Quashing of Prohibition and Seizure Orders Post-Remand: A Victory for Taxpayer Rights
This ruling (delivered in early 2026) addresses the legality of continuing restrictive search and seizure orders (INS-03 and INS-02) when the underlying assessment order has been quashed and no notice for confiscation exists. The Tamil Nadu/Madras High Court clarified that these orders cannot be held “in perpetuity” as a tool for administrative pressure during a remand.
The Legal Issue
Can the Department continue a Prohibition Order (INS-03) or a Seizure Order (INS-02) against a taxpayer’s goods while a case is being re-adjudicated (remand), especially if the primary assessment order was quashed and no specific notice for confiscation was issued?
Facts of the Case
The Inspection: Pursuant to a search for the period 2017-18 to 2023-24, the Department issued a Seizure Order (INS-02) and a Prohibition Order (INS-03) against the petitioner’s goods.
The Allegation: The Department alleged belated availment of Input Tax Credit (ITC) beyond the timelines prescribed under Section 16(4).
The Assessment: An assessment order (DRC-07) was passed, but it was later quashed by a Writ Court in a separate proceeding, and the matter was remanded for fresh adjudication.
The Deadlock: Even after the assessment order was set aside, the Department continued the prohibition on the petitioner’s goods. The petitioner argued that without a valid assessment or a specific confiscation notice under Section 67(2), the seizure could not legally continue.
The Decision: Seizure Orders Quashed
The Court ruled in favour of the assessee, ordering the immediate release of the goods:
Mandatory Confiscation Notice: Under Section 67(7), if goods are seized and no notice for their confiscation is issued within six months (extendable by another six months), the goods must be returned.
Absence of Section 67(2) Proposal: The Department admitted that no notice proposing the confiscation of the seized goods (as required under Section 67(2) read with Section 130) had been issued.
Effect of Quashing DRC-07: Once the final assessment order was quashed, the “reason to believe” that the goods were liable for seizure was significantly weakened.
No Subsistence during Remand: The Court held that remand proceedings are meant for fresh adjudication of tax liability. They do not automatically grant the Department the right to keep goods under “prohibition” or “seizure” unless the specific statutory conditions for confiscation are met and pursued.
Key Takeaways for Taxpayers
The Six-Month Clock: Always track the date of your INS-02. If the Department does not issue a specific Show Cause Notice for confiscation (not just a general tax demand) within 6 months, you have a statutory right to the return of your goods.
Prohibition vs. Seizure: Form INS-03 (Prohibition) is used when it is “not practicable” to physically seize the goods. Legally, it is treated with the same rigor as a seizure. If the grounds for seizure fall, the prohibition must also be lifted.
Quashed Orders = Release of Assets: If you win a Writ Petition against an assessment order, ensure you separately pray for the lifting of any bank attachments or prohibition orders on stock. The Department often tries to keep these active as “security” during remand, but this case confirms that such a practice is illegal without a separate confiscation proceeding.
Summary of Section 67(7) Protection
Action: Seizure of Goods (INS-02).
Time Limit: 6 Months from date of seizure.
Requirement: Issue Notice proposing confiscation.
Failure to Issue Notice: Mandatory Return of goods to the owner.
W.M.P. Nos. 53167 and 53168 of 2025
| (i) | The orders impugned herein is quashed insofar as it relates to the claim made by the petitioners for ITC which is barred by limitation in terms of Section 16(4) of the CGST Act, 2017 but, within the period prescribed in terms of Section 16(5) of the said Act. |
| (ii) | Therefore, the respondent-Department is restrained from initiating any proceedings against the petitioners by virtue of the impugned orders based on the issue of limitation. |
| (iii) | In view of the fact that the impugned orders are quashed, the respondent-Department is directed to take immediate steps towards de-freezure of the concerned petitioners bank accounts, which have been freezed in furtherance of the impugned orders, by sending intimation to the concerned bankers. |
| (iv) | In the event, in the interregnum, i.e. during the pendency of these Writ Petitions, if any orders are proposed to be passed towards recovery, same shall be dropped immediately upon production of the order copy by the petitioners, in whichever case, where, there is no interim order. |
| (v) | It is also made clear that if at all, if there is any tax amounts were collected from the petitioner based on the impugned assessment order from the cash ledgers/credit ledgers of the petitioner concerned, the same shall be refunded to them or by means of orders of this Court or even in the absence of any order from this Court, if any amount is deposited either in the cash ledgers/credit ledgers of the petitioner concerned, the same is permitted to be utilized/adjusted by the petitioners towards payment of future tax. |
| (vi) | Insofar as the apprehension expressed by the learned Special Government Pleader for the respondent-Department that in certain Writ Petition apart from the issue on limitation, challenges have also been made to the order related to issues such as discrepancies in availing the ITC/wrong availment of ITC/excess claim of ITC/Fake ITC claim, as the case may be, or such other issues, liberty is be granted to the respondent-Department to proceed against the assessee/petitioner in furtherance of the impugned order in accordance with law.” |