2025 (12) TMI 83 - HC - GST

Tax presumption under Sections 132(4A) and 292C limited to IT Act, GST may independently use seized records

HC held that the rebuttable presumption under Sections 132(4A) and 292C of the IT Act is confined to IT Act proceedings and does not automatically extend ... Large scale GST evasion on the part of the Petitioner - admissibility of evidence collected by the IT Department under provisions of the IT Act, and the presumption under Section 292C of the IT Act - admissibility of presumption u/s 292C IT Act in respect of proceedings under the IT Act and - can the same cannot form the basis for any investigation under the CGST Act or not - present case is at the stage of SCN - whether the material recovered by the IT department cannot constitute evidence and cannot lead to GST liability? - Constitutional validity of Section 75(2) of the Central Goods and Services Tax Act, 2017 - HELD THAT:- As per the judgment of the Supreme Court in PR Metrani v. Commissioner of Income Tax, Bangalore [2006 (11) TMI 136 - SUPREME COURT], the language of Section 132(4)(A) would show that the presumption in respect of documents and material which are seized, is a rebuttable presumption. The said presumption is only for the purpose of action being taken under Section 132 and would not be available for framing the regular assessment. A perusal of the above-mentioned decision would show that the presumption under Section 132(4A) and 292C of the IT Act is merely for the purposes of the proceedings under the specific provisions of the IT Act. The said presumption is a rebuttable presumption, and the assessee can rebut the same. The presumption is also for the purpose of provisional assessment and not for framing of the final assessment order. Whether there is a presumption in respect of proceedings under the CGST Act, qua the said assets which are seized during the search? - HELD THAT:- The IT Act and the CGST Act are taxation statutes and are to be interpreted strictly. It is clear from the above-mentioned judicial precedents that, the documents and material seized under the IT Act could be used to make provisional assessments and the presumptions therefrom either from the material or usage of the statements given constituting evidence would all be rebuttable by the Assessee. The said material and statements cannot even be the basis of framing final assessments, by themselves. Insofar as the CGST Act is concerned, such material cannot lead to any presumptions nor can they straightaway constitute evidence under the CGST Act. However, the concerned authorities under the CGST Act would not be prevented from considering the documents and material seized for the purpose of investigation under the CGST Act. In the present case, the seized documents and material passed on by the IT Department to the GST Department were scrutinized by the GST Department, prima facie, on its own. This is clear from a perusal of the SCN itself. The GST department did not simply take the findings of the IT department. Before issuing the SCN, the GST department analysed the documents, material, statements etc., and came to its own conclusions. At this stage the GST department has merely issued a SCN, which can be replied to and rebutted by the Petitioner. All grounds and legal objections would be available to the Petitioner - while the prima facie presumption as existing under the IT Act would not apply under the CGST Act, the assets and material seized could form the basis of an independent investigation by the GST Department. A perusal of the SCN would show that, at this stage, it cannot be said that the SCN is bereft of material particulars or that it is vague, in fact, all the documents, statements, evidence, etc. which was seized by the IT Department, and passed onto the GST Department is well within the knowledge of the Petitioner. Moreover, the RUDs have been supplied to the Petitioner. Thus, the SCN cannot be held to be baseless or vague. Thus, there are discrepancies in the judgments which are cited by the GST Department. The GST Department and even other Departments, including the IT Department ought to be careful while citing judicial precedents in this manner, specially if the same has been produced or accessed through Artificial Intelligence software, as there is a clear possibility of the citations themselves being fake, as is clear from one of the judgments, which is cited in the present SCN. This Court is of the opinion that the challenge to the SCN is completely pre-mature. The Petitioner ought to reply to the SCN, and participate in the proceedings. The Petitioner ought to be given a chance of personal hearing, and the SCN is directed to be decided in accordance with law. Petiiton disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a writ petition under Article 226 challenging a show cause notice issued under the CGST Act, at the stage of notice, was maintainable or premature. 1.2 Whether material and statements seized and recorded by the Income Tax Department under the Income Tax Act, 1961, particularly under Sections 132(4), 132(4A) and 292C, could lawfully form the basis of investigation and issuance of a show cause notice under the CGST Act, 2017. 1.3 Whether presumptions available under Sections 132(4A) and 292C of the Income Tax Act extend to or can be invoked in proceedings under the CGST Act. 1.4 Whether the impugned show cause notice was vague or bereft of material particulars and therefore liable to be quashed in light of the legal standards governing show cause notices under the CGST regime. 1.5 Whether use of incorrect or non-existent judicial precedents, including those apparently generated through Artificial Intelligence tools, in the show cause notice, vitiated the notice. 1.6 Whether the challenge to the constitutional validity of Section 75(2) of the CGST Act was ripe for consideration. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Maintainability / prematurity of writ against show cause notice Interpretation and reasoning 2.1 The Court noted that the matter was at the stage of show cause notice under Section 74 of the CGST Act. No adjudication had taken place and the Petitioner had not yet filed a reply. 2.2 The show cause notice itself contained a detailed narration of facts, analysis of documents and statements, computation of alleged GST liability, and annexed all relied upon documents (RUDs). The Petitioner had been supplied with these RUDs. 2.3 The Court took note that an earlier writ petition by the same Petitioner, challenging the commencement of investigation and non-compliance with summons, had already been dismissed by a Coordinate Bench, and the dismissal had been affirmed by the Supreme Court. Under these circumstances, the Court viewed the present challenge to the show cause notice as a second attempt to stall the statutory process. 2.4 The Court emphasised that all objections, including on admissibility and evidentiary value of material, can be urged before the adjudicating authority in response to the show cause notice, and that the Petitioner is entitled to a personal hearing and full opportunity to rebut the material. Conclusions 2.5 The Court held that the challenge to the show cause notice was premature and that the writ petition, to that extent, was not liable to be entertained. 2.6 The Petitioner was directed to submit a reply to the show cause notice and participate in the adjudication, where all legal and factual objections could be raised and considered. Issue 2: Use of Income Tax Department material in GST proceedings Legal framework (as discussed) 2.7 The Court examined Sections 132(4), 132(4A) and 292C of the Income Tax Act, which govern search and seizure, admissibility of statements, and presumptions regarding books of account, documents, money and other assets found during search/survey. 2.8 The Court referred to judicial precedents interpreting these provisions, holding that the presumptions therein are rebuttable and operate within the framework of the Income Tax Act for limited purposes. Interpretation and reasoning 2.9 The Court recorded that the Income Tax Department had conducted a search, seized extensive digital and physical material (including the 'JSK' server and various devices), recorded statements of multiple persons, and prepared special audit reports and assessment orders for several financial years. 2.10 The Income Tax Department then shared all such material, RUDs, special audit reports, statements and assessment orders with the GST Department. 2.11 The Court noted that, as per paragraph 15 of the show cause notice, the GST Department had scrutinised the documents 'with the GST point of view', independently analysed the special audit reports and assessment orders, and recorded detailed, year-wise findings on alleged GST evasion, modus operandi, and computation of alleged taxable turnover and GST liability. 2.12 The Court held that material and statements collected under the Income Tax Act cannot, by themselves, be treated as conclusive evidence or be automatically imported with Income Tax presumptions into GST proceedings. However, they can legitimately be used as a starting point and basis for independent investigation and formation of a prima facie view by the GST Department. 2.13 The Court observed that the GST authorities had not blindly adopted Income Tax findings; instead, they scrutinised statements of multiple employees and related entities, correlated them with electronic records (including WhatsApp chats and 'kachchi parchis'), and carried out their own analysis before issuing the show cause notice. Conclusions 2.14 The Court held that there is no legal bar on the GST Department using documents and statements seized by the Income Tax Department as material for an independent investigation under the CGST Act. 2.15 The Court held that such material can form the basis for issuance of a show cause notice, subject always to the assessee's right to rebut and contest their evidentiary value in the GST proceedings. Issue 3: Applicability of Income Tax presumptions (Sections 132(4A) and 292C) to CGST proceedings Legal framework (as discussed) 2.16 The Court analysed Section 132(4A) and Section 292C of the Income Tax Act, and the judicial view that these provisions create rebuttable presumptions about ownership, truthfulness of contents, and signatures relating to seized books and documents. 2.17 It noted that such presumptions are confined to proceedings 'under this Act' (the Income Tax Act) and, in particular, to proceedings relating to search, seizure, provisional assessment and retention of assets, unless expressly extended by statute. Interpretation and reasoning 2.18 The Court held that the Income Tax presumptions cannot be automatically transposed into GST proceedings. The IT Act and CGST Act are distinct taxing statutes, both to be strictly construed; presumptions created by one statute cannot be read into another in the absence of express legislative incorporation. 2.19 The Court clarified that, even under the Income Tax Act, such presumptions are rebuttable and primarily applicable for provisional purposes and not for framing final assessment orders in the absence of other evidence. 2.20 In contrast, the CGST Act has its own evidentiary and presumptive provisions. The Court referred to Section 144 of the CGST Act (not extracted but noticed in the judgment) as permitting reliance on material and evidence from 'any source' with certain rebuttable presumptions with respect to such material. 2.21 The Court held that statements recorded under Section 132(4) of the Income Tax Act may be used as evidence in Income Tax proceedings; in GST matters, they may at best serve as a starting point or material for investigation but do not, by operation of the Income Tax Act alone, carry statutory presumptions in CGST proceedings. Conclusions 2.22 The Court concluded that presumptions under Sections 132(4A) and 292C of the Income Tax Act are confined to proceedings under the Income Tax Act and do not, as such, apply to proceedings under the CGST Act. 2.23 Nevertheless, documents and statements seized by the Income Tax Department can be examined and relied upon by GST authorities as material, subject to independent scrutiny and subject to rebuttal in CGST proceedings. Issue 4: Alleged vagueness and insufficiency of the show cause notice under CGST Act Legal framework (as discussed) 2.24 The Court considered a prior judgment that laid down requirements for a valid show cause notice under the GST regime: (i) It cannot be vague. (ii) It must be supported by evidence commensurate with the gravity of allegations. (iii) It must set out the background for initiation of proceedings. (iv) It must clearly state the legal provisions allegedly contravened. (v) All materials relied upon must be disclosed and appended to enable an effective reply. Interpretation and reasoning 2.25 The Court undertook a detailed examination of the impugned show cause notice. It recorded that the notice: * Describes the alleged business model ('Pakka' and 'Kachcha' transactions) and modus operandi of clandestine cash-based supplies and commissions. * Summarises special audit reports for multiple financial years and the analysis of the 'JSK' parallel books/server. * Analyses statements of numerous employees, accountants, executives and persons handling cash, as well as statements of suppliers and buyers whose names surfaced from the JSK server. * Correlates material such as WhatsApp chats, 'kachchi parchis', internal branch documents and digital ledgers in support of the allegation of concealed business operations. * Computes alleged unaccounted taxable turnover and corresponding GST liability for multiple financial years, and sets out the provisions of the CGST Act proposed to be invoked. 2.26 The Court noted that the list of RUDs indicated annexation of statements, letters, summons, Income Tax special audit reports and assessment orders, and that these had been furnished to the Petitioner. 2.27 In this factual context, the Court rejected the contention that the show cause notice was vague, unsupported by evidence, or issued without independent application of mind by GST authorities. Conclusions 2.28 The Court held that the show cause notice, read as a whole, contained adequate particulars of allegations, evidence, legal provisions, background and computation of alleged liability, and met the legal requirements for a valid GST show cause notice. 2.29 The Court held that the notice could not be quashed on the ground of vagueness or lack of material at this stage. Issue 5: Effect of incorrect / non-existent case law citations and use of Artificial Intelligence tools Interpretation and reasoning 2.30 The Petitioner contended that some judicial precedents cited in paragraph 21 of the show cause notice were non-existent or AI-generated. 2.31 The Court independently verified, through physical law reports, each of the three judgments cited in the show cause notice. It found that: * One precedent (Pullangode Rubber Produce Co. Ltd. v. State of Kerala) had been correctly cited. * The citation purportedly for 'Surjeet Singh Chhabda v. Union of India' in fact corresponded to an entirely different decision, and the named case was non-existent. * The citation given for 'Kishan Lal v. Union of India' actually related to a different case (Commissioner of Income Tax v. Kishan Lal (HUF)) on issues unconnected with the propositions stated in the show cause notice. 2.32 The Court observed that such discrepancies suggested the possibility of reliance on AI tools that may hallucinate or fabricate case law. It referred to other judicial pronouncements warning against unverified use of AI-generated citations, including instances where non-existent case law had been relied upon by tax authorities. 2.33 The Court underscored that, although AI tools may be used for preliminary research and analysis, they cannot substitute human verification when exercising quasi-judicial or adjudicatory functions. Authorities must take full responsibility for verifying the existence, correctness and relevance of any precedent cited in official documents such as show cause notices and assessment orders. Conclusions 2.34 The Court held that at least one cited judgment in the show cause notice was non-existent and another was inaccurately described, and cautioned the GST Department and other authorities to exercise 'utmost caution' and to verify all judgments before issuing notices or completing assessments. 2.35 While deprecating such practice and directing careful verification of case-law, the Court did not hold that these citation errors, by themselves, rendered the entire show cause notice invalid at the threshold, particularly in view of the substantial factual and evidentiary material forming its foundation. Issue 6: Challenge to constitutional validity of Section 75(2) of the CGST Act Interpretation and reasoning 2.36 The show cause notice in question had been issued under Section 74 of the CGST Act. The Petitioner nevertheless challenged the constitutional validity of Section 75(2), apprehending that the proceedings may be converted into proceedings under Section 73(1). 2.37 The Court noted that, as on date, there was no decision by the GST authorities to invoke or apply Section 75(2) in the Petitioner's case. Any presumption that Section 75(2) would be invoked was speculative. 2.38 The Court therefore considered the challenge to be premature in the absence of any actual adverse action or proceeding under Section 75(2) against the Petitioner. Conclusions 2.39 The Court held that the challenge to Section 75(2) of the CGST Act was premature and did not arise for adjudication at this stage. 2.40 The Petitioner was granted liberty to challenge the vires of Section 75(2) if and when any concrete action or proceeding is taken against it involving that provision and if it is then aggrieved. Overall Disposition 2.41 The writ petition was disposed of with directions that the Petitioner reply to the show cause notice, avail of personal hearing, and raise all permissible objections on facts, law, admissibility and evidentiary value of material before the adjudicating authority, which shall decide the matter in accordance with law. The Court expressly refrained from expressing any opinion on the merits of the allegations of GST evasion.