Tvl.Rising International Co vs The Commissioner Of Central Gst And on 6 October, 2020

Summary of Judgment: Tvl.Rising International Co vs The Commissioner Of Central Gst

1. Outcome

The writ petition was partly allowed.

• The Court sustained the seizure order (GST INS-02) but modified the prohibition order (GST INS-03).
• The respondents (GST authorities) were directed to release the seized goods provisionally upon the petitioner:
  1. Executing a personal bond.
  2. Making a payment of ₹2.00 lakhs.
• The respondents were given the liberty to proceed with adjudication proceedings based on their findings.

2. Core Issue

The central legal issue was whether the GST authorities had a valid "reason to believe" as required under Section 67 of the CGST Act, 2017, to justify the search, seizure of goods, and subsequent issuance of a prohibition order preventing the petitioner from dealing with the seized stock.

3. Key Facts

• The petitioner, a registered dealer, imports and sells toys.
• The petitioner claimed to have filed all GST returns up to March 2020 and had just reopened the business after the COVID-19 lockdown.
• On 21.08.2020, GST officials conducted a search of the petitioner's business premises.
• Following the search, the officials seized all goods and several documents under Form GST INS-02.
• They also issued a prohibition order in Form GST INS-03, restraining the petitioner from removing or dealing with the seized goods, on the grounds that they had "reasons to believe" the goods were liable for confiscation.
• The petitioner challenged both the seizure and prohibition orders in the High Court.

4. Arguments

• Petitioner's Arguments:

  • The search was a "fishing enquiry" conducted without any reasonable basis or pre-existing "reason to believe".
  • Mere non-maintenance of a stock register at the business premises cannot be a valid ground for seizing all goods.
  • The petitioner has a clean record, has been promptly paying customs duty, and is prepared to account for the entire stock.
  • The continued prohibition on dealing with the goods would cause disastrous financial consequences, especially after the lockdown.

• Respondents' (GST Department) Arguments:

  • The search was initiated based on intelligence that the petitioner was evading tax by misdeclaring imported electric toys (attracting 18% IGST) as non-electric toys (attracting 12% IGST).
  • During the search, a large quantity of goods was found to be unaccounted for, as the petitioner failed to maintain a proper stock register as mandated by Section 35(1) of the CGST Act.
  • The "reason to believe" of a proper officer should not be subject to judicial scrutiny in a writ petition.
  • The petition is premature, as adjudication proceedings are yet to commence, where the petitioner will have an opportunity to present their case.

5. Court’s Reasoning

• On "Reason to Believe": The Court noted that while it cannot sit in appeal over the sufficiency of the officer's belief, it can examine if there was a rational connection between the information available and the belief formed. The respondents made a "bare assertion" about intelligence inputs but failed to produce any material before the Court to substantiate it. The Court found it procedurally improper that the belief seemed to have been formed during the search rather than before authorizing it.
• Balancing of Interests: Despite the procedural concerns, the Court refrained from quashing the seizure order entirely, as the search had revealed the failure to maintain a stock register.
• Prohibition Order and Delay: The Court found the indefinite prohibition order unjustified. It noted that over 40 days had passed since the seizure without even a show-cause notice being issued. This delay causes significant harm to businesses. The Court observed, "Officials who get their salaries in the first week of every month may not be conscious of the cost of delays in such cases."
• Pragmatic Approach: Emphasizing the need to support economic activity post-lockdown, the Court held that the petitioner must be allowed to conduct business. It invoked Section 67(6) of the CGST Act, which provides for the provisional release of seized goods. Allowing the business to function enables the petitioner to pay any future tax liability that may be determined.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 35(1): Requirement to maintain true and correct accounts of stock.
  • Section 67: Power of inspection, search, and seizure.
  • Section 67(1) & (2): Conditions for authorizing search and seizure based on "reasons to believe".
  • Section 67(6): Provision for provisional release of seized goods on furnishing a bond and security.
  • Section 70: Power to summon persons.
• Constitution of India:
  • Article 226: Power of High Courts to issue writs.
• CGST Rules, 2017:
  • Rule 56: Pertains to the maintenance of accounts.

7. Precedents Cited

• Income Tax Officer, Calcutta and Ors. vs. Lakhmani Mewal Das (AIR 1976 SC 1753): On the scope and meaning of "reason to believe".
• State of Gujarat vs. Shri Mohanlal Jitamalji Porwal and another (1987 (20) E.L.T 483 (S.C)): On the court's limited role in scrutinizing the officer's belief.
• Indru Ramchand Bharvani vs. Union of India (1992 (59) E.L.T 201 (S.C)): Supporting the department's power to conduct searches.
• Bhagawan R. Daswani vs. Collector of Central Excise, Coimbatore (2004 (168) E.L.T 298 (Mad.)): Stating that the basis for an officer's belief need not be tested under a "legal microscope".
• Liversidge vs. Anderson ((1942) AC 206): Cited for the general legal principle that laws speak the same language in war as in peace.