Confiscation of Excess Stock is Invalid; Regular Tax Demand Provisions Must Be Used.

Confiscation of Excess Stock is Invalid; Regular Tax Demand Provisions Must Be Used.

Issue

Whether GST authorities can initiate confiscation proceedings under Section 130 of the CGST Act for unaccounted “excess stock” found during a survey of a registered business premise, or if they are legally bound to use the standard demand and recovery provisions (Section 73/74) to determine the tax on such goods.

Facts

• The petitioner’s business premises were surveyed by GST authorities.
• During the survey, the authorities alleged discrepancies, including the presence of excess stock that was not accounted for in the regular books.
• Instead of assessing the tax on this stock, the authorities initiated confiscation proceedings under Section 130.
• The adjudicating authority passed a confiscation order, which was subsequently upheld by the appellate authority.
• The petitioner challenged these orders, arguing that confiscation is not the correct legal mechanism for dealing with excess stock found at a business premise and that the proper course is to determine the tax liability under Sections 73 or 74.

Decision

• The High Court allowed the writ petition and quashed both the confiscation order and the appellate order.
• It held that the GST Act is a “complete code” and provides a specific procedure for goods that are not accounted for: the proper officer shall determine the tax payable on such goods using the demand provisions of Section 73 or Section 74.
• The court ruled that the confiscation provision (Section 130) cannot be invoked for such a discrepancy.
• This issue was held to be already settled by binding precedents, including a case affirmed by the Supreme Court.
• The court ordered that any amount deposited by the petitioner pursuant to the illegal confiscation orders must be refunded.

Key Takeaways

• Section 130 is Not for Stock Discrepancies: Confiscation is an extremely harsh measure. Its use is not permitted for dealing with excess or unaccounted stock found at a taxpayer’s registered business premises during a survey or audit.
• Prescribed Demand Machinery is Mandatory: The law provides a clear and specific path for such situations. The officer must follow the demand and recovery machinery (SCN under Section 73 or 74) to assess and demand the tax payable on the unaccounted goods.
• Distinction from Goods in Transit: The power to confiscate is generally applied to specific, severe violations, often related to goods in transit without valid documents. It is not a tool for routine assessment discrepancies.
• Right to Refund: Since the entire confiscation proceeding was legally invalid (void ab initio), any penalty or deposit paid by the taxpayer under such an order must be refunded.