2024 (7) TMI 1205 - HC - GST

Excess stock discovery requires section 74 procedures not section 130 proceedings under UPGST Act

The Allahabad HC quashed orders initiating proceedings under section 130 read with section 122 of the UPGST Act after excess stock was found during ... Assessment/determination of tax under Section 130 - proceedings under Section 130 read with Section 122 - survey under Section 67 - maintenance of accounts under Section 35(1) - Section 35(6) deemed supply and quantification under Sections 73 & 74 - penalty in survey proceedings - valuation by eye-estimationAssessment/determination of tax under Section 130 - penalty in survey proceedings - Whether tax liability and penalty could be quantified and levied by resort to proceedings under Section 130 (survey/confiscation) when excess stock was found. - HELD THAT: - The Court followed its earlier decisions (including Metenere Limited and M/s Maa Mahamaya Alloys Pvt. Ltd.) and held that Section 130 is not the statutory vehicle for assessment or quantification of tax arising from alleged unaccounted/excess stock. While Section 130 permits certain actions at the time of survey, the determination and quantification of tax and imposition of penalty for unaccounted goods must follow the procedure prescribed for assessment/demand (i.e., Sections 73/74 as applicable). The Court observed that the department cannot, by resort to Section 130, itself quantify tax and levy penalty in the manner of an assessment order; doing so is contrary to the statutory scheme and the consistent judicial exposition cited. [Paras 11, 12, 13]Proceedings under Section 130 cannot be used to assess/quantify tax or impose penalty in place of the statutory procedure under Sections 73/74; impugned orders founded on such exercise are unsustainable.Section 35(6) deemed supply and quantification under Sections 73 & 74 - maintenance of accounts under Section 35(1) - Whether, where books/accounts are not maintained and unaccounted goods are found, the proper officer must determine tax payable in accordance with Section 35(6) read with the assessment procedures in Sections 73/74. - HELD THAT: - Relying on the exposition in Metenere Limited reproduced in the judgment, the Court held that Section 35(6) empowers the proper officer to determine tax on unaccounted goods by treating them as 'deemed supplies', but the process of determination/quantification is to be undertaken in accordance with Sections 73 or 74, mutatis mutandis. Thus, mere resort to survey powers does not dispense with the safeguards and statutory steps prescribed for assessment or determination of tax where failure to keep accounts is alleged. [Paras 10, 11, 14]Determination of tax under Section 35(6) must be carried out following the procedure laid down in Sections 73/74; Section 130 cannot be used as a substitute for that procedure.Valuation by eye-estimation - penalty in survey proceedings - Whether valuation/quantification based solely on eye-estimation during survey suffices for determining tax and penalty under the statutory scheme. - HELD THAT: - The Court noted the contention that only eye-measurement was done and observed, in line with the earlier authorities considered, that valuation and quantification for purposes of tax determination cannot be effected by summary yardsticks at survey without following the statutory assessment procedure. The judgments relied upon cast doubt on the validity of assessing tax or levying penalty based solely on such estimates made during survey proceedings. [Paras 5, 12]Valuation or quantification based solely on eye-estimation during survey is not a permissible basis for assessment and levy of penalty in lieu of the statutory assessment procedure.Final Conclusion: The impugned orders of assessment/penalty founded on survey proceedings under Section 130 (read with Section 122) are quashed; the writ petitions are allowed. The authorities must proceed, if at all, in accordance with the statutory scheme (including Sections 35(6) and Sections 73/74) rather than by quantifying tax and penalty in survey proceedings. Issues:Challenge to impugned orders under UPGST Act for Assessment Years 2019-20 and 2020-21.Analysis:The judgment pertains to three writ petitions concerning Assessment Years 2019-20 and 2020-21 under the UPGST Act. The main issue revolves around the validity of the impugned orders passed against a registered dealer engaged in the trading of iron & steel. The petitioner contested the initiation of proceedings under section 130 of the UPGST Act following a survey that allegedly revealed excess stock. The petitioner argued that sections 73 and 74 should have been applied instead. The petitioner relied on precedents such as M/s Maa Mahamaya Alloys Pvt. Ltd. and Metenere Limited to support their case. Conversely, the Additional Chief Standing Counsel defended the impugned orders, citing malpractice due to unaccounted excess stock found during the survey.The court examined the contentions of both parties and referred to the judgment in Metenere Limited, emphasizing that proceedings under section 130 cannot be initiated solely based on excess stock. The court also cited M/s Maa Mahamaya Alloys Pvt. Ltd. to highlight that tax assessment and penalty imposition under section 130 must align with the procedures outlined in sections 73 and 74 of the Act. The court found that the impugned orders were unsustainable as they were solely based on a survey under section 130 without recourse to section 74 for tax quantification and penalty determination. Consequently, the court quashed the impugned orders in all writ petitions, ruling in favor of the petitioners.In conclusion, the judgment underscores the importance of adhering to the prescribed procedures under the UPGST Act, particularly in cases involving tax assessment and penalty imposition. It establishes that proceedings under section 130 cannot be standalone grounds for determining tax liability and levying penalties, emphasizing the need to follow the provisions of sections 73 and 74 for such determinations.