Valerius Industries vs Union Of India on 28 August, 2019

1. Outcome

The High Court of Gujarat allowed the writ application, quashing and setting aside:
* The assessment order dated 17th June 2019 passed by the Commercial Tax Officer, demanding Rs. 1,60,79,302/- (tax, interest, and penalty) under Section 74 of the GST Act. The Court clarified that the authority may initiate fresh proceedings under Section 74 after issuing an appropriate show-cause notice and providing an opportunity of hearing.
* The provisional attachment order of stock worth Rs. 1,60,00,000/- dated 27th November 2018.
* The provisional attachment order of the petitioner's bank accounts (current and FD/RD CC accounts) dated 20th November 2018.
* The blockage of input tax credit (ITC) amounting to Rs. 30,55,680/- dated 13th February 2019, directing its immediate release.

2. Core Issue

The core issues before the Court were:
* Whether a State Tax Officer, as opposed to the Commissioner, could validly exercise the power of provisional attachment of property under Section 83 of the Central/Gujarat Goods and Services Tax Act, 2017, even with a delegation order from the Commissioner.
* Whether the assessment order under Section 74 and the blocking of Input Tax Credit (ITC) without issuing a show-cause notice or providing an opportunity of hearing were legally sustainable.
* The interpretation of "opinion" and "necessary" for exercising the drastic power of provisional attachment under Section 83.

3. Key Facts

• Valerius Industries, a partnership firm, is engaged in the business of purchasing copper scrap, melting it into copper pipes, and selling them.
• The firm purchased copper scrap (totaling Rs. 15.51 Crore) in 2017-18, including purchases from four specific firms (Adideva, Laxmiraj, Radhesh, Raghav) totaling Rs. 4.21 Crore, with GST of Rs. 75.84 Lakh.
• Payments were made via RTGS/cheque (Rs. 2.60 Crore) and through counter-sales of copper pipes (Rs. 2.37 Crore), on which Valerius paid GST (Rs. 36.15 Lakh). The selling firms reportedly did not remit the GST to the department, despite it being credited to their GSTR2A.
• On 20th November 2018, Respondent No. 3 (State Tax Officer) raided the petitioner's premises, alleging a "huge conspiracy" of bogus billing and passed orders for provisional attachment of the petitioner's current and FD/RD CC bank accounts without affording a hearing.
• On 27th November 2018, another raid occurred, seizing records. The State Tax Officer provisionally attached stock of goods valued at Rs. 1.60 Crore out of Rs. 2.48 Crore found, based on a prima facie belief of fictitious transactions and fraudulent ITC availment. Summons under Section 70 were also issued.
• On 13th February 2019, the petitioner received an email stating that ITC of Rs. 30,55,680/- had been blocked, without any formal order or explanation.
• On 17th June 2019, Respondent No. 4 (Commercial Tax Officer) issued an assessment order (DRC-07) demanding Rs. 1,60,79,302/- (tax + interest + penalty) under Section 74, purportedly without a prior show-cause notice or hearing.
• The Revenue contended that the Commissioner of State Tax had delegated powers under Section 83 to State Tax Officers via an order dated 15th January 2018, making the attachments valid. They also cited a statement from another dealer implicating Valerius in fictitious transactions.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Valerius Industries):

  • The provisional attachment orders were without jurisdiction as Section 83 explicitly vests this power in the "Commissioner," and the State Tax Officer lacked the authority.
  • The blocking of ITC via computer entry was illegal, arbitrary, and lacked due process, including a show-cause notice.
  • The Section 74 assessment order was illegal and violated natural justice principles as it was passed without a show-cause notice or opportunity of hearing.
  • The actions constituted an arbitrary exercise of power contrary to the GST Act.

• Revenue (Union of India / State Tax Officer):

  • The Commissioner of State Tax, Gujarat, had legally delegated his powers under Section 83 to subordinate officers (Deputy Commissioner, Assistant Commissioner, and State Tax Officer) through a specific order dated 15th January 2018, in accordance with Section 5(3) of the GGST Act.
  • The raids and investigations revealed bogus billing and fraudulent ITC availment, providing sufficient subjective satisfaction for the provisional attachments.
  • A statement from another dealer confirmed Valerius's involvement in fictitious transactions.
  • The petitioner has an alternative statutory remedy of appeal under Section 107 of the GST Act against the assessment order.

5. Court’s Reasoning

The High Court meticulously analyzed the provisions and arguments:

• Delegation of Power under Section 83:

  • Section 83 clearly states that the "Commissioner is of the opinion" for provisional attachment.
  • While noting a difference in delegation provisions between CGST and GGST Acts, the Court did not definitively rule on the validity of the Commissioner's delegation order itself, as it was not specifically challenged.
  • However, even assuming delegation was permissible, the Court emphasized that the formation of an "opinion" or "reason to believe" for such a drastic power must be based on credible, relevant material and not mere imagination or vague information.
  • The Revenue's counsel conceded that the provisional attachment order was "bereft of any reason" and there was no material on the original file to ascertain the genuineness of the belief formed by the authority.
  • The reasons for conducting inspection/search/seizure under Section 67 are distinct and not automatically sufficient to justify a provisional attachment under Section 83. Section 83 requires a higher threshold of subjective satisfaction, contemplating a necessity to protect government revenue due to an apprehension of the assessee defaulting or disposing of property.
  • The power under Section 83 must be used "sparingly, with extreme care and caution," as a "last resort," and not to harass or irreversibly harm the assessee's business.

• Assessment Order under Section 74:

  • Section 74 unequivocally mandates the service of a show-cause notice and an opportunity of hearing to the assessee before determining tax, interest, and penalty.
  • The Court found that the assessment order dated 17th June 2019 was passed "without affording any opportunity of hearing" and "without issue of any show cause notice." This constituted a clear violation of statutory provisions and principles of natural justice, rendering the order untenable.

• Blocking of Input Tax Credit:

  • The blocking of ITC by a mere "computer entry" without any formal order or process was held to be illegal. The Act provides for provisional attachment, not outright blockage without due procedure.

• Guidelines for Section 83: The Court summarized specific guidelines for exercising power under Section 83, including:

  • Subjective satisfaction must be based on credible material and supervening factors.
  • It is a drastic, far-reaching power to be used sparingly and on weighty grounds.
  • Requires a reasonable apprehension of the assessee defaulting or disposing of property to thwart demand.
  • Should not be used to harass or detrimentally affect business.
  • Attachment of bank accounts and trading assets should be a last resort.
  • Consideration of revenue-neutrality and whether existing input credit reversal sufficiently secures revenue.

6. Statutory References

• Constitution of India: Article 226
• Central Goods and Services Tax Act, 2017 (CGST Act): Sections 2(24), 2(25), 5(3), 39, 44, 45, 46, 47, 50, 62, 63, 64, 67, 70, 73, 74, 83, 107, 122, 125, 129, 130, 132, 143, 151, 158, 167, 168.
• Gujarat Goods and Services Tax Act, 2017 (GGST Act): Sections 2(24), 2(25), 3, 5(3), 29(2), 83, 167, 168.
• Central Goods and Services Tax Rules, 2017 / Gujarat Goods and Services Tax Rules, 2017: Rules 139(1) (Forms INS-01, INS-02), 142(5) (Form DRC-07), 159(1) (Form DRC-22).
• Income Tax Act, 1961: Sections 147, 281B.
• Code of Criminal Procedure, 1973: Section 165(5).
• Reserve Bank of India Act, 1934: Section 45(1), Second Schedule.

7. Precedents Cited

• Gwalior Rayon Silk Manufacturing (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Others [1974 (4) SCC 98] on the concept of delegation.
• Sheonath Singh's case [AIR 1971 SC 2451] on judicial review of "reasons to believe."
• Bhikhubhai Vithlabhai Patel and others vs. State of Gujarat [AIR 2008 SCC 1771] on the construction of "necessary" and unfettered discretion.
• J. Jayalalitha vs. U.O.I. [AIR 1999 SC 1912] on the meaning of "as may be necessary."
• Barium Chemicals Ltd. vs. Company Law Board [AIR 1967 SC 295] on subjective satisfaction being based on existent circumstances.
• Income-tax Officer, Calcutta and Ors. vs. Lakhmani Mewal Das [AIR 1976 SC 1753] on the requirement of a rational connection or live link for "reason to believe."
• Smt. S.R. Venkatraman vs. Union of India [(1979) ILLJ 25(SC)] on malice in law and abuse of power based on non-existent facts.