Search under Section 67 CGST valid, but Sections 73(5) and 74(5) cannot force ITC payments

HC held that the search and inspection under Section 67 CGST Act were not illegal merely because the authorization in Form INS-01 reproduced all possible statutory grounds without specifying a particular one, as the recorded reasons were connected and "reasons to believe" were stated to exist on file. However, HC held that Sections 73(5) and 74(5) are enabling provisions for voluntary tax payment and cannot be used to compel deposit of tax or ITC during search or inspection. As the ITC debit was not voluntary in this sense, HC directed reversal of ITC of Rs. 18,72,000 and its immediate re-credit to the petitioner's electronic credit ledger.

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Issues Involved:
1. Legality of the search conducted under Section 67 of the CGST Act.
2. Entitlement to the reversal of Input Tax Credit (ITC) debited from the petitioner's Electronic Credit Ledger (ECL).

Summary:

Issue 1: Legality of the Search Conducted Under Section 67 of the CGST Act

The petitioner challenged the search conducted at his premises on 07.10.2022, arguing that the authorization for the search was vague and imprecise. Section 67(1) of the CGST Act allows a proper officer to authorize an inspection if there is reason to believe that the taxable person has suppressed transactions, stock, or claimed excess ITC, among other reasons. The Court examined the authorization form GST INS-01 and noted that the proper officer had listed all possible reasons for the search without specifying any particular one. However, it was observed that the reasons were connected and the cancellation of the suppliers' registration with retrospective effect provided a rational basis for the search. The Court concluded that the authorization was not illegal as it was based on a rational belief that grounds for conducting the search existed.

Issue 2: Entitlement to Reversal of ITC Debited from the Petitioner's ECL

The petitioner claimed that he was coerced into making a deposit of Rs. 18,72,000/- by debiting his ECL during the search operations. The Court noted that the petitioner was subjected to search operations beyond normal business hours, and the deposit was made at 2:06 am on 08.10.2022. The Court accepted the petitioner's claim that the deposit was made under duress and not voluntarily. It was emphasized that voluntary payment of tax under Section 73(5) of the CGST Act requires the taxpayer to acknowledge the underlying liability, which the petitioner disputed. The Court also observed that the requisite procedure under Rule 142 of the CGST Rules was not followed, as no acknowledgment in Form GST DRC-04 was issued by the respondents. The Court referred to previous judgments and guidelines that prohibit the collection of tax during search operations and require any voluntary payment to be made after the conclusion of such operations.

In conclusion, the Court directed the respondents to reverse the ITC of Rs. 18,72,000/- deposited by the petitioner and credit the same in his ECL. The Court clarified that this would not preclude the respondents from taking any lawful steps to protect the interest of the Revenue, including actions under Rule 86A of the CGST Rules if conditions are satisfied.

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