Introduction
The Supreme Court in Kesari Nandan Mobile v Office of Assistant Commissioner of State Tax (‘Kesari Nandan Mobile’) held that an order of provisional attachment under Section 83 of the Central Goods and Services Act, 2017 (‘CGST Act of 2017’) cannot extend beyond one year. A plain reading of Section 83(2) of the CGST Act of 2017 reveals that every provisional attachment shall cease to have effect after expiry of one year. However, Section 83(2) doesn’t expressly prohibit renewal of an attachment order after expiry of one year.
In Kesari Nandan Mobile, the Revenue Department after expiry of one year issued a new attachment order terming it as ‘renewal’ of the previous attachment order. The Gujarat High Court dismissed the assessee’s challenge to ‘renewal’ of the attachment order. The Gujarat High Court provided two major reasons:
first, prima facie the assessee was engaged in supply of bogus invoices and claiming Input Tax Credit (‘ITC’) based on those invoices. In view of the assessee’s conduct, the Gujarat High Court held that the order of provisional attachment cannot be said to cause any harassment to the assessee;
second, the Gujarat High Court added that under Section 83(2) of the CGST Act of 2017, there was no embargo to issue a new provisional attachment order after lapse of the previous attachment order. And that a provisional attachment order passed after one year was intended to safeguard the revenue’s interest and was not in breach of Section 83(2) of the CGST Act of 2017.
The Supreme Court set aside the Gujarat High Court’s decision by interpreting Section 83(2) in favor of the assessee. The Supreme Court referred to comparable legislations – Income Tax Act, 1961 (‘IT Act, 1961’) as well as Customs Act, 1962 and The Central Excise Act, 1944 – and noted that the authorities can renew an order of provisional attachment only when a statute expressly provides for it. But, if the statute does not expressly confer a power for extension of provisional attachment, the executive ‘cannot overreach the statute’.
In this article, I argue that the Supreme Court in Kesari Nandan Mobile has added a welcome restraint on the Revenue Department’s power of provisional attachment by correctly interpreting Section 83(2) of the CGST Act of 2017. I further suggest that the Supreme Court in the impugned case reinforced the legal framework on provisional attachment elaborated in in M/S Radha Krishan Industries v The State of Himachal Pradesh(‘Radha Krishan Industries’). The Supreme Court in Radha Krishan Industries was categorical that the power of provisional attachment was ‘draconian in nature’ with serious consequences. And the rights of assessees against such a power were valuable safeguards that needed protection. The Supreme Court in Kesari Nandan Mobile builds on the foundation laid in Radha Krishan Industries and expressly states that provisional attachment is only a pre-emptive measure and not a recovery mechanism.
Radha Krishan Industries on Provisional Attachment
The Supreme Court in Radha Krishan Industries noted that the legislature was aware of the draconian nature of provisional attachment and serious consequences that emanate from it. And use of power of provisional attachment is predicated on specific statutory language used in Section 83 of the CGST Act of 2017. Interpreting Section 83(1) of the CGST Act of 2017, the Supreme Court emphasized that the Commissioner must only issue an order of provisional attachment if it is necessary to do so and not because it was practical or convenient. Necessity of protecting the interest of the revenue is the fountainhead reason that triggers the power of provisional attachment.
Supreme Court in Radha Krishan Industries also interpreted Section 83(1) of the CGST Act of 2017 alongside Rule 159 of the CGST Rules of 2017. The latter provided detailed procedure and rights of assessee’s vis-à-vis provisional attachment. The Supreme Court specifically interpreted Rule 159(5) of the CGST Rules and held that it provided two procedural entitlements to the person whose property was attached: first, the right to file an objection on the ground that the property was not or is not liable to be attached; second, an opportunity of being heard. The Supreme Court underlined the importance of these rights and dismissed the Revenue Department’s stance that the right to file objections was not accompanied by a right to be heard.
Finally, in Radha Krishan Industries, the Supreme Court took umbrage that a previous attachment order against the assessee was withdrawn by the Revenue Department after considering representations of the assessee; but a subsequent order of provisional attachment was passed on the same grounds. The Supreme Court observed that unless there was a change in circumstances it was not open to the Revenue Department to pass another order of provisional attachment. While this observation of the Supreme Court was not in the context of outer time limit, it laid down the law that even if a new provisional attachment order is issued within one year, the onus is on the Revenue Department to prove that there was a change in circumstances that necessitated a new order.
It is in the backdrop of the Supreme Court’s above observations in Radha Krishan Industries on provisional attachment that we need to understand the issue of time restraint addressed in Kesari Nandan Mobile.
Supreme Court Adds Time Restraint
In Kesari Nandan Mobile, the Supreme Court was faced with the issue of whether an order of provisional attachment can be issued after expiry of one year of issuance of the previous attachment order. The Supreme Court noted that issuance of an order of provisional attachment after one year cannot be justified on the ground that it is not prohibited under a legislative or executive instrument. The Supreme Court added three more reasons to support its conclusion that provisional attachment cannot take place after expiry of one year:
First, the ‘complete absence of any executive instruction’ that is consistent with the legislative policy of allowing renewal of orders of provisional attachment after expiry of one year.
Second, the Supreme Court reasoned that Section 83(2) of the CGST Act of 2017 must be interpreted in a manner that does not reduce it to a dead letter. As per the Supreme Court, conceding to the Revenue Department’s argument of allowing renewal of provisional attachment after expiry of one year would make Section 83(2) otiose. The Supreme Court – impliedly invoked Radha Krishan Industries – and held that Section 83(1) conferred a draconian power and Section 83(2) should not be interpreted to ‘confer any additional power over and above the draconian power’ upon the lapse of one year envisaged under Section 83(2).
Third, the Supreme Court further observed that issuance of a fresh provisional attachment order on substantially the same grounds as previous one would be in disregard to the safeguard provided under Section 83(2) of the CGST Act of 2017. In Radha Krishan Industries the Supreme Court had disallowed issuance of a fresh provisional attachment order on similar grounds as the previous order. But the Supreme Court’s primary objection was that the new provisional attachment order was issued despite there being no change in facts. However, in Kesari Nandan Mobile, the Supreme Court expressed concern that issuance of new order after expiry of one year may lead to continuous issuance of provisional attachment under the garb of renewal and would be contrary to a plain reading of Section 83(2).
The Supreme Court’s observations in Kesari Nandan Mobile are an important win for taxpayer protection, a plain reading of tax statutes, and a welcome restraint on the Revenue Department’s power. The Gujarat High Court’s decision was influenced by dishonest conduct of the taxpayer. Ideally, the taxpayer’s conduct should not intervene in plain and strict reading of the tax statutes unless the context warrants otherwise. In the impugned scenario, there was little reason for the Gujarat High Court to interpret Section 83(2) in a way that provided additional powers to the Revenue Department. Especially when the powers in question are intrusive and can cause permanent damage to the assessee’s business.
Incongruity Between Section 83(2) and Rule 159(2)
The Supreme Court in Kesari Nandan Mobile also took note of the incongruity between Section 83(2) of the CGST Act of 2017 and Rule 159(2) of CGST Rules of 2017. The former provides that every order of provisional attachment shall cease to have effect after expiry of one year. Rule 159(2) in turn provides that an order provisional attachment shall cease to have effect only when the Commissioner issues written instructions. Thus, even after expiry of one year the provisional attachment continues unless written instructions are issued by the Commissioner. The Supreme Court noted that the incongruity had been brought to the notice of the GST Council and an amendment to Rule 159(2) was proposed. The amendment to Rule 159(2) will provide that a provisional attachment shall cease to have effect after one year or from the date of order of the Commissioner, whichever is earlier.
But even though the proposed amendment – though approved by the GST Council – has not been effectuated, the Supreme Court held that it is important that Section 83(2) is complied with strictly. Implying that an order of provisional attachment should not extend beyond one year.
Conclusion
The power of provisional attachment is certainly intrusive, but at the same time necessary. The necessity stems from preventing an eventual frustration of the tax demand because the assessee has disposed of their properties. At the same time, as courts have reminded the Revenue Department: the power of provisional attachment is not a recovery measure. It is temporary until the investigation is over. And failure to complete the investigation or recover tax cannot be used as a cover to extend the duration of provisional attachment beyond the statutory mandate. And each time, the Revenue Department must be mindful of the consequences that provisional attachment entails and its disruption to assessee’s business and profession.
