Hon’ble Patna High Court has come up with much desired guidelines on initiation of recovery process under the provision of Section 78 of the CGST Act, 2017. First, let’s peruse Section 78 of the CGST Act, which prescribes provision for initiation of recovery proceedings and the same reads as under-
“78. Initiation of recovery proceedings- Any amount payable by a taxable person in pursuance of an order passed under this Act shall be paid by such person within a period of three months from the date of service of such order failing which recovery proceedings shall be initiated:
Provided that where the proper officer considers it expedient in the interest of revenue, he may, for reasons to be recorded in writing, require the said taxable person to make such payment within such period less than a period of three months as may be specified by him.”
As could be seen from the above proviso clause, recovery action can be initiated by the proper officer even before the period of three months period (appeal period), for which three conditions are required to be fulfilled-
1. The proper officer considers it expedient in the interest of revenue to initiate recovery action even before prescribed period of 3 months
2. the reasons thereof are to be recorded in writing, and
3. he may require the TP to make such payment within such period (as may be specified by him) less than a period of 3 months.
Though the three conditions are essentially to be fulfilled for initiating recovery action under Section 78 even before the minimum appeal period of 3 months, it is seen that Department has been invariably initiating action under the said provision, arbitrarily, on flimsy ground and without even giving due notice to the taxpayer, in some cases.
In the case before the Hon’ble Patna HC [Sita Pandey vs. State of Bihar- Civil Writ Jurisdiction Case No. 5407 of 2023-decided on 23.8.2023] on an issue of eligibility of exemption, the matter was held against the petitioner by the Appellate Authority by issuance of Order on 27.3.2023 imposing total liability of Rs.73 Lakhs and on the very next day, the assessing officer issued notices to four banks for recovery of about Rs. 70 lakhs (10% having already been pre-deposited), whereby the entire amount was recovered, leading to the subject WP challenging the recovery notice and the recovery made. It was contended that the said recovery process has frustrated the appellate remedy of the petitioner and also put their very business into jeopardy.
On the other hand, Departments contention was that they have acted very much within the legal contours of the statute, relying on the provision of Section 78, which enables recovery even within the period of three months, if the proper officer considers expedient in the interest of the Revenue.
As could be seen, action for recovery was initiated the very next day of the appellate order without even giving any notice to the petitioner. It was argued by the Department that there is no requirement for a notice and reasons alone are to be recorded which is available in the files. The reasons recorded was that the financial year 2022-23 is coming to an end and there are bank holidays on the immediate days following.
In the above context, it was held that the bank holidays cannot be termed valid reasons to justify an expedient recovery under the proviso to Section 78 and it is not clear as to how the interest of the revenue would suffer, if the recovery is kept in abeyance for three months or at least a notice is issued to the assessee before the recovery is effectuated from the banks, behind the back of the assessee. The counter affidavit does not speak of any notice having been given to the assessee before recovery.
It was further held that the principles of natural justice stand embedded in every coercive action taken by a statutory authority, even within the four corners of the law; when it could, in the normal circumstances cause prejudice to the person against whom such proceedings are levelled. The recording of reasons as coming forth in the provision to Section 78 are not to be recorded surreptitiously and kept in the files, but to be informed to the assessee and a time specified within three months for the payment to be made. In fact, on a reading of the proviso we are of the definite opinion that there is a requirement of notice, if not prior to the recording of reasons; at least intimation of the reasons which motivates the proper officer to recover the amounts due, considering such recovery to be expedient in the interest of revenue with clear specification of the period; less than a period of three months, within which the amounts are to be paid.
It was further held that since in the event of an appeal filed to the Tribunal, only intended twenty percent of the tax dues alone is to be paid; on which payment the entire demand was liable to be stayed till the disposal of the appeal, even if coercive action could have been taken the tax officer should have confined it to the twenty percent of the total amounts assessed, in addition to the ten percent paid at the first appellate stage and any admitted tax, if remaining unpaid.
The best part of this judgement is that the Hon’ble High Court has not restricted itself to giving orders on the issue involved, it has proceeded to issue guidelines in so far as recoveries are concerned, relying on the dictum laid down in UTI Mutual Fund v. Income Tax Officer [(2012) 345 ITR 71 (BOM)], which are as under-
(1). There shall be no recovery of tax within the time limit for filing an appeal and when a stay application is filed in a properly instituted appeal, before the stay application is disposed of by the Appellate Authority;
(2) Even when the stay application in the appeal is disposed of, the recovery shall be initiated only after a reasonable period so as to enable the assessee to move a higher forum;
(3) However, in cases where the Assessing Officer has reason to believe that the assessee may defeat the demand or that it is expedient in the interest of Revenue, as is provided under the proviso to Section 78, there can be a recovery but with notice to the assessee, which notice shows the reasons for initiating it and specifies the lesser time within which the assessee is directed to satisfy the dues;
(4) Though a bank account could be attached; before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law;
(5) We also remind the Tax Authorities, as was done in the UTI Mutual Fund (supra) that the ‘authorities under the tax enactment shall not act as a mere tax gatherer but act as a quasi-judicial authority vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate the hardship to the assessee’ (sic-UTI Mutual Fund).
As could be seen from the above guidelines, Departmental Officers while initiating action under the proviso to Section 78 cannot keep the Taxpayer in dark and due importance is given to reasonable prior notice to be given to the Taxpayer against whom action of recovery proceedings is being initiated. The fourth guideline is particularly in tune with Rule 159(5) of CGST Rules, which gives an opportunity to the person whose property is attached to file an objection to the effect that the property attached was or is not liable to attachment and if the Commissioner, after affording an opportunity of personal hearing, is satisfied that the property is no liable for attachment, may release such property.
CONCLUSION : The guidelines issued by the Hon’ble High Court are a blessing for the Tax payers as it has made amply clear that, recoveries cannot be initiated within the time limit available for filing appeal and till the disposal of the stay application filed along with the appeal and even after disposal of stay application, reasonable period to be given for approaching higher appellate forum. Further, if recovery action is to be initiated under the proviso to Section 78 of the GST Act, adequate prior notice needs to be given to the person against whom action is proposed to be initiated.
Moreover, most importantly, as per the above HC decision, even if coercive action is to be taken, under the provision of Section 78, it has to be limited to twenty per cent of the disputed tax amount, in addition to the ten per cent paid at the first appellate stage and admitted tax, if any, remaining unpaid. However, if the aggrieved person does not file an appeal, then, for the remaining part of the amounts due, again recovery action might be initiated under the provision of Section 79 of the CGST Act.
A suitable clarificatory Circular in tune with the directions issued by the Patna High Court could also be expected in order to make the Departmental Officers aware of the directions so issued.
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