SC dismisses Revenue’s SLP against Allahabad HC judgment affirming no penalty order u/s 130 of the CGST Act for stock discrepancies found during surveys

The Hon’ble Supreme Court in  the case of Additional Commissioner Grade-2 & Anr. Versus M/s. Dayal Product. - 2025 (9) TMI 602 - SC Order held that where a stock discrepancy is discovered during the survey of a registered dealer, the initiation of confiscation and penalty proceedings under Section 130 of the GST Act is unsustainable. Such issues must be addressed through assessment and recovery proceedings under Sections 73 or 74. The SLP against the Allahabad High Court’s judgment was dismissed, thereby upholding the High Court’s view.

Facts:

Dayal Product ('the Petitioner') is a registered dealer engaged in hosiery goods trading. The business premises were surveyed by Revenue and, based on alleged stock discrepancies found during survey, penalty and confiscation orders were passed under Section 130 of the GST Act.

The Additional Commissioner Grade-2 (“the Respondent”), disputed that these discrepancies merited proceeding exclusively under Section 130, invoking confiscation and heavy penalties based on inventory differences.

The Petitioner contended that, in such cases, proceedings could only be sustained under the tax assessment and recovery architecture of Sections 73 (determination of tax not paid or short paid) or 74 (cases involving fraud, suppression etc.), and not under Section 130.

The Respondent contended that the penalties and confiscation were justified on account of the serious discrepancies recorded and that Section 130 appropriately covered such situations.

Aggrieved by the penalty/confiscation and the proceedings under Section 130 rather than 73/ 74, the Petitioner approached the Allahabad High Court by writ petition; the Revenue’s special leave petition to the Supreme Court followed the High Court’s quashing of those orders.

Issue:

Whether discovery of stock discrepancy during a survey of a registered dealer justifies initiation of proceedings under Section 130 of the GST Act, or whether appropriate action lies only under Sections 73 or 74?

Held:

The Hon’ble Supreme Court in Additional Commissioner Grade-2 & Anr. Versus M/s. Dayal Product. - 2025 (9) TMI 602 - SC Order held as under:

• Observed that, where a stock discrepancy is found regarding a registered dealer, the proper statutory remedy is for proceedings to be initiated under Sections 73 or 74 and not Section 130.
• Noted that, the proceedings under Section 130 resulting in confiscation and penalty orders, in these circumstances, were unsustainable in law as correctly set out by the Allahabad High Court.
• Dismissed the Revenue’s SLP and refused to interfere with the High Court’s quashing of the Section 130 proceedings and further held that the impugned judgment and dismissal of the SLP do not preclude the Revenue from using any other remedies permitted by law, so long as correct statutory procedures are followed.

Our Comments:

The judgment is in harmony with the earlier Allahabad High Court precedents in S/S Dinesh Kumar Pradeep Kumar Versus Additional Commissioner Grade 2 And Another - 2024 (8) TMI 71 - ALLAHABAD HIGH COURTand in the case ofM/s Maa Mahamaya Alloys Pvt. Ltd. Versus State of U.P. And 3 Others - 2023 (3) TMI 1358 - ALLAHABAD HIGH COURT which upheld that Section 130, which addresses offences relating to confiscation and penalty, is not the default or proper provision for tax recovery claims arising from stock discrepancies detected during surveys of registered dealers. Rather, Sections 73 and 74 provide the statutory mechanism for such recoveries involving normal or extended period assessments, subject to procedural safeguards.

Relevant Provisions:

Section 73, Central Goods and Services Tax Act, 2017:

“73. Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-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 for any reason, other than the 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 leviable under the provisions of this Act or the rules made thereunder. ..”

Section 74, Central Goods and Services Tax Act, 2017:

74. Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful- 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…”

Section 130 of the Central Goods and Services Tax Act, 2017:

“130. Confiscation of goods or conveyances and levy of penalty.-

(1) Where any person-

1. supplies or receives any goods in contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or
2. does not account for any goods on which he is liable to pay tax under this Act; or
3. supplies any goods liable to tax under this Act without having applied for registration; or
4. contravenes any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or
5. uses any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made thereunder unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance, then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to penalty under section 122...”

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