Confiscation of goods under Section 130 is not permissible for excess stock found at business premises; demand proceedings under Section 73/74 are the appropriate recourse.
Issue
Whether the discovery of excess stock at the business premises of a registered person during a survey can trigger confiscation proceedings under Section 130 of the CGST/UPGST Act, 2017, or if the proper course of action is to initiate demand and recovery proceedings under Section 73 or Section 74 of the said Acts.
Facts
During a survey conducted at the business premises of the assessee, the inspecting officers found that the physical stock of goods was in excess of the stock recorded in the books of accounts. Based on this finding of “unaccounted” goods, the tax authorities invoked Section 130 of the GST Act, which pertains to the confiscation of goods and the levy of penalty. An order for confiscation of the excess goods and imposition of a penalty was subsequently passed against the assessee. The assessee challenged this order, arguing that Section 130 was inapplicable to the facts of the case and that the department should have followed the procedure prescribed under Sections 73 or 74 for determination of tax.
Decision
The High Court ruled decisively in favour of the assessee, quashing the impugned order of confiscation. The Court held that the initiation of proceedings under Section 130 for excess stock found at the business premises was legally unsustainable.
The Court, referencing its own precedents on multiple occasions, clarified the legal position as follows:
- The discovery of excess or unaccounted stock at a taxpayer’s premises does not automatically imply that the goods are liable for confiscation.
- Confiscation under Section 130 is a stringent measure reserved for specific contraventions, such as supplying or receiving goods with the intent to evade tax, supplying goods without registration, or using a conveyance for transporting goods in contravention of the Act.
- Excess stock found at the premises is essentially unaccounted stock. The liability on such goods is the tax that has not been paid. The correct legal procedure is to determine this tax liability.
- Sections 73 (for non-fraud cases) and 74 (for fraud, willful misstatement, or suppression of facts) of the GST Act are the specific provisions designed for the determination and recovery of tax that has not been paid or has been short-paid.
- Therefore, when excess stock is found, the proper officer should initiate proceedings under Section 73 or Section 74 to demand the applicable tax, along with interest and penalty, but cannot directly resort to confiscating the goods under Section 130.
Key Takeaways
- Section 130 is Not for Tax Determination: The provision for confiscation under Section 130 is a punitive measure for specific, serious offences and is not a mechanism for determining tax liability on unaccounted goods found at a registered business premise.
- Correct Procedure is Section 73/74: The appropriate legal pathway for dealing with discrepancies like excess stock is through the demand and recovery provisions outlined in Sections 73 and 74 of the CGST Act. These sections provide a structured mechanism for issuing a show-cause notice and determining the tax payable.
- Distinction Between Unaccounted Stock and Goods Liable for Confiscation: The law draws a clear distinction. Unaccounted stock at a business premise leads to a liability of tax, which must be assessed. Goods transported in contravention of the Act or supplied with an intent to evade tax are what typically fall under the ambit of confiscation.
- Judicial Precedent is Clear: Multiple High Court judgments have consistently held that invoking Section 130 merely on the grounds of finding excess stock is an incorrect application of the law and such orders are liable to be quashed.
“10. The issue in hand is covered by the judgement of this Court in Metenere Limited (supra), in which following observations have been made:-
“22. From the perusal of the scheme of the Act and the statutory provisions what emerges is that Section 9 of the CGST is the charging section which provides for levy of tax on supplies of goods or services. Section 12 of the CGST Act provides for time on which the tax are to be paid and elaborates the “time of supply of goods” and Section 12 (2) clearly provides that the “time of supply of goods” is the date of issue of invoices or the date of receiving of the payment in respect to such supplies.
23. Section 35 (1) clearly provides that all the registered person are required to keep and maintain at the principal place of business a true and correct account of things specified in Clause (a) to (f). The Second proviso to Section 35 (1),Rule 56 and Rule 57 make it further necessary to keep the said documents as specified in Clause (a) to (f) in the electronic form.
24. Section 35 (6) of the said Act provides that in the event the person fails to keep their accounts for the goods or the services in accordance with the provisions of Sub-section 1of Section 35, the proper officer is empowered to determine the amount of tax payable on the goods or the services which are unaccounted for as if such goods or services had been supplied by such person and the provisions of Section 73 or 74 shall mutatis mutandis apply for determination of the said tax.
25. A perusal of the said section 35(6) makes it clear that proper officer is empowered to determine the taxes payable and while determining the said tax payable he is bound to determine the same in accordance with the provisions of Sections 73 & 74 of the Act.
26. In the present case, the proper officer was empowered to determine the liability of payment of tax in terms of the powers conferred under Section 35 (6) after resorting to the procedure as established under Section 74 of the Act. Section 74 of the Act reads as under:
Section 74 – Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.
| (1) | Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice. |
| (2) | The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of order. |
| (3) | Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under subsection (1), on the person chargeable with tax. |
| (4) | The service of statement under sub-section (3) shall be deemed to be service of notice under subsection (1) of section 73, subject to the condition that the grounds relied upon in the said statement, except the ground of fraud, or any wilful-misstatement or suppression of facts to evade tax, for periods other than those covered under subsection (1) are the same as are mentioned in the earlier notice. |
| (5) | The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment. |
| (6) | The proper officer, on receipt of such information, shall not serve any notice under subsection (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder. |
| (7) | Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable. |
| (8) | Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded. |
| (9) | The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order. |
| (10) | The proper officer shall issue the order under sub-section (9) within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within five years from the date of erroneous refund. |
| (11) | Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded. |
27. Although in terms of the provisions of Section 35 (6), the unaccounted goods are ”deemed to be supplied’ however, determination and quantification of the tax on the said ”deemed supply’ has to be done in accordance with Section 73 or Section 74 of the Act.”
“9. Considering the rival submissions made at the bar, the following questions which arise for determination;
| (I) | . Whether tax can be assessed/ determined in exercise of powers under Section 130 of the GST Act? |
| (II) | . Whether penalty can be levied only on the allegations that at the time of verification of goods, the goods in excess were found at the premises? |
| (III) | . Whether the service of notice as claimed by the respondent satisfies the requirement contemplated under Section 169 of the GST Act? |
| (IV) | . Whether the valuation of goods can be done on the basis of eye estimation alone and on the basis of production capacity and/ or the consumption of electricity etc? |
11. The issue raised herein in Issue no.I is marked resemblance to facts referred in the judgment of this Court in the case M/s Metenere Limited (supra) wherein on the basis of a similar search conducted, the demand was quantified. This Court after analysing the provisions of the Act and the Rules applicable held that for the infractions as contained in Section 122 of the GST Act and specified in Column ”A’ of paragraph 35 of the said judgment M/s Metenere Limited (supra) held that penalty has to be Rs.10,000/- or the amount of tax evaded whichever is higher, whereas for the infractions specified in Column ”B’ of paragraph 35, the penalty that can be imposed is Rs.10,000/- only. This Court also held that the demand for tax can be quantified and raised only in the manner prescribed in Section 73 or Section 74 of the Act, as the case may be.
12. In the light of what has been decided by this Court in the case of M/s Metenere Limited (supra), it is clear that the entire exercise resorted to under Section 130 of the GST Act for assessment/ determination of the tax and the penalty is neither stipulated under the Act, nor can be done in the manner in which it has been done, more so, in view of the fact that the department itself had undertaken the exercise of quantifying the tax due, by taking recourse under Section 74.
13. As the entire tax has been determined and the penalty has been levied only on the basis of a survey by taking recourse under Section 130 of the GST Act and not taking a recourse to Section 74, the order impugned is clearly unsustainable.
15. On a plain reading of the allegations levelled against the petitioner with regard to the improper accounting of goods, the only stipulation contained in Clauses (ii) and (iv) of subsection (1) of Section 130 can at best be invoked by the department, however, in the present case, even assuming for the sake of argument, that the goods were lying in excess of the goods in record, the case against the petitioner would not fall under Clause (ii) of sub-section (1) of Section 130 for the simple reason that the liability to pay the tax arises at the time of point of supply, and not at any point earlier than that. On a plain reading, the scope of Clause (ii) of sub-section (1) of Section 130 is that any assessee who is liable to pay tax and does not account for such goods, after the time of supply is occasioned, would be liable to penalty under Clause (ii). Analyzing Clause (iv) of sub-section (1) of Section 130, the contravention of any provision of the Act or the Rules should be in conjunction with an intent to evade payment tax and penalty can be levied by invoking Clause (iv) only when the department establishes that there were a contravention of the Act and Rules coupled with the ”intent to make payment of tax’. There is no such allegation in the show cause notice or any of the orders, I have no hesitation in holding that even the Clause (iv) of sub-section (1) of Section 130 would not be attracted in the present case.”