03.01.2023: Deposit During Search Proceedings Cannot Be Considered As Voluntary Payment Made By The Assessee – Delhi High Court

The Hon’ble High Court of Delhi vide its order dated 20.12.2022 in the matter of M/s Vallabh Textiles Vs. Senior Intelligence Officer and Ors. in W.P. (C) – 9834 of 2022, held that the amount deposited by the assessee search proceedings cannot be considered as Voluntary payment.  Further, the collection of the amount towards tax, interest and penalty would give it colour of coercion, if there is violation of the safeguards prescribed under the Act, Rules and by the Court, to ensure that unnecessary harassment is not caused to the assessee.

Facts of the Case: –

  • That the petitioner is engaged in the business of trading in Ready-Made Garments (RMG) and is also engaged in selling these very goods on behalf of the third parties in the domestic market on commission basis.
  • That during the period July 2017 to February 2022, it is alleged by the official respondents/revenue, that the petitioner- concern sold goods in cash, on behalf of two entities i.e., Empire Apparels Pvt. Ltd. (“EAPL”) and M/s Navrang Enterprises (“NE”).
  • It is the claim of the Respondents/Revenue that RMGs worth Rs. 149 crores were sold in cash by the petitioner on the behalf of the aforementioned entities and against which the petitioner has received a commission [at the rate of 5%] Rs.7.50 crores, in cash.
  • According to the revenue/respondents, the petitioner concern failed to disclose the said cash transaction and pay the required tax on the commission earned by it. On intelligence being received by the respondents/revenue, a search at the petitioner’s premises was conducted between 16.02.2022 and 17.02.2022.  The said premises, as per the stand of the official respondents/revenue, was unregistered.
  • It is also the case of the revenue that at the time of search, one Mr Sumit Jain i.e., the manager and authorized representative of the petitioner-concern was found at its premises. It was discovered that the petitioner-concern maintained a ledger concerning cash sales in soft form in a laptop, which was ultimately resumed by them. That the ledger contained the details such as the party to whom the cash sale was made, the name of the transporter, date of sale, transporter name, lorry receipt number of the transporter, as also information concerning the value of the sales transactions, and the commission earned on such transactions.
  • Further, it appears that the officers carrying out the search, apart from the laptop, also resumed various registers, physical bill books and documents, which according to them, contained details of clandestine clearances made by the petitioner-concern.
  • That simultaneously searches were conducted at the premises of NE and EAPL on 16.02.2022, whose goods as indicated above, were allegedly sold in cash, by the petitioner-concern.
  • That the statements of the proprietor of NE and the Director of EAPL were recorded, which confirmed that the aforementioned entities got their goods sold through the petitioner-concern, for which it was paid a commission. It was revealed to the revenue/respondents that the petitioner-concern was paid a commission at the rate of 5%.
  • This amount in dispute i.e., Rs.1,80,10,000/-, inclusive of Tax at the rate of 18% along with interest and penalty, was deposited by the petitioner through a prescribed challan in DRC-03, dated 17.02.2022. That in the same way, EAPL voluntarily deposited with the official respondents/revenue Rs.1.32 crores, which also included tax, interest and penalty.

Petitioner’s Submissions: –

  • It was submitted on the behalf of the petitioner that the said deposit of Rs.1,80,10,000/-was not voluntary. The statements and documents, on which the signatures of Mr Sumit Jain were obtained on 17.02.2022 and 24.02.2022, were a product of coercion.
  • Since the copies of documents have not been furnished till today, the official respondents/revenue have contravened the provisions of Section 67(5) of the CGST Act, 2017. Moreover, between 16.02.2022 and 17.02.2022, when the search was carried out, CCTV cameras were switched off.  Therefore, the enquiry conducted on 24.02.2022 was not backed by camera recording.
  • That the so-called independent witnesses were connected to the official respondents/revenue. Mr Deepak Kumar Jha was a computer operator, working in tandem with the official respondents, while Mr Anil Kumar was seen to be driving the vehicle of one of the officers included in the search party.
  • The deposit made during the search was in contravention of the provisions of Rule 142(1A) and 142(2) of the Central Goods & Service Tax Rules, 2017, as there was no notice issued by the proper officer, ascertaining the tax, interest and penalty payable by the petitioner-concern. Further, even if it is assumed that that the petitioner-concern's representative made an ascertainment on his own concerning tax, interest and penalty that was required to be paid, upon payment being made, the proper officer was obliged in law to issue an acknowledgement qua the same in the prescribed form i.e., GST DRC-04 as stipulated in sub-rule (2) of that very rule i.e., Rule 142.  And, if such payment is made on self-ascertainment, a show cause notice cannot possibly be issued.  However, in the present case, the petitioner-concern has been repeatedly summoned for enquiry/investigations.
  • These actions taken on behalf of the official respondents/revenue are inconsistent with the provisions of Section 74(5) of the 2017 Act, which provides for self-ascertainment before service of notice under sub-section (1) of the said section i.e., section 74 of the Act.
  • That in the instant matter, the officials of the respondent/revenue in the search proceedings, have violated Instruction No. 01/2022-2023 dated 25.05.2022, issued by the GST-Investigation Wing.
  • That the amount in dispute was deposited under coercion is evident from the blatant violation of safeguards provided in law. That when Mr Sumit Jain presented himself before the concerned officer on 24.02.2022 in pursuance of the summons dated 22.02.2022, he was detained for several hours, and was allowed to leave only after he had appended his signatures on the documents, copies of which were also not provided to the petitioner concern.
  • Pursuant to which, the petitioner vide letter dated 25.05.2022, addressed to the respondent No. 1, indicated that that statements said to have been made by Mr Sumit Jain, and documents supposedly signed by him, were the result of coercion exerted on him.

Respondents’ Submissions: –

  • On the other hand, referring to the pleadings filed, it was submitted on the behalf of the petitioner that, to show that the petitioner concern was avoiding payment of tax, by making cash sale on behalf of NE and EAPL.
  • That Mr Sumit Jain, the authorized representative of the petitioner-concern had accepted that goods were sold in cash to third parties worth Rs.149.90 crores, on which commission amounting to Rs.7.49 crores, in cash, was earned.
  • It has been accepted by NE and EAPL that such transactions took place during the period in dispute, and had deposited the amount towards tax, interest and penalty on 17.02.2022. This would show that the aforementioned amounts were deposited by the petitioner concern voluntarily on 17.02.2022.
  • That the objection concerning the deposit of the aforementioned amount was taken only after the second summon was issued i.e., summon dated 13.04.2022. Further, the retraction of the statement made by Mr Sumit Jain along with the other documents, was communicated after more than a month of the summon dated 13.04.2022 being issued i.e., on 25.05.2022.

Held: –

  • The Hon’ble Court after considering the submissions from the both sides and facts of the case, found that the sole question which arises for our consideration is: whether the cumulative sum of Rs.1,80,10,000/- deposited on behalf of the petitioner-concern, during search proceedings carried out between 16.02.2022 and 17.02.2022, was a voluntary act or not. It is the claim of the petitioner that the aforesaid amount was deposited in four tranches, between 01:28 A.M. and 07:03 A.M. on 17.02.2022.
  • It was found by the Hon’ble Court that the Act provides for provisions enabling the person chargeable with tax to make payment before service of notice on him, in case the required tax has not been paid or input tax credit has been wrongly availed. Thus, if the payment is made, the proper officer is restrained from issuing any notice under the provisions of the Act, unless the amount paid as per its self-ascertainment falls short of the amount payable as per law.
  • Further, where the person chargeable with tax is served with a show cause notice and pays the tax, along with interest, under Section 50 of the 2017 Act within thirty [30] days of the issue of the show-cause notice, no penalty is leviable, and all proceedings in respect of such notice are deemed to be concluded.
  • That in the Act the notices are issued under Sections 73 & 74. Section 73 provides for a situation other than Fraud, suppression and wilful-misstatement, however, Section 74 provides for situation where fraud and suppression are involved.
  • The aforesaid sections have to be read with Rule 142(1) of the CGST Rules, wherein under sub-rule (1A) of the rule 142 of the CGST rules, where a proper officer, before service of notice under Section 73(1) or Section 74(1) of the 2017 Rules seeks to communicate details of tax, interest or penalty, he is required to do so in the prescribed form i.e., via Part A of Form GST DRC-01A.
  • It was found by the Hon’ble Court that where the person chargeable with tax, wishes to pay the tax as provided under Section 73(5) & Section 74(5), he is required to inform the proper officer of such payment made in the prescribed form i.e., GST DRC-03. The proper officer thereafter, is required to issue an acknowledgement, accepting the payment made by the person, also in the prescribed form i.e., GST DRC-04.
  • Similarly, it is required to be done by the proper officer in terms of Rule 142(1A) on ascertainment of tax, interest and penalty.
  • From the facts of the case, it is clear that although payments were made in the prescribed form i.e., GST DRC-03, no document has been placed on record by the official respondents/revenue, demonstrating acknowledgement of having accepted the payment. Therefore, the stand taken before us by the official respondents/revenue, that this was a voluntary payment, based on self-ascertainment of tax, interest and penalty, is not established, as incorporated under the provisions of Section 73/74 of the 2017 Act and the 2017 Rules, adverted to hereinabove, has not been adhered to. And the amount deposited of Rs. 1,80,10,000 (deposited in four tranches) did not have any element of voluntariness.
  • That in the instant case, it is not in dispute that the search proceedings commenced on 16.02.2022 at about 03:30 PM and were concluded on the following day i.e., 17.02.2022 at 09:30 A.M. The fact that the said deposit was made before conclusion of search, would show that the payments were not voluntary.  The deposits made were not in terms of provisions of sub-section (5) of Section 73 or sub-section (5) of Section 74.
  • Further it was found by the Hon’ble Court that if the payments/deposits were voluntary, the respondents/revenue were required to issue an acknowledgment as in GST DRC-04, as prescribed under sub-section (2) of Rule 142 of the 2017 Rules. Therefore, the official respondents/revenue, in our opinion, have not been able to discharge this burden.
  • Thereafter, the Hon’ble Court took reference of instructions issued in this regard by CBIC Instruction No. 01/2022-2023 dated 25.05.2022 issued in this regard ‘Deposit of Tax during the course of search, inspection or investigation’ and were issued following the order of Hon’ble High Court of Gujarat in the matter of Bhumi Associate v. Union of India MANU/GJ/0174/2021, wherein the following directions were issued: –

“The Central Board of Indirect Taxes and Customs as well as the Chief Commissioner of Central/State Tax of the State of Gujarat are hereby directed to issue the following guidelines by way of suitable circular/instructions: 

1) No recovery in any mode by cheque, cash, e-payment or adjustment of input tax credit should be made at the time of search/inspection proceedings under Section 67 of the Central/Gujarat Goods and Services Tax Act, 2017 under any circumstances. (2) Even if the assessee comes forward to make voluntary payment by filing Form DRC-03, the assessee should be asked/ advised to file such Form DRC-03 on the next day after the end of search proceedings and after the officers of the visiting team have left the premises of the assessee.

 (3) Facility of filing [a] complaint/ grievance after the end of search proceedings should be made available to the assessee if the assessee was forced to make payment in any mode during the pendency of the search proceedings.

(4) If complaint/ grievance is filed by assessee and officer is found to have acted in defiance of the afore-stated directions, then strict disciplinary action should be initiated against the concerned officer.”

  • It was noted by the Hon’ble Court that in view of the aforesaid instructions and the directions contained in Bhumi Associate, no recovery of tax should be made during search, inspection or investigation unless it is voluntary- it does not elaborate on various modes for collection adopted in such circumstances, for example via cheque, cash, e-payment or even via adjustment of input tax credit.
  • It was further noted by the Hon’ble Court that said instruction falls short, as it does not cover the directions contained in Bhumi Associate, which states that even if the assessee comes forward to make voluntary payment in the prescribed form i.e., GST DRC-03, he/she should be advised to file the same the day after the search has ended and the concerned officers have left the premises of the assessee.
  • The aforesaid directions issued by the Gujarat High Court are binding on the respondents/revenue, however, the same has not been followed in the instant matter.
  • The violation of the safeguards put in place by the Act, Rules and by the Court, to ensure that unnecessary harassment is not caused to the assessee, required adherence by the official respondents/revenue, as otherwise, the collection of such amounts towards tax, interest and penalty would give it a colour of coercion, which is not backed by the authority of law.
  • It was found that the objection raised on the behalf of revenue that the amount was deposited only after the summon dated 13.04.2022 was issued, so in our opinion, would not help the cause of the official respondents/revenue, as the procedure prescribed under the law or by any judgment has to be strictly followed. Failure to follow the prescribed procedure will, as in this case, have us conclude that the deposit of tax, interest and penalty was not voluntary.
  • The Hon’ble Court with the aforesaid discussions, held that the amounts deposited by the petitioner concern in the instant matter, lacked an element of voluntariness.

The Hon’ble Court with the above findings, disposed of the writ petition with the directions to the respondents/revenue to refund the amount of Rs. Rs.1,80,10,000/- to the petitioner-concern, along with interest at the rate of 6% (simple) per annum, from 17.02.2022. Since, the Hon’ble Court was in agreement with the directions contained in Bhumi Associate, directions were given to CBIC to align Instruction No. 01/2022-2023 dated 25.05.2022 with the directions issued by the Gujarat High Court in Bhumi Associate.


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