Penalty under s.129(1)(b) quashed for relying on unverified third-party statement without notice or independent verification

HC allowed the appeal, set aside the writ order and quashed the penalty imposed under s.129(1)(b) of the CGST Act. The court found the tax authority had accepted an unverified third-party statement as gospel without notice or independent verification when goods were detained, and issued the penalty on that uncorroborated basis. Subsequent cancellation of the third party's registration (not shown on record) did not cure the defect. The penalty and related proceedings were held illegal and unsustainable.

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ISSUES PRESENTED AND CONSIDERED

1. Whether penalty under Section 129(1)(b) of the Act can be imposed where the person-in-charge produced the invoice, e-way bill and consignment note as required by Section 68 read with Rule 138A at the time of interception.

2. Whether the authority lawfully rejected documentary evidence and proceeded to impose penalty based on the vendor's unauthenticated denial of having issued the invoice, without independent verification or confronting the detained persons with the vendor's statement.

3. Whether invocation of Section 129 requires a finding of intention to evade tax and, if so, whether that prerequisite was established on the facts.

4. Legal consequence, if any, of subsequent cancellation of the supplier's registration on the validity of the transaction and the penalty imposed at the time of detention.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of Section 129 where Rule 138A documents were produced

Legal framework: Section 129(1) permits detention/seizure of goods in transit where contravention of the Act or rules is shown; Section 68 and Rule 138A prescribe documents (invoice/bill/delivery challan and e-way bill) to be carried and validated during transit.

Precedent Treatment: The Court relied on statutory text and administrative circular guidance rather than distinguishing prior judicial decisions; no prior case was expressly overruled or followed.

Interpretation and reasoning: The Court found undisputed production of the invoice, e-way bill and consignment note at the time of interception, satisfying Rule 138A(1)(a)-(b). Where prescribed documents accompanied the consignment, statutory requirements for movement were met and Section 129 could not be invoked merely because the Department later doubted genuineness.

Ratio vs. Obiter: Ratio - production of the prescribed documents at the time of interception negates application of Section 129 for detention/penalty in absence of further incriminating facts; Obiter - none materially affecting outcome.

Conclusion: Section 129 had no application on the facts once Rule 138A documents were validly carried and no additional contravention was established.

Issue 2 - Legality of relying on vendor's unverified statement without notice/verification

Legal framework: Principles of natural justice oblige adjudicatory authorities to verify material allegations and to give affected persons an opportunity to meet adverse assertions that determine liability; procedural safeguards under the Act and rules require proper inquiry before imposing penalties under Section 129.

Precedent Treatment: The Court treated prior administrative practice and the statutory scheme as mandating verification; no direct case law was applied, but principles of fair procedure were enforced.

Interpretation and reasoning: The authority adopted the vendor's denial as "Gospel Truth" without conducting on-the-spot verification at the time of detention, without corroboration, and without putting that denial to the detained persons before issuing the show-cause/adjudication. This procedural lapse amounted to condemning the appellants without being heard and constituted legal error.

Ratio vs. Obiter: Ratio - adjudicatory reliance on an uncorroborated third-party denial without verification or notice violates natural justice and vitiates penalty proceedings under Section 129; Obiter - observations on how departmental verification normally ought to proceed.

Conclusion: The penalty was unsustainable because the Department failed to verify the vendor's stand and failed to afford the detained persons a fair opportunity to meet that stand before reaching the adverse conclusion.

Issue 3 - Requirement of intention to evade tax for invoking Section 129

Legal framework: Section 129 authorizes detention/seizure for transit contraventions; invocation for penalty presupposes circumstances indicating evasion of tax or contravention beyond mere transport.

Precedent Treatment: The Court applied statutory interpretation to require evidentiary foundation for an intention to evade, rather than treating intention as automatically inferable from interception.

Interpretation and reasoning: The authority produced no evidence of intent to evade tax by the appellants; mere suspicion or a later unverified statement by the supplier does not equate to proof of intention. In absence of such evidence, Section 129's penal measures were not properly attracted.

Ratio vs. Obiter: Ratio - imposition of penalty under Section 129 requires establishment of intent to evade tax or clear contravention beyond mere transport with accompanying documents; Obiter - remarks on administrative consequences if lax procedures are routinely followed.

Conclusion: The prerequisite of intent to evade tax was not established; therefore, penalty under Section 129 could not be validly imposed.

Issue 4 - Effect of subsequent cancellation of supplier's registration on past transaction validity

Legal framework: Validity of a transaction and genuineness of documents at the time of detention govern liability; later administrative action against the supplier does not retroactively validate an earlier departmental conclusion without contemporaneous verification.

Precedent Treatment: The Court treated the alleged subsequent cancellation as irrelevant absent contemporaneous evidence proving the transaction was fraudulent at the time of interception.

Interpretation and reasoning: Even if the supplier's registration was later cancelled, there was no record before the Court to substantiate that fact, and, in any event, cancellation after detention cannot cure the Department's failure to verify or substitute for lack of proof of fraud at the relevant time.

Ratio vs. Obiter: Ratio - subsequent cancellation of supplier's registration does not validate an otherwise unsubstantiated finding of fake invoice or justify earlier penalty without contemporaneous proof; Obiter - none material.

Conclusion: Subsequent cancellation (even if assumed) does not affect the legality of the transaction at the time of detention nor sustain the penalty imposed without proper verification.

Relief and Practical Direction

Interpretation and reasoning: Given the procedural and evidentiary deficiencies (document production at interception, lack of verification, absence of proof of intent), the Court concluded the penalty order was unsustainable.

Ratio vs. Obiter: Ratio - penalty set aside and refund directed where Section 129 penalty was imposed following acceptance of uncorroborated vendor denial without verification or opportunity to be heard; Obiter - cautionary note that similar departmental procedures would harm revenue if routinely followed without proper safeguards.

Conclusion: The imposition of penalty under Section 129(1)(b) was set aside; the Department directed to refund sums collected within a specified period. No costs were awarded.

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