2023 (12) TMI 238 - HC - GST

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 ... Authorization for search under Section 67 - reason to believe - voluntary payment / self-ascertainment under Section 73(5) and Section 74(5) - payment under duress / coercion during search - reversal and refund of ITC deposited under compulsion - non-compliance with procedural requirements under Rule 142 and Form GST DRC-04 - administrative directions prohibiting recovery during search (Bhumi Associate / CBIC instructions)Authorization for search under Section 67 - reason to believe - Validity of the search/inspection authorization issued in Form GST INS 01 - HELD THAT: - Clause A of Form GST INS 01 contains selectable grounds for authorising inspection/search under Section 67(1). Although the issuing officer had reproduced multiple possible reasons instead of specifying a single distinct ground, the Court found that the reasons stated were connected and that the cancellation of suppliers' registrations with retrospective effect supplied a rational nexus with a reason to believe that Input Tax Credit claimed may be ineligible. Sufficiency of the recorded reasons to believe is not open to judicial re examination so long as a rational basis exists. On these findings the authorization was not held to be illegal for want of reasons to believe. [Paras 17, 19, 20, 21]The search/inspection authorised on 07.10.2022 was not illegal for want of reasons to believe.Payment under duress / coercion during search - voluntary payment / self-ascertainment under Section 73(5) and Section 74(5) - reversal and refund of ITC deposited under compulsion - non-compliance with procedural requirements under Rule 142 and Form GST DRC-04 - administrative directions prohibiting recovery during search (Bhumi Associate / CBIC instructions) - Whether the ITC amount debited from the petitioner's Electronic Credit Ledger during the search was voluntary and hence non refundable, or was deposited under duress and must be reversed - HELD THAT: - The statutory regime recognises voluntary payment by self ascertainment (Sections 73(5)/74(5)) which affords immunity from penalty in specified circumstances, but such provisions do not authorise the Department to compel payment. The material facts show the petitioner was subjected to inspection/search beyond normal business hours, produced numerous documents and did not admit liability for wrongfully availing ITC. The recorded statement did not amount to an acknowledgement of liability. Further, the procedural requirement of issuing an acknowledgement (Form GST DRC 04) under the Rules was not complied with. CBIC and judicial directions prohibit recovery during search and require that any voluntary payment be made after the search team has left to avoid coercion. In these circumstances the Court accepted that the deposit at 02:06 am on 08.10.2022 was made under duress and not within the scheme of voluntary self ascertainment; accordingly the payment must be reversed. The Court clarified that this restoration does not bar the respondents from subsequently initiating proceedings in accordance with law, including under Rule 86A if conditions are met. [Paras 33, 36, 37, 43, 44]The ITC debited on 08.10.2022 is to be reversed and credited back to the petitioner's Electronic Credit Ledger; respondents remain free to pursue lawful action thereafter.Final Conclusion: The petition is allowed in part: the search authorisation dated 07.10.2022 is not invalidated for want of reasons to believe, but the sum debited from the petitioner's Electronic Credit Ledger during the search proceedings (on 08.10.2022) was deposited under duress and must be reversed forthwith and credited to the petitioner; the respondents remain entitled to proceed in accordance with law thereafter. 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 ActThe 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 ECLThe 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.