated to inform the reasons to believe for initiating the proceedings would not fetter the fundamental opportunity of being heard in a fair manner when the HC itself does not sit to verify? When the goods are admittedly kept at a disclosed place, how can a presumption be made to their secretion. The understanding seems to be not in conformity with the intention of law which unruly brings the diligent Assesse within the ambit of seizure. Similarly, seizure being a constraining provision that makes an Assesse lose right over their assets has to be understood in conformity with the scheme of law and should not be interpreted too far to handicap the Assesse of its essential rights under the law.
Contravention of any law is not permissible and to rely on the popular maxim Vigilantibus et non dormientibus jura sub veniunt i.e. that law will always serve the one who is vigilant and not the one who is dormant and sleeps over his own rights. Therefore, though there being abuse of power by the officers, even the authority will act in favour when the Assesse is compliant and diligent enough to know their rights and privileges against the stringent procedure that is per se designed for the contravener.
Special mention to CA Anil Kumar Bezwada for vetting the article. For any inputs/suggestions, please write at firstname.lastname@example.org.
 (1976) 103 ITR 437 (SC)]