Search, Seizure, and Inspection under GST laws: Observations of the Madras High Court

Introduction

The Madras High Court in M/s Bhima Enterprises v The Principal Commissioner of GST & Central Excise Tamil Nadu & Puducherry (‘Bhima Enterprises case’) decided a taxpayer’s writ petition challenging the legality of search and seizure operation conducted under Section 67(2), Central Goods and Services Act, 2017 (‘CGST Act, 2017’). 

The taxpayer was a partnership firm in the jewelry business. During the search, gold ornaments and bullion was seized by the Revenue Department because they weren’t reflected in the books of account. The taxpayer challenged the legality of search and seizure operation on various grounds. One of taxpayer’s argument was that the authorization document did not cite Document Identification Number (‘DIN’). The taxpayer demanded refund of the tax paid – Rs 32,62,640/- which, it claimed was paid under coercion. The Revenue Department justified its actions by arguing that citing DIN on every document was not mandatory and regardless the DIN was generated later. Further, the Revenue Department claimed that the taxpayer paid the tax voluntarily. 

In a previous writ filed by the taxpayer, it had argued that because the tax was paid in full, it was entitled to receive back its goods. A single judge of the Madras High Court had ordered the Revenue Department to release the taxpayer’s goods citing payment of tax. In Bhumi Enterprises case, the taxpayer was seeking a refund of the tax paid. The relief obtained by taxpayer in the previous writ petition prejudiced its claim in Bhumi Enterprises case. In Bhumi Enterprises case, the Madras High Court despite castigating the Revenue Department for its conduct did not order a refund of tax. Instead, the High Court ordered initiation of fresh assessment proceedings to determine if the taxpayer was entitled to a refund. The High Court reasoned that because the taxpayer had relied on payment of tax to receive its good back in the previous writ petition, it couldn’t now claim a full refund of the tax by questioning the legality of search and seizure operation. 

In Bhima Enterprises case, the Madras High Court made some crucial observations about search and seizure powers and importance of DIN. I elaborate on these aspects below.    

Anatomy of Section 67, CGST Act, 2017 

Section 67(1), CGST Act, 2017 empowers a Joint Commissioner to issue an order authorizing in writing:

any other officer of central tax to inspect any places of business of the taxable person or the persons engaged in the business of transporting goods or the owner or the operator of warehouse or godown or any other place. (emphasis added)

While Section 67(2), CGST Act, 2017 empowers the Joint Commissioner to:

may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things: (emphasis added)

Section 67(2) states a Joint Commissioner can issue an authorisation to search and seize can be pursuant to inspection under sub-section (1) or otherwise. 

There are two major takeaways from the above provision: 

(i) search and seizure can follow an inspection or can be initiated independently without a prior inspection; (ii) inspection and ‘search and seizure’ are distinct concepts even if they may overlap. 

The Revenue Department argued that since Section 67, CGST Act, 2017 deals with inspection as well as search and seizure, the distinction is blurred. The High Court held that inspection and search are conceptually distinct acts though one may closely follow another. Based on this observation, the High Court noted that the authorization for search was issued under Section 67(2) but at the foot of communication it was described as an ‘inspection warrant’. The authority of document was unclear, and it merely reproduced statutory language defeating the purpose of statutory safeguards. After the above observations, the Madras High Court questionably concluded that: 

Though any move of the authority is open to judicial review, Courts would be reluctant to undertake the exercise once the act is done. In other words, if an illegal search conducted by the authority leads to discovery of tax evasion, the Court will not restrain the authority from proceeding further merely because, the conditions precedent for undertaking a search were absent. (para 9)

The Madras High Court’s observations about the authorization document not having a clear source and its above conclusion did not follow one another. The Madras High Court’s conclusion in fact suggests that illegal searches by tax officers can be condoned retrospectively if it leads to ‘discovery of tax evasion’. A problematic statement and one that hopefully would not become a precedent for other courts because it treats procedural safeguards for taxpayers as dispensable. And even if one were inclined to accept the above statement, the phrase ‘discovery of tax evasion’ is undefined and provides more than necessary leeway to the Revenue Department to retrospectively justify their searches that do not adhere to procedural safeguards.  

DIN Question 

The Madras High Court referred to CBIC’s circular on DIN where it is explicitly stated that after 8 November 2019, no search authorization, summons, arrest memo or inspection notices shall be issued by officers to a taxpayer or any other person ‘without a computer-generated Document Identification Number (DIN) being quoted prominently in the body of such communication.’ The High Court elaborated that while some exceptions were incorporated in the circular, the communication is void if it is not covered by the exceptions. Further, even if a communication is covered by the two exceptions the circular was clear that the officer was obligated to generate a DIN within 15 days of issuing the communication.

The Madras High Court’s observations about the conduct and excuses of Revenue Department’s officers were forthright. The High Court held that the officers cannot simply say that DIN was not generated due to ‘technical difficulty’ to justify the exception. It was incumbent on the officers to state the exact reason why the DIN was not generated. And the burden is on the officer invoking an exception to generating DIN at the time of issuing communication to the taxpayer. And when a DIN is generated subsequently – ideally within 15 days of issuing communication – it must be communicated to the taxpayer who can verify genuineness of the document. And the Revenue Department cannot claim that no purpose will be served in communicating the DIN to taxpayer if the notice has been sent earlier. The High Court observed:    

The very purpose of introducing DIN was to ensure transparency. This object is frustrated by not sharing the DIN with the noticee. If the noticee wants to verify the genuineness of the document, he can do so only after entering DIN in the portal. By denying the details relating to DIN, the noticee is disabled from verifying its validity. (para 14)

Despite noting that source of authorization was unclear and doubting the Revenue Department’s officers claim of not being able to generate DIN due to technical difficulty, the Madras High Court held that it was unable to invalidate the search because the petitioner had – in its previous writ petition – obtained relief of provisional release of goods. The single judge had ordered the release of goods, but did not set aside the seizure. And since seizure was not set aside, legality of steps that preceded it – inspection/search – cannot be questioned by a taxpayer after their goods had been released. 

Refund of Tax Paid 

The petitioner claimed that it paid Rs 32,62,640/- during inspection. The differing contentions about the payment were that petitioner claimed the money was paid under coercion while the Revenue Department claimed that the money was paid voluntarily. The Madras High Court referred to the guidelines on this point enumerated by the Gujarat High Court and later adopted by the CBIC. Though the latter didn’t mention one crucial guideline laid down by the Gujarat High Court: if a taxpayer voluntarily comes forward to pay, the tax officers must direct it to make the payment a day after the search or once the officials have left the taxpayer’s premises. 

In Bhima Enterprises case, it was found during the search that the taxpayer had excess stock of jewelry and shortage of stock gold bullion. And it was during the search that the proper officer found that there had been non-payment of tax and issued a notice to the taxpayer under Section 74, CGST Act, 2017. Thus, the taxpayer was entitled to pay the tax under Section 74(5), CGST Act, 2017 ‘on the basis of his own ascertainment’. But the Madras High Court held that the Revenue Department needs to satisfy the requirements of informing the taxpayer that they can seek provisional release of seized goods after furnishing a bond and there must be material to show that the assessee was informed of such a right. The High Court noted that taxpayer paid 100% penalty when under Section 74(5) only a 15% penalty can be levied. And based on its appreciation of the facts, the High Court concluded that: 

I am more than satisfied that search conducted by the respondents was not in tune with the statutory procedure. The payment made by the petitioner was also not voluntary. The department, on the strength of an illegal warrant, descended on the petitioner’s premises and seized jewelry and gold bullion. (para 33)

However, the High Court refused to grant a straight relief for refund. This is because the taxpayer had got its goods released my making the argument that it had paid full tax. And the single judge had ordered release of goods but did not set aside the seizure order. Thus, accounting for relief obtained by the taxpayer in previous writ petition the High Court instead of ordering a refund, ordered the Revenue Department to initiate fresh assessment proceedings, and the outcome of such proceedings should decide if the taxpayer was entitled to a refund or not.       

Major Takeaways

The Madras High Court despite not giving a straightforward relief to the taxpayer has reiterated certain legal boundaries for the Revenue Department. 

Firstly, the onus is on officers of the Revenue Department to generate DIN when issuing a communication to taxpayers. Or if the officers are claiming exceptions for not generating the DIN they need to state the reason specifically not merely ‘technical difficulty’. Further, if a DIN is generated after sending a communication the taxpayer needs to be informed of DIN. 

Secondly, tax payments during search are not permissible. And the Revenue Department needs to put on record material that the taxpayer was informed of his right to get the goods released that are seized during a search and seizure operation. 

Finally, though the Madras High Court’s opinion that courts will not invalidate a search if it leads to discovery of tax evasion is problematic. The procedural safeguards incorporated in Section 67, CGST Act, 2017 e.g., the Joint Commissioner must have a ‘reason to believe’ that an inspection is necessary is a crucial valve to protect taxpayer rights. And if the Revenue Department is allowed to not adhere to its requirement and go on fishing expeditions on the hope that they may discover tax evasion is prejudicial to taxpayers’ rights. Hopefully, either the High Court’s observation will be treated as obiter or will be reversed in future decisions.