Section 130 of CGST Act Inapplicable for Excess Stock found at the time of survey

Proceedings under Section 130 of CGST Act cannot be put to service if excess stock is found at the time of survey: Allahabad High Court

Summary: In Vijay Trading Company v. Additional Commissioner (Writ Tax No. 1278 of 2024, August 20, 2024), the Allahabad High Court ruled that Section 130 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) cannot be applied merely due to the detection of excess stock during a survey unless intent to evade tax is established. M/s Vijay Trading Company contested the orders passed under Section 130 following a stock inspection based on visual estimates. The Court observed that tax determination in such cases should align with Sections 73 or 74 of the CGST Act, which provide for tax calculation and penalties without requiring confiscation proceedings. The judgment emphasized that Section 130 applies only when clear intent to evade tax is evident. It noted that unaccounted goods might be deemed as supplied under Section 35(6) of the CGST Act, but tax quantification must still adhere to Sections 73 or 74. Supporting precedents such as Dinesh Kumar Pradeep Kumar v. Additional Commissioner and Shree Om Steels v. Additional Commissioner were cited to reinforce that procedural safeguards under the CGST Act prevent arbitrary invocation of Section 130. The Court quashed the impugned orders, reiterating that excess stock findings alone do not suffice to invoke confiscation or penal provisions under Section 130 unless fraudulent intent is conclusively proven. This decision safeguards businesses from potential misuse of the powers under Section 130 while ensuring adherence to the proper procedural framework.

The Hon’ble Allahabad High Court in the case Vijay Trading Company v. Additional Commissioner [Writ Tax No. 1278 of 2024 dated August 20, 2024] set aside order passed under Section 130 under Central Goods and Services Tax Act, 2017 (“the CGST Act”) following the determination of excess stock in inspection and directed the determination of tax on Section 73/74 of the CGST Act.  As intent to evade tax must be present for the application of Section 130 of CGST Act.

Facts:

M/s Vijay Trading Company (“the Petitioner”) was engaged in the business of manufacture and sale of hardware goods. On May 11, 2022, an inspection/search under Section 67 of the CGST Act was conducted at the business premises of the Petitioner by the SIB and the stock was assessed on the basis of eye measurement and it was held that excess stock was found.

Consequently, the First Appellate Authority (“the Respondent-1”) passed an Order dated January 24, 2023 (“the Impugned Order-1”) and the Order dated April 03,2024 (“the Impugned Order-2”) passed by Additional Commissioner Grade-2 (“Respondent no. 2”).

The Petitioner contended that the proceedings under Section 130 of the CGST Act should not have been initiated against the Petitioner, rather, proceedings under Sections 73/74 of the CGST Act should have been initiated.

Hence, aggrieved by the Impugned Orders the Petitioner had filed the present writ before the Hon’ble Allahabad High Court.

Issue:

Whether proceedings under Section 130 of the CGST Act cannot be put to service if excess stock is found at the time of survey?

Held:

The Hon’ble Allahabad High Court Writ Tax No. 1278 of 2024 held as under:

• Relied on, the case Dinesh Kumar Pradeep Kumar v. Additional Commissioner Grade 2 [Writ Tax No. 1082 of 2022 dated July 25, 2024] wherein the Hon’ble Allahabad High Court further relied on Shree Om Steels v. Additional Commissioner Grade-2 [Writ Tax No. 1007 of 2002] wherein it was held that excess stock findings must lead to proceedings under Sections 73 or 74 of the CGST Act, not Section 130 of the CGST Act, unless fraudulent intent is unequivocally proven. Further, the Section 35(6) of the CGST Act makes it clear that proper officer is empowered to determine the taxes payable and while determining the said tax payable he is bound to determine the same in accordance with the provisions of Sections 73 & 74 of the CGST Act. Although, in terms of Section 35(6) of the CGST Act, the unaccounted goods are ”deemed to be supplied”. However, determination and quantification of the tax has to be done in accordance with Section 73 or Section 74 of the CGST Act. Hence, even if excess stock is found, the proceedings under section 130 of the Uttar Pradesh Goods and Services Tax Act, 2017 (“the UPGST Act”) cannot be initiated.
• The Court further relied on M/s Maa Mahamaya Alloys Pvt. Ltd. v. State of Uttar Pradesh [Writ Tax No. 31/2021 dated March 23, 2023] wherein the Hon’ble Allahabad High Court relied on Metenere Limited v. Union of India [2020 NTN (74) 574] which held that Section 130 of the CGST Act for assessment/ determination of the tax and the penalty is neither stipulated under the CGST Act, nor can be done in the manner in which it has been done, more so, in view of the fact that the Department itself had undertaken the exercise of quantifying the tax due, by taking recourse under Section 74 of the CGST Act. As the entire tax has been determined and the penalty has been levied only on the basis of a survey by taking recourse under Section 130 of the GST Act and not taking a recourse to Section 74 of the CGST Act, the order impugned is clearly unsustainable. Section 130(1)(ii) of the CGST Act and Section 130 (1)(iv) of the CGST Act can at best be invoked by the department, however, in the present case, even assuming for the sake of argument, that the goods were lying in excess of the goods in record, the case against the petitioner would not fall under later for the simple reason that the liability to pay the tax arises at the time of point of supply, and not at any point earlier than that. On a plain reading, the scope of Section 130(1)(ii) of the CGST Act is that any Assessee who is liable to pay tax and does not account for such goods, after the time of supply is occasioned, would be liable to penalty under Section 130(1)(ii) of the CGST Act. Analysing, Section 130(1)(iv) of the CGST Act, the contravention of any provision of the Act or the Rules should be in conjunction with an intent to evade payment tax and penalty can be levied by invoking Clause (iv) only when the department establishes that there were a contravention of the Act and Rules coupled with the ”intent to make payment of tax’.
• Held that, the proceedings under Section 130 of the CGST Act cannot be put to service if excess stock is found at the time of survey. Hence, the Impugned Orders were set quashed.

Our comments:

Section 130 of the CGST Act governs “Confiscation of goods or conveyances and levy of penalty”. Section 130(1) of the CGST Act states that where any person:

1. supplies or receives any goods in contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or
2. does not account for any goods on which he is liable to pay tax under this Act; or

• supplies any goods liable to tax under the CGST Act without having applied for registration; or

1. contravenes any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or
2. uses any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made thereunder unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance,

then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to penalty under section 122 of the CGST Act.

In a pari materia case of Banaras Industries v. Union of India [Writ Tax No. 1233 of 2024 dated August 07, 2024], the Hon’ble Allahabad High Court held that the proceedings under Section 130 of the GST Act cannot be put to service if excess stock is found at the time of survey.

The significance of this judgment lies in the clarification it has provided regarding the limits procedural and substantive limits of authorities. This judgment has clarified the limits of Section 130 of the CGST Act and established the requirement of intent to evade tax for its application.  The judgment has placed a greater amount of evidence for application of Section 130 of the CGST Act which prevents misuse of powers. Section 130 of CGST Act deals with the confection of goods that are not disclosed with intent to evade tax and it also gives penalty for the same.

******

(Author can be reached at [email protected])