Provisional Attachment – A measure to protect the interest of the revenue should be used with utmost care

 Provisional Attachment – A measure introduced to protect the interest of the revenue by provisionally attaching any property of a taxable person, including a bank account. We begin this article with the comments given by the division bench of Justice Dhananjaya Y Chandrachud and Justice MR Shah as:

“The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled.”

The power of provisional attachment is given to the GST Authorities, more specifically to the Commissioner of GST and there are numerous of cases rolling up these days involving the matter of provisional attachment in lieu of the powers conferred under Section 83 of the CGST Act, 2017. It has always been a litigative & debatable matter whether the action of the Competent Authority of provisionally attaching the bank account or any other property belonging to the taxpayer is as per the powers conferred and is justified in the circumstances.

Brief Introduction of Provisional Attachment

Before talking about the pertinent judicial pronouncements on this issue, here’s a brief of what powers are conferred under Section 83 of the CGST Act, 2017 and subject to what conditions. Section 83 of the CGST Act, 2017, as introduced w.e.f. 01 July 2017, reads as –

“(1) Where during the pendency of any proceedings under section 62 or section 63 or section 64 or section 67 or section 73 or section 74, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property, including bank account, belonging to the taxable person in such manner as may be prescribed.

(2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order made under sub-section (1).”

However, the sub-section (1) is proposed to be amended by the Finance Act, 2021 w.e.f. a date yet to be notified and after substitution, it shall read as –

“(1) Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in sub-section (1A) of section 122, in such manner as may be prescribed.”

Vide the aforementioned amendment, scope of provisional attachment which is currently applicable on pendency of proceedings under Section 62, 63, 64, 67, 73 or 74 is proposed to be enlarged by giving power to invoke provisional attachment after initiation of proceedings under Chapter XII (covering Sections 59 to 64), XIV (covering Sections 67 to 72) and XV (covering Sections 73 to 84).

Now coming to the provision under Section 83 that currently exists, it provides for –

• Proceedings under Section 62, 63, 64, 67, 73 or 74 must be pending in order to invoke provisional attachment of any property of the taxpayer;
• Such power must be invoked after forming an opinion that the same is done with an objective to protest interest of the revenue;
• The competent authority to invoke such power has been defined under Section 83 to be Commissioner of GST;
• Any property, including bank account, belonging to the taxpayer can be provisionally attached by the Commissioner by passing an Order in writing; and,
• The provisional attachment cannot have an effect for more than 1 year from the date of order.

Whereas Rule 159 of CGST Rules, 2019 contains procedure and inter-alia provides for mechanism for release of property in cases –

• where the property so attached is perishable or hazardous in nature (sub-rule 4); and,
• where person whose property is provisionally attached is of the opinion that such property is not liable for attachment, filing of objections thereof (sub-rule 5 & 6).

Cases wherein power of provisional attachment can generally be invoked

CBIC, recently issued Instructions/Guidelines bearing no. CBEC-20/16/05/2021 – GST/359 dated 23 February 2021 for provisional attachment of property under Section 83 wherein certain cases (illustrative) were listed by the CBIC itself where, if the situations so warrant, provisional attachment can be resorted to, like –

• Where a person supplies any good or services without issuance of an invoice, with an intent to evade tax or vice – vera;
• Where a person has availed ITC using invoice issued without supply of goods or services;
• Where a person has collected any amount as tax but failed to pay to the Government beyond 3 months;
• Where a person has fraudulently obtained refund; and,
• Passed on ITC to recipient but not paid due taxes.

What properties can be provisionally attached?

Bank account can be attached as mentioned in the Section 83 itself. Further, CBIC vide aforementioned Instructions/Guidelines dated 23 February 2021 contains certain guidelines with respect to the type of properties which can be provisionally attached –

• More than 1 property can be provisionally attached in case 1 property is not sufficient to cover due taxes estimated to be collected from the taxpayer;
• Movable property should only be attached in case immovable property, available for attachment, is not sufficient to cover estimated dues, i.e. preference must be given to immovable property available for attachment, like, warehouse, godown, etc.;
• In case movable property (including bank account) is attached by the officers and taxpayer offers his immovable property (enough to cover estimated liability) for attachment, such movable property may be released; and,
• Raw material & Inputs required by the taxpayer for production or finished goods should not be attached by the officers. This is to ensure that provisional attachment does not hamper normal business activities of the taxpayer.

Some pertinent judicial pronouncements/resources on Provisional Attachment

This section discusses some of the important judgements pronounced under GST law on this topic setting precedents as to when this power can be invoked and when it must not be invoked and in what manner should this power be invoked by the concerned authority.

1. Power for ordering of provisional attachment must be supported by substantial grounds (depicting formation of a valid opinion, as required) by the Commissioner as the said power is draconian in nature and to be exercised sparingly

• In the matter of Radha Krishan Industries v. State of Himachal Pradesh, cited at MANU/SC/0293/2021, the Hon’ble Supreme Court while setting aside the judgment of the Hon’ble High Court and the order of the provisional attachment has held that –
  • The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled;
  • The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the Assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue.
  • The expression “necessary so to do for protecting the government revenue” implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment.
• A judgment was pronounced by the Hon’ble High Court of Gujarat in the matter of Valerius Industries v. Union of India, cited at MANU/GJ/1743/2019 where it was held that the power of provisional attachment under Section 83 of the CGST Act 2017 could be termed as very drastic and far-reaching power. Such power should be used sparingly and only on substantive weighty grounds and reasons. The said power to be exercised with extreme care and caution. The power under Section 83 should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.

It was further held that the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief.

Also, the Hon’ble Court laid down the points to be considered by the authority before exercising power under Section 83 and provisionally attaching any property as –

• Whether it is revenue neutral situation; and,
• the statement of “output liability or input credit”. Having regard to the amount paid by reversing the input tax credit if the interest of the revenue is sufficiently secured, then the authority may not be justified in invoking its power under Section 83 of the Act for the purpose of provisional attachment.

• Due to increased instances of provisional attachment by departmental officers and upper courts quashing such orders of provisional attachment passed by officers, CBIC in line with directions laid down by upper courts and to ensure uniformity of actions, recently issued Instructions/Guidelines bearing no. CBEC-20/16/05/2021 – GST/359 dated 23 February 2021 for provisional attachment of property under Section 83 which, inter-alia contains –
  • That for forming an opinion, it is important that Commissioner must exercise due diligence and duly consider as well as carefully examine all the facts of the case, including the nature of offence, amount of revenue involved, established nature of business and extent of investment in capital assets and reasons to believe that the taxable person, against whom the proceedings referred in Section 83 are pending, may dispose of or remove the property, if not attached provisionally;
  • Further, it was directed by CBIC that the basis on which Commissioner has formed an opinion shall be duly recorded on file; and,
  • The remedy of attachment, available to Government officers, by its very nature, extraordinary, needs to be resorted to with utmost circumspection and with maximum care and caution. It should normally not be invoked in cases of technical nature.

2. Property of any joint owner or third party (who is not the part of proceedings) cannot be provisionally attached

• M/s Abhi Engg. Corporation Pvt. Ltd. v. Union of India (High Court of Bombay), cited at MANU/MH/0334/2021 –

Facts of the Case: In the present case, the Petitioner and M/s Creative Business Associates (“Respondent 1”) opened a joint escrow account; Respondent No. 1, being the first party and the Petitioner, being the second party to the account. It was agreed that out of the deposits made in the escrow account, 3% shall be transferred to Respondent No. 1 and 97% shall be transferred to Petitioner.

In the present matter, the proceedings were initiated against the Respondent 1 under Section 74 to determine the tax and other amount due from the said person. Further the escrow account as held jointly by the Petitioner and Respondent 1 was, in entirety, provisionally attached by the Competent Authority exercising the power conferred by Section 83 to protect the interest of the revenue.

Order: The Hon’ble High Court of Bombay has held that Petitioner is not the taxable person in the present case and after considering the fact that no proceedings have been initiated against the Petitioner and no inquiry has been contemplated against the Petitioner, it was directed to the Competent Authority to lift the provisional attachment in so far as Petitioner’s share in the escrow account is concerned, i.e. 97% and department is empowered to provisionally attach such bank account to the extent of only 3%, i.e. Respondent No. 1’s share.

• Roshni Sana Jaiswal v. Commissioner of Central Taxes GST Delhi (East), reported at [2021] 128 taxmann.com 357 – In this matter, Petitioner was acting as a director on the Board of Directors of a company, namely, M/s Milkfood Ltd between 2006 and 2008 and since then, was working as a mentor/advisor to the Company for which receiving a remuneration from the company and also had 14.33% equity stake in M/s Milkfood Ltd. Department on the basis of an information received that Milkfood Ltd. was availing ITC against fake/ineligible invoices, commenced investigation, under Section 67 against Milkfood Ltd. In the process, provisional attachment order was passed attaching bank account of the Petitioner, i.e. bank account of the mentor/advisor of the Company on whom proceedings were pending.

Hon’ble Delhi High Court, in this matter, while setting aside the provisional attachment order, held that exercise of power u/s 83 to provisionally attach bank account of the Petitioner was without jurisdiction, as the petitioner is not a ‘taxable person’ as defined in GST law, instead M/s Milkfood Ltd. is the taxable person against whom proceedings u/s 67 were pending.

• Similarly, in the matter of Dharmesh Gandhi v. Assistant Commissioner (Anti-Evasion), CGST & Central Excise, Belapur, reported at [2021] 128 taxmann.com 50 (Bombay), bank accounts of not only Petitioner but also his family members (mother, wife & son) were provisionally attached by the department. Hon’ble Bombay High Court after relying upon an identical matter in Siddhart Mandavia v. Union of India, reported at [2020] 121 taxmann.com 68 (Bom.) ordered to release the bank accounts of the family members.
• Furthermore, CBIC, vide Instructions/Guidelines dated 23 February 2021 categorically states that provisional attachment can be made only of the property belonging to the taxable person, against whom proceedings are pending and not against any third person.

3. Provisional attachment not required when substantial amount of disputed tax has already been paid/reversed

• In the matter of M. Industrial P. Ltd. v. Commissioner of Central GST and Central Excise cited at MANU/GJ/0457/2019, proceedings u/s 67, 73 or 74 were pending against the Petitioner when Order of provisional attachment of the bank account u/s 83 was passed by the competent authority. As on the date of passing of Order of provisional attachment, liability was estimated to Rs. 14.62 crores which on the date of this decision was enhanced to Rs. 16.24 crores. It was held by the Hon’ble Gujarat High Court that provisional attachment of the property to safeguard the interest of the revenue is not required as in the present matter, the Petitioner has already reversed the substantial amount of the ITC (Rs. 13.52 crores) out of total estimated demand (Rs. 14.62 crores). Thus, it was concluded that there is no requirement to provisionally attach the bank account as the interest of the Revenue is sufficiently secured.
• In pursuance to the above judgment, similar view can be drawn from the matter of Pranit Hem Desai v. Additional Director General cited at MANU/GJ/1009/2019 where in the present case the Petitioner has paid GST more than the ITC availed (availment of which was under dispute). Moreover, it could not be said that the interest of the revenue was at stake and held that there is requirement to provisionally attach the bank account.
• The same judgement can be relied upon in the of Patran Steel Rolling Mill v. Assistant Commissioner of State Tax cited at MANU/GJ/1398/2018 where the Hon’ble High Court of Gujarat observed that the Petitioner has on his own deposited a sum of Rs. 17,00,000/- during search covering more than tax liability that might be assessed, i.e. Rs. 13,84,000/-, then the impugned order of provisional attachment does not hold good and thus, set aside and quashed.
• Furthermore, CBIC, vide Instructions/Guidelines dated 23 February 2021 categorically stated that Departmental officers should ensure that value of property attached is not excessive. The provisional attachment of property shall be to the extent it is required to protect the interest of revenue i.e., to cover the estimated pending dues from such taxpayer, whose property is proposed to be provisionally attached.

4. Authority cannot attach the bank account “again” when the order for releasing the same has been passed earlier

In the matter of Patran Steel Rolling Mill v. Assistant Commissioner of State Tax cited at MANU/GJ/1173/2019, the Competent Authority has once exercised the power under sec 83 of the CGST Act by attaching the Bank account of the assessee against which the assessee had filed the Writ Petition and the Hon’ble High Court in the said matter had set aside the impugned order of the Competent Authority and directed to release the attached property of the assessee.

After that, once again the Competent Authority has attached the same bank account of the assessee by passing an identical order again which vide this interim order of Hon’ble Gujarat High Court was directed to be released.

5. Provisional attachment ceases to be effective after the expiry of one year from the date of order or from the date of attachment if order does not specify any date.

• In the matter of Namaskar Enterprise v. Commissioner of Goods and Service Tax cited at MANU/GJ/1313/2020, Petitioner filed the writ application with the subject matter of releasing the bank account attached vide Section 83 of the CGST Act 2017. The contention of the Petitioner was that the provisional attachment of the bank account will only to have effect for one year from the date of the order. However, in the present case the date no specific date was mentioned so the date of freezing the bank account of the Petitioner is to be taken into the consideration and the one year from the date of attaching the bank account has lapsed.

The Hon’ble High Court of Gujarat has held that the provisional attachment would cease to have effect after the expiry of a period of one year from the date of attachment and thereby directed the bank to permit the Petitioner to operate his bank account forthwith.

• The similar judgement has been passed by the Hon’ble High Court of Gujarat in the matter of Badal Shambhubhai Shah v. The Directorate General of Goods & Service Tax Intelligence cited at MANU/GJ/0885/2020 where the Competent Authority was directed to lift the provisional attachment order as the period of one year was over and thus the impugned order had lapsed on completion of one year.

6. Provisional attachment order would come to an end once final order is passed concluding the pending proceedings

In the matter of Usha Industries (India) v. Deputy Commissioner cited at [2021] 128 taxmann.com 269, Hon’ble Punjab & Haryana High Court while relying upon the Apex Court’s decision in Radha Krishan Industries (supra) held that since a final Adjudicating order under Section 74(9) of the Act has been passed, the proceedings under the provisional attachment order passed comes to an end.

7. Even after attachment of bank account, assessees are allowed to operate the bank account subject to certain conditions so that business of such assessee is not paralyzed

• In the matter of Skj Finvest Advisory Pvt. Ltd. Union of India cited at [2021] 128 taxmann.com 53 (Gujarat), Hon’ble Gujarat High Court allowed the Petitioner to operate his bank account (provisionally attached by the revenue) subject to the condition that as on the date of provisional attachment, balance in such bank account showed a balance of Rs. 22 lakhs which the Petitioner was directed to maintain at all times.
• In another matter of SPNN Business Services (P.) Ltd. Commissioner of Central Tax (GST), Delhi reported at [2021] 129 taxmann.com 207 (Delhi), the concern raised by the Petitioner was that in absence of bank account became inoperable due to provisional attachment, Petitioner is unable to distribute salaries of its employees. Taking cognizance of the situation, Hon’ble Delhi High Court permitted the Petitioner to collect Rs. 2 crores from the attached bank accounts to be used only to pay the salaries of the employees.

Conclusion:

From the case laws described supra & Instructions/Guidelines issued by the CBIC, it will not be correct to deny the fact that the power of provisional attachment is very extreme in nature and must be exercised with full caution as if these powers are used in a harsh manner, it may eventually lead to the closure of the business of the taxable person which is never the purpose of GST law. No doubt this power is necessary to protest the interest of revenue but it should be used in a rational manner and to be exercised only if utmost necessary as it will hamper the working of the business even if the taxable person has no mala-fide intention.

Further, with the changes proposed to be made in Section 83 of the CGST Act 2017 brought by the Finance Act 2021, the scope of the powers will be expanded and now it is more imperative to be exercised carefully and with caution.