Excess Stock Found During Search to Be Dealt Under Sections 73/74, Not Section 130

Excess Stock Found During Search to Be Dealt Under Sections 73/74, Not Section 130

Issue: When excess stock is found during an inspection or search, should proceedings be initiated under Section 73/74 (determination of tax, interest, penalty) or under Section 130 (confiscation of goods or conveyances and levy of penalty)?

Facts:

• An inspection/search was conducted at the business premises of the assessee.
• During this operation, excess stock was found.
• Subsequently, an order was passed under Section 130 of the CGST Act (dealing with confiscation of goods).
• The assessee challenged this order in appeal, but the appeal failed.
• The assessee further contended that the stock was assessed based on “eye measurement” (implying an arbitrary assessment) and, crucially, that proceedings under Section 130 had been initiated instead of the appropriate proceedings under Section 73 or Section 74.

Decision: The impugned orders passed under Section 130 were quashed. The court held that if excess stock is found, then proceedings under Section 73/74 should be initiated, not proceedings under Section 130. It emphasized that Section 35 prescribes the maintenance of accounts and other records, and if goods are not recorded in books of account, then the Proper Officer should proceed as per the provisions of Section 73/74. The court explicitly stated that “Once Act specifically contemplates action to be taken, then provision of section 130 cannot be pressed into service.” The decision was in favor of the assessee.

Key Takeaways:

• Specific Provisions for Excess Stock: The GST Act provides specific mechanisms for dealing with discrepancies like excess stock. Sections 73 and 74 are designed to determine and demand tax, interest, and penalties on undeclared or under-declared output, including that arising from unrecorded stock.
• Section 130 – Confiscation as a Last Resort/Specific Offence: Section 130 deals with confiscation of goods or conveyances and related penalties. This section is generally invoked for more severe violations, such as goods being transported in contravention of the Act with intent to evade tax, or for unrecorded goods that are clearly found to be with the intent to evade tax. It’s a provision focused on the confiscation of goods.
• Distinction Between Non-Recording and Confiscation: The court drew a clear distinction: if goods are merely “not recorded in books of account,” the appropriate course of action is to bring them to tax under Section 73 or 74. Confiscation under Section 130 is not the automatic or default recourse for simply finding excess stock.
• “Eye Measurement” and Proper Assessment: While not the central point of the ruling, the assessee’s argument about “eye measurement” hints at the need for proper, verifiable methods of stock assessment during searches.
• “Once Act specifically contemplates action”: This phrase is critical. It implies that if the law provides a specific pathway for a particular scenario (like excess stock being subject to tax determination under 73/74), authorities cannot bypass that specific pathway and invoke a more stringent or less appropriate provision (like Section 130) solely for convenience or to impose harsher penalties.
• Consequences of Wrong Procedure: Initiating proceedings under the wrong section of the Act, even if excess stock is genuinely found, can lead to the quashing of the entire order, as the authority would have acted outside its properly invoked jurisdiction for that specific scenario.