Protecting Taxpayer Rights: Understanding "Reason to Believe" in GST Search and Seizure
The Hon’ble Bombay High Court HC ruling in Smruti Waghdhare v. Joint Director, DGGI (W.P. 839 of 2025, decided March 10, 2026), serves as an excellent example of how the courts are trying to maintain the rule of law and that fiscal authorities can only act in accordance with statutory law. Here, the petitioner sought relief against the search operation conducted by the DGGI seizing a total of ₹1 crore in cash and in doing so, asked “Where is the power?” to which the Bombay HC did not ignore.
Factual Matrix of the Case
Smruti Waghdhare (hereinafter referred to as “the petitioner”), operates as a sole proprietor under the name of M/s Platinum International, with her business primarily involved in the trade of scrap and ferrous and non-ferrous metals and is registered under the GST. On June 27 and 28, 2023, officers from the DGGI conducted searches at the premises of her primary business, an additional commercial property, her residence and the residence of her parents.
The officers seized cash of ₹60 lakh & ₹40 lakh from one Office and from her parents’ house respectively, as documented through seizure orders issued in Form GST INS-02 dated 27th & 28th June 2023, during their searches of these premises on the said dates.
The department alleged that the abovementioned locations were being used to facilitate a large illegal invoice and ITC fraud scheme involving approximately 155 bogus companies as well as one Hitesh Chheda who was arrested under Section 132 of the CGST Act, and that there was also a connection between Hitesh and the cash seized.
The Petitioner challenged the seizure based on an assertion that:
- the CGST Act does not provide for the seizure of cash;
- that there was no valid “reason to believe” supporting the conclusion that the premises were linked to the continuing fraud;
- that part of the cash would be necessary for her parents’ medical treatment.
Observation of the Hon’ble High Court
The Bombay HC held that, “On a plain reading of the aforesaid Section, it is clear that the seizure has to be of any goods or any documents or books or things which are liable for confiscation, and for which the proper officer not below the rank of Joint Commissioner should have ‘reason to believe’ that the same are useful or relevant to any proceedings under the CGST Act. In the facts of the present case, the Respondent-Department has given a go-by to the expression ‘reason to believe’, which forms the bedrock to initiate proceedings under Section 67(2) of the CGST Act to seize goods, documents, books or things.”
The Core Statutory Debate: Section 67(2) and “Reason to Believe”
According to Section 67(2), a proper officer not below the rank of Joint Commissioner who has “reason to believe” that any goods that are subject to confiscation or any document, book or thing useful or relevant to an investigation have been or will be secreted in any place, has the authority to conduct a search and seize such items. To limit the exercise of this power, the statute provides for:
- a restraint order as a possible alternative to the physical seizure of items when it would be impractical to seize them;
- a defined time limit for keeping any documents, books or things for examination and investigation.
The Hon’ble Court viewed the “reason to believe” in Section 67(2) of the CGST Act as a jurisdictional requirement, not just a formula word. The HC followed the SC’s classic exposition in ITO v. Lakhmani Mewal Das 1976 TMI 6471 SC and held that any belief must have a rational basis to the material before the officer, must not be based upon suspicion and must be properly recorded by the officer in order to permit the courts to see if there is good reason to believe that the property itself can be seized.
In the case of the petitioner, the DGGI did not state any reasons for its belief that the cash, as opposed to anything else like goods or documents, was liable to be seized or how cash was relevant to the GST proceeding in question; thus, the requirement under Section 67(2) of a recorded reason had been ignored.
Is Cash a ‘Thing’ Under Section 67(2)?
It is important to note that while the expression “money” is separately defined under Section 2(75), Section 2(52) defines “goods” as movable property excluding money & securities. This led to a central question of whether cash would fall within the expression “thing” contained within the meaning of goods defined in Section 2(52) of the CGST Act.
Previous decisions like Smt. Kanishka Matta v UOI MANU/MP/1071/2020, have constructed the expression “things” broadly, drawing upon dictionary definitions and the Mischief Rule, particularly including cash especially where the same is alleged to have been the proceeds of tax‑evasive sales.
The Bombay HC literally interpreted the expression in question and held that Section 67(2) “does not require the seizure of any cash,” and made the distinction clear between goods, documents, and such other records & items of evidentiary or record-like character. The court’s rationale therefore interprets “things” to mean those items of evidentiary or record-like character, as compared to unaccounted or fungible currency, which is not an item subject to seizure under Section 67.
This places the Smruti Waghdhare decision on the same footing as that of Delhi HC in the case of Commissioner of CGST v. Deepak Khandelwal and thus concludes that the powers of the GST search must be narrowly construed and shall not be extended to the seizure of separate objects or “unaccounted cash” under Section 67.
Section 67(7): Time‑Bound Retention and the Due Process Function
Even if assuming for the sake of argument that it would be appropriate to treat cash as a “thing,” the HC ruled that the seizure in this case was illegal due to an additional, independent reason i.e. non-compliance with Section 67(7). The said provision requires that where seized goods are not accompanied by a notice within the statutory timeline, the seized goods must be returned to the person that they were seized from. Although the text refers to “goods,” several HCs have held that Section 67(7) embodies a wider due process principle that the State cannot retain possession of seized property indefinitely while investigations are being conducted but remain “pending.”
The Bombay HC held that since no notice was issued within the initial six-month timeframe, and subsequent statutory extension was also absent, the State was bound to return to Waghdhare the property that it had seized from her, regardless of whether or not it was classified as “goods.”
The Court provided further context for this procedural violation by recognizing Waghdhare’s responsibilities as a caregiver to her elderly parents and the certain need for funds for her mother’s heart alignment procedure, as documented by the hospital. While this alternative perspective does not take the place of a statutory assessment, it provides additional support for the disparity that exists between the government depriving a person of his or her property without following at least the minimum statutory protections.
An Additional Illegality: Transferring Cash to the Income Tax Department
The DGGI emerged to have transferred the seized cash as not being part of the GST regime to the Income Tax Department by issuing notices in accordance with Section 131 of the Income Tax Act. The HC expressed “utter shock & dismay” at this admission and explicitly questioned how GST officers could transfer a type of seizure that was inappropriate and/or illegal on the part of their parent legislation to the Income Tax Department.
From a rule-of-law perspective, the problem gives raise to two problems, firstly, routing a seized asset to another statutory regime in attempting to cure an ultra vires seizure and secondly, even though the Income Tax Act confers powers to conduct independent attachment or requisition, the said powers must be exercised through a formal process and not by way of an informal hand‑over from another agency.
Accordingly, the HC ordered that the respondents to “forthwith release the aforesaid amounts…, along with the applicable interest”, and clarified that its findings would not prejudice any separate income tax claims made against Waghdhare.
AMLEGALS Remarks
The case is more than a return of ₹1 crore based on a favourable ruling, it is rather a part of a broader constitutional effort directed toward better enforcing GST requirements and upholding taxpayers’ rights, while ensuring that the extraordinary power associated with GST search & seizure is only exercised by clear statutory authority, in good faith following proper procedure within the specified timeframe. From a policy perspective, the case emphasizes the need for legislative clarification about the extent of GST seizure powers. Different jurisdictions have interpreted the term “things” varyingly which has led to divergent interpretations in-turn the ambiguity. To unify & harmonize the law and avoid inconsistent application, a clarificatory amendment or an authoritative judicial pronouncement by the SC is needed.
For any queries or feedback, feel free to connect with dhwani.tandon@amlegals or hiteashi.desai@amlegals.com