TaxTMI 
TaxTMI 
Excess Stock Does Not Mean Automatic Confiscation
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....xcess Stock Does Not Mean Automatic Confiscation<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 1-10-2026<br>When a Stock Difference Is Taken Down the Wrong Statutory Path Detection of excess or unaccounted stock during a survey may legitimately invite investigation. It may indicate defective account maintenance, unreported production, suppressed supplies, or possible tax evasion. However, the discovery of a stock difference does not, by itself, determine the statutory provision under which the Department must proceed. Suspicion may initiate an inquiry, but the resulting liability must be determined through the procedure prescribed by the CGST Act, 2017. This distinction forms the foundation of Jitendra Kumar Versus M/s....
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..... R.V. Brick Field, Partner. - 2026 (9) TMI 1475 - GSTAT AGRA. Four departmental appeals arose from surveys conducted at different brick kilns. The authorities allegedly found 19,27,289 bricks and 60 metric tonnes of coal in one case, 15,15,500 bricks in the second, 21,53,500 bricks in the third, and 16,30,000 bricks in the fourth case. Treating these quantities as unaccounted stock, the department-initiated proceedings under Section 130 read with Section 122, culminating in demands for a fine in lieu of confiscation and a penalty under Sections 130(2) and 122, respectively. The First Appellate Authority set aside the proceedings on the ground that unaccounted stock found during a survey had to be dealt with through tax-determi....
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....nation proceedings under Sections 73 or 74. The Department thereafter filed four appeals before the GSTAT, numbered APL/158-161/AGR/2026, but confined its challenge to the fine. It did not challenge the foundational finding that the proceedings under Section 130 were legally unsustainable. This selective challenge proved as decisive as the substantive issue relating to unaccounted stock. Section 35(6) Prescribes the Route for Unaccounted Goods Section 35(1) of the CGST Act, 2017 requires every registered person to maintain true and correct accounts of production or manufacture, inward and outward supplies, stock, input tax credit, and output tax payable and paid. Section 35(6) specifically addresses a failure to account for goods or s....
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....ervices. It provides that the proper officer shall determine the tax payable on such goods or services as if they had been supplied, and Sections 73 or 74 shall apply, mutatis mutandis, for determining that tax. The expression mutatis mutandis means that the provisions are to be applied with such necessary changes as the circumstances require. Accordingly, when goods are allegedly not recorded in the books, the officer must first examine whether they can legally be treated as supplied, determine the relevant tax period, ascertain their quantity and taxable value, identify the applicable rate, and quantify the resulting tax. The taxpayer must receive proper notice and an effective opportunity to contest the Department's computation an....
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....d factual assumptions. This statutory process is particularly important in industries such as brick manufacturing. Stock may exist at different stages of production and may include raw, semi-burnt, damaged, or finished bricks. Quantities may be determined through physical counting and through estimation. A survey figure does not automatically establish when the goods were manufactured, whether they were capable of supply, whether they had already been recorded under another description, or whether the difference arose from an error in measurement or accounting. These matters require adjudication under the machinery expressly contemplated by Section 35(6). A Survey Discrepancy Is Not an Automatic Confiscation Event Section 130 is a ....
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....confiscatory provision with serious civil consequences. It applies when one or more specified statutory conditions are established, including the supply or receipt of goods in contravention of the Act with intent to evade tax, failure to account for taxable goods, or the use of a conveyance to carry goods in contravention of the law. Its invocation may result in confiscation, penalty, and a fine offered in lieu of confiscation. The presence of unaccounted goods may constitute relevant evidence, but it cannot be treated as conclusive proof of all conditions necessary for confiscation. The proper officer must distinguish between a discrepancy that calls for determination of tax and conduct independently satisfying the ingredients of Sectio....
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....n 130. Where the real allegation is that certain goods were not reflected in the books and should therefore be treated as supplied, Section 35(6) directs the officer towards Sections 73 or 74. The decision should not be understood as granting immunity to unaccounted stock or as declaring that Section 130 can never apply in a stock-related matter. Its ratio is narrower and legally more disciplined: mere discovery of excess or unaccounted stock during a survey cannot automatically be converted into confiscation proceedings. If the Department seeks to invoke Section 130, the statutory foundation for confiscation must be independently established. Section 130 cannot be used merely as a faster substitute for determination of tax under Section....
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....s 73 or 74. The Allahabad High Court Had Already Settled the Statutory Sequence The governing legal position stood supported by three decisions of the Allahabad High Court: S/S Dinesh Kumar Pradeep Kumar Versus Additional Commissioner Grade 2 And Another - 2024 (8) TMI 71 - ALLAHABAD HIGH COURT; M/s Shree Om Steels, M/s Pal Trading Company, M/s Shri Om Krishi Yantra Udyog Versus Additional Commissioner Grade-2 And Another - 2024 (7) TMI 1205 - ALLAHABAD HIGH COURT; and M/s VK Electricals Versus Additional Commissioner Grade-2 Appeal-Ii And Another - 2024 (8) TMI 1265 - ALLAHABAD HIGH COURT. The First Appellate Authority quoted the decision in Dinesh Kumar Pradeep Kumar while setting aside the adjudication orders. The....
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.... Tribunal considered the consistent legal position emerging from these authorities. Where excess stock is discovered during a survey, the proper statutory course is determination of the corresponding tax and consequential liability under Sections 73 or 74. Confiscation cannot follow merely because the physical stock exceeds the quantity reflected in the books. These decisions do not mean the Department must ignore excess or unaccounted stock. The proper officer remains fully empowered to verify the physical stock, examine the books and production records, seek an explanation from the taxpayer, and collect evidence regarding any possible unrecorded supply. If the inquiry indicates that tax has not been paid, proceedings may be initiated u....
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....nder Section 73 or Section 74, as applicable. The notice must clearly disclose the quantity and value of the disputed goods, the relevant tax period, the proposed tax liability, and the evidence relied upon. The taxpayer must then be given an opportunity to explain the discrepancy and contest the proposed demand before a reasoned order is passed. These decisions prevent an immediate jump from the discovery of excess stock to confiscation. The Department's authority to investigate and recover tax is not taken away; it is only required to exercise that authority through the correct statutory procedure. This protects revenue by permitting recovery of tax, interest, and penalty wherever legally justified, while also protecting the taxpay....
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....er from confiscation based merely on an unexplained or disputed stock difference. Thus, effective tax enforcement and procedural fairness are maintained together. Fine in Lieu of Confiscation Cannot Survive Without Confiscation The judgment also draws an essential distinction between penalty and fine in lieu of confiscation. A penalty is imposed for a specified statutory contravention. A fine under Section 130(2), by contrast, is offered as an alternative to actual confiscation of the goods. Although both may arise from the same proceedings, they are legally distinct consequences and should not be described interchangeably. A fine in lieu of confiscation necessarily depends upon the existence of valid confiscation proceedings. It i....
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....s not an independent demand that can survive after the confiscation itself has been set aside. Once the First Appellate Authority quashed the proceedings under Section 130 and removed their legal foundation, the consequential fine also lost its independent basis. The Department contended that the First Appellate Authority had left the question of the fine open. That interpretation could not be reconciled with the operative relief. The adjudication orders, including the proceedings for confiscation, penalty and fine, had been set aside. Nothing in the appellate orders preserved the fine as an independent liability. The consequence could not be severed from the proceeding that created it. Acceptance of the Foundational Relief Defeated t....
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....he Limited Appeals The case's most important procedural feature was the narrow scope of the Department's appeals. The First Appellate Authority concluded that initiating proceedings under Section 130 was unsustainable and set aside the adjudication orders. The Department did not challenge this foundational conclusion. Its appeals were confined to the fine amount. The First Appellate Authority had set aside the entire proceedings under Section 130 after concluding that confiscation was not the proper legal course for dealing with the alleged unaccounted stock. The Department did not challenge this basic finding in its appeals before the Tribunal. It challenged only the setting aside of the fine imposed in lieu of confiscation. ....
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....Consequently, the finding that the confiscation proceedings were invalid remained undisturbed and binding for the purpose of those appeals. A fine in lieu of confiscation cannot exist independently of a valid confiscation order. Therefore, the Department could not seek restoration of the fine without first challenging the finding that Section 130 had been wrongly invoked. If the Department wanted the fine restored, its appeals had to question the First Appellate Authority's conclusion that the underlying confiscation proceedings were invalid. Without such a challenge, the Tribunal could not revive only the fine while leaving intact the finding that the proceedings giving rise to that fine were unlawful. The principle applies more ....
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....broadly to appellate proceedings. When relief is granted on a basic or foundational finding and other demands are set aside as a consequence of that finding, an appeal must challenge the foundational finding itself. Merely questioning the consequential relief is ordinarily insufficient. A demand that depends upon an unchallenged finding cannot be restored indirectly through an appeal confined only to that demand. Section 112 Review Requires More Than Mechanical Authorisation Before directing the filing of an appeal under Section 112, the competent Commissioner must examine the legality and propriety of the order, the grounds available against it, the applicable judicial precedents, and the precise relief that can be obtained. This rev....
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....iew is a substantive statutory responsibility. Its purpose is to ensure that a departmental appeal presents a sustainable grievance and does not merely repeat objections already answered by the appellate order. The four appeals were found to have been filed perfunctorily, without proper application of mind. The Commissioner authorised a challenge confined to the fine, even though the very proceedings from which that fine arose had been quashed. No effective challenge was directed against the principal finding that Section 130 had been wrongly invoked. Consequently, even success on the limited grounds stated in the appeals could not have restored the fine's legal foundation. A reasoned departmental review should therefore ask wheth....
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....er the proposed grounds challenge the operative basis of the order, whether the liability sought to be restored can survive independently, and whether binding or jurisdictional High Court decisions already cover the controversy. Such scrutiny prevents avoidable litigation and ensures that departmental appeals serve a genuine legal purpose. Tax Determination Must Precede Penal Consequences The dismissal of all four departmental appeals preserves the statutory sequence governing unaccounted goods. A survey may reveal a stock discrepancy, but that is only the starting point. The Department must determine the tax implications by the procedure prescribed by Section 35(6), read with Sections 73 or 74. Before imposing liability, the Departme....
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....nt must examine quantity, valuation, tax period, taxability, and the taxpayer's explanation. Confiscation operates in a different, more stringent field. It cannot be invoked automatically merely because the physical stock does not correspond with the books. Equally, a fine in lieu of confiscation cannot be retained after the confiscation proceedings have been quashed, particularly where the Department does not challenge that foundational relief. The decision therefore does not weaken action against unaccounted stock; it requires that such action remain within the statutory framework. Tax, interest and penalty may follow wherever the facts and the relevant provisions justify them. Confiscation cannot be used as a shortcut around ta....
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....x adjudication. Unaccounted stock may call for determination and recovery, but confiscation must rest on its own legally established foundation. *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....