M/S Utkarsh Ispat Llp vs State Of Gujarat on 27 January, 2022

Judgment Summary: M/S Utkarsh Ispat Llp vs State Of Gujarat

1. Outcome

The writ application was partly allowed. The High Court quashed and set aside the provisional attachment orders (FORM GST DRC-22) related to:
1. The stock of goods lying at the factory premises.
2. The sundry debtors of the firm.
3. The personal immovable property of one of the partners, Shri Niraj Jaydev Arya.

The provisional attachment on all other properties (factory building, plant & machinery, bank accounts, etc.) was allowed to remain in effect in accordance with the law.

2. Core Issue

The central legal questions before the court were:
1. Whether the GST authorities, under Section 83 of the CGST Act, 2017, can provisionally attach the personal property of a partner of a Limited Liability Partnership (LLP) during the pendency of proceedings against the LLP itself.
2. Whether the provisional attachment of the firm's stock-in-trade and sundry debtors was legally justified, especially considering its impact on the business operations.

3. Key Facts

• Petitioner: M/s Utkarsh Ispat LLP, a registered partnership firm engaged in manufacturing TMT bars.
• Department's Action: On 19th November 2021, GST officials conducted a search under Section 67 of the CGST Act at the petitioner's business and residential premises of a partner. The allegation was the fraudulent availment of Input Tax Credit (ITC) based on fake invoices.
• Impugned Orders: During the pendency of the search proceedings, the Assistant Commissioner (Respondent No. 3) issued multiple orders in FORM GST DRC-22 under Section 83, provisionally attaching various assets.
• Attached Properties: The attached properties included the factory, plant & machinery, stock, bank accounts, sundry debtors, and importantly, the personal immovable property of a partner, Shri Niraj Jaydev Arya.
• Challenge: The petitioner filed a writ application challenging these provisional attachment orders as being outside the scope (dehors) of the provisions of Section 83 of the CGST Act.

4. Arguments

• Petitioner's Argument (Implicit): The power under Section 83 can only be exercised against the "taxable person." The LLP is the taxable person, not its individual partners. Therefore, the personal property of a partner cannot be attached. Further, attaching operational assets like stock and debtors brings the business to a halt and is an excessive measure.

• Respondent's (GST Department's) Argument:

  • To justify the attachment of the partner's personal property, the department invoked Section 90 (Liability of partners of firm to pay tax) and Section 137 (Offences by companies/LLPs) of the CGST Act.
  • They argued that the partner was the main person responsible for the alleged fraud.
  • They contended that the value of the firm's attached properties was insufficient to cover the potential government revenue loss, making it necessary to attach the partner's property as well.

5. Court’s Reasoning

A. On Attaching a Partner's Personal Property:

1. Scope of Section 83: The Court first analyzed Section 83, noting that it explicitly allows attachment of property "belonging to the taxable person."
2. Who is a "Taxable Person"? A "taxable person" is defined under Section 2(107) as a person who is registered or is liable to be registered. The definition of "person" under Section 2(84) includes an LLP as a distinct legal entity. Therefore, the LLP is the "taxable person," not its individual partner.
3. Misapplication of Section 90: The Court held that the department's reliance on Section 90 was misplaced. Section 90 establishes the joint and several liability of partners for the firm's tax dues. However, this liability can be enforced against the partners only after the tax liability of the firm has been finally determined and assessed. It cannot be used to invoke a provisional attachment against a partner's personal assets while proceedings against the firm are still pending.
4. Misapplication of Section 137: The Court dismissed the reliance on Section 137, stating it had "absolutely no application." This section deals with fixing vicarious liability on partners for offences committed by the firm, not with the provisional attachment of property to protect revenue.
5. Conclusion: The legislature treats an LLP as a taxable entity distinct from its partners. Consequently, the respondent was wholly unjustified in provisionally attaching the personal property of a partner under Section 83 for proceedings pending against the LLP.

B. On Attaching Stock and Sundry Debtors:

1. Draconian Power: The Court, citing the Supreme Court in Radha Krishan Industries, reiterated that the power of provisional attachment is draconian and must be exercised with utmost care and circumspection.
2. CBIC Guidelines: The Court heavily relied on the CBIC's own guidelines (dated 23.02.2021) for provisional attachment under Section 83.
3. Clause 3.4.5 of Guidelines: The Court specifically highlighted Clause 3.4.5, which mandates that "as far as possible, it should also be ensured that such attachment does not hamper normal business activities of the taxable person." The guideline clarifies that raw materials, inputs, and finished goods should not normally be attached.
4. Impact on Business: The Court noted that the attachment of goods, stock, and receivables, especially when they were already pledged to a bank for a cash credit facility, would bring the petitioner's entire business to a standstill.
5. Conclusion: The Court did not approve the provisional attachment of the stock and receivables as it contravened the spirit of the law and the department's own guidelines by crippling the business.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 2(84): Definition of "person"
  • Section 2(107): Definition of "taxable person"
  • Section 67: Power of inspection, search, and seizure
  • Section 83: Provisional attachment to protect revenue in certain cases
  • Section 90: Liability of partners of firm to pay tax
  • Section 137: Offences by companies
• Constitution of India:
  • Article 226: Power of High Courts to issue certain writs
• Indian Partnership Act, 1932:
  • Section 25: Liability of a partner for acts of the firm

7. Precedents Cited

1. M/s. Radha Krishan Industries vs. State of Himachal Pradesh and others (Supreme Court) - Emphasized that the power of provisional attachment is draconian and must be exercised strictly in line with statutory conditions.
2. Kaish Impex Private Limited vs. Union and others (Bombay High Court) - Held that Section 83 proceedings cannot be automatically extended to another taxable person who has merely been issued a summons in an inquiry against someone else.
3. Kapurchand Shrimal vs. Tax Recovery Officer, Hyderabad and others (Supreme Court) - Established that when a Hindu Undivided Family (HUF) is the taxable entity, recovery proceedings cannot be initiated against the manager (Karta) in his personal capacity.
4. Her Highness Maharani Mandalsa Devi vs. H. Ramnarain Private Ltd. (Supreme Court) - Clarified that a partnership firm is not a legal entity distinct from its partners, establishing the principle of joint and several liability.