Provisional Attachment in GST must be after Formation of Opinion and an Observance of Principles of Natural Justice
In M/s Radha Krishan Industries Vs. State of Himachal Pradesh & Ors, a bench of Supreme Court comprising of Justice Dr Dhananjaya Y Chandrachud & Justice M.R.Shah, in Civil Appeal No 1155 of 2021 (Arising out of SLP(C) No 1688 of 2021) decided on the most sensitive issue of Provisional Attachment under GST vis-a vis HPGST Act,2017.
In the backdrop of the orders of provisional attachment issued by the third respondent against the appellant on 28 October 2020 under Section 83 of the HPGST Act,2017 two issues arose as under:
(i)Whether a writ petition challenging the orders of provisional attachment was maintainable under Article 226 of the Constitution before the High Court; and
(ii) If the answer to (i) is in the affirmative, whether the orders of provisional attachment constitute a valid exercise of power.
A ‘detection case’ was registered against GM Powertech, Kala-Amb7 , one of the suppliers of the appellant, under Section 74 of the HPGST Act and the CGST Act read with Section 20 of the Integrated Goods and Services Tax Act, 2017.
In turn, the appellant received a memo by an e-mail dated 15 December 2018 from the third respondent directing it to be present on 17 December 2018 for explaining the allegedly illegal claim of ITC made during 2017-18 and 2018-19. By its letter dated 17 December 2018, the appellant contended that it had validly claimed ITC as it fulfilled the conditions under Section 16 and other provisions of the HPGST Act and the CGST Act.
On 9 January 2019, a notice10 was issued to Fujikawa Power, Bagbania, BBN Baddi, one of the customers of the appellant, for provisionally attaching an amount of Rs. 5 crores due to the appellant, under Section 83 of the HPGST Act. On 19 January 2019, the third respondent passed an order of provisional attachment in respect of receivables worth Rs. 5 crores due from Fujikawa Power. This order inadvertently referred to Sarika Industries instead of the appellant. The appellant responded by a representation dated 29 January 2019, claiming inter alia, that the order of attachment was without affording a hearing.
The appellant also claimed that on 26 December 2018, they had noticed that the ITC had been blocked without prior notice. On 30 January 2019, the notice of attachment was withdrawn by the third respondent.
Delegation of Powers
A tax liability of Rs 39.48 crores was confirmed against GM Powertech on the conclusion of the proceedings against it. GM Powertech was found to have no business establishment or property in Himachal Pradesh and the case was considered to fall into the category of a serious tax fraud.
On 21 October 2020, the Commissioner of State Taxes and Excise, Himachal Pradesh delegated his powers under Section 83 of the HPGST Act to the third respondent.
In exercise of the powers delegated by the Commissioner, the third respondent issued two orders of provisional attachment13 dated 28 October 2020 attaching the receivables of the appellant from its customers, Fujikawa Power and M/s Deepak International.
On being challenged under a writ, the High Court prima facie observed that it was undisputed that the third respondent and the Divisional Commissioner, who has been appointed as Commissioner (Appeals) under the GST Act, are constituted under the HPGST Act, and therefore, it is assumed that there is no illegal or irregular exercise of jurisdiction.
The High Court further observed that even if there is some defect in the procedure followed during the hearing of the case, it does not follow that the authority acted without jurisdiction, and though the order may be irregular or defective, it cannot be a nullity so long it has been passed by the competent authority.
The High Court finally held that when a statutory forum of appeal exists, an appeal should “not be entertained ignoring the statutory dispensation”.
This led to an appeal before Supreme Court in India.
The Court on the first issue made a reference to the ratio as laid down in two decisions as under:
a. In Assistant Commissioner (CT) LTU, Kakinada and others v Glaxo Smith Kline Consumer Health Care Limited-AIR 2020 SC 2819, the High Court noted that
although it can entertain a petition under Article 226 of the Constitution, it must not do so when the aggrieved person has an effective alternate remedy available in law. However, certain exceptions to this “rule of alternate remedy” include where, the statutory authority has not acted in accordance with the provisions of the law or acted in defiance of the fundamental principles of judicial procedure; or has resorted to invoke provisions, which are repealed; or where an order has been passed in violation of the principles of natural justice. Applying this formulation, the High Court noted that the appellant has an alternate remedy available under the GST Act and thus, the petition was not maintainable.
b. In Whirlpool Corporation v Registrar of Trademarks, Mumbai,(1998) 8 SCC 1, a two judge Bench of this Court after reviewing the case law on this point, noted:
“14. The power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provision of the Constitution. This power can be exercised by the High Court not only for issuing writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari for the enforcement of any of the Fundamental Rights contained in Part III of the Constitution but also for “any other purpose”.
15. Under Article 226 of the Constitution, the High Court, having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. But the High Court has imposed upon itself certain restrictions one of which is that if an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. But the alternative remedy has been consistently held by this Court not to operate as a bar in at least three contingencies, namely, where the writ petition has been filed for the enforcement of any of the Fundamental Rights or where there has been a violation of the principle of natural justice or where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged. There is a plethora of case-law on this point but to cut down this circle of forensic whirlpool, we would rely on some old decisions of the evolutionary era of the constitutional law as they still hold the field.” (emphasis supplied)
c. In Harbanslal Sahnia v Indian Oil Corpn. Ltd. (2003) 2 SCC 107, this court noted that
“7. So far as the view taken by the High Court that the remedy by way of recourse to arbitration clause was available to the appellants and therefore the writ petition filed by the appellants was liable to be dismissed is concerned, suffice it to observe that the rule of exclusion of writ jurisdiction by availability of an alternative remedy is a rule of discretion and not one of compulsion. In an appropriate case, in spite of availability of the alternative remedy, the High Court may still exercise its writ jurisdiction in at least three contingencies: (i) where the writ petition seeks enforcement of any of the fundamental rights; (ii) where there is failure of principles of natural justice; or (iii) where the orders or proceedings are wholly without jurisdiction or the vires of an Act is challenged. (See Whirlpool Corpn. v. Registrar of Trade Marks [(1998) 8 SCC 1] .) The present case attracts applicability of the first two contingencies. Moreover, as noted, the appellants’ dealership, which is their bread and butter, came to be terminated for an irrelevant and non-existent cause. In such circumstances, we feel that the appellants should have been allowed relief by the High Court itself instead of driving them to the need of initiating arbitration proceedings.” (emphasis supplied)
7 Principles of Law on Alternative Remedy
After having referred the aforesaid precedents, the Court laid down the following 7 Principles of Law:
(i) The power under Article 226 of the Constitution to issue writs can be exercised not only for the enforcement of fundamental rights, but for any other purpose as well;
(ii) The High Court has the discretion not to entertain a writ petition. One of the restrictions placed on the power of the High Court is where an effective alternate remedy is available to the aggrieved person;
(iii) Exceptions to the rule of alternate remedy arise where
(a) the writ petition has been filed for the enforcement of a fundamental right protected by Part III of the Constitution;
(b) there has been a violation of the principles of natural justice;
(c) the order or proceedings are wholly without jurisdiction; or
(d) the vires of a legislation is challenged;
(iv) An alternate remedy by itself does not divest the High Court of its powers under Article 226 of the Constitution in an appropriate case though ordinarily, a writ petition should not be entertained when an efficacious alternate remedy is provided by law;
(v) When a right is created by a statute, which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before invoking the discretionary remedy under Article 226 of the Constitution. This rule of exhaustion of statutory remedies is a rule of policy, convenience and discretion; and
(vi) In cases where there are disputed questions of fact, the High Court may decide to decline jurisdiction in a writ petition. However, if the High Court is objectively of the view that the nature of the controversy requires the exercise of its writ jurisdiction, such a view would not readily be interfered with.
The Court further held that the above principles of law have been consistently been held in in Seth Chand Ratan v Pandit Durga Prasad(2003) 5 SCC 399, Babubhai Muljibhai Patel v Nandlal Khodidas Barot,4 (1974) 2 SCC 706 and Rajasthan SEB v. Union of India, 5 (2008) 5 SCC 632 among other decisions.
The Court further approved on the second issue of provisional attachment and made reference to various order of High Courts on Section 83 of the CGST Act,2017 as under:
a. In Valerius Industries v Union of India,2019 (30) GSTL 15 (Gujarat), the Gujarat High Court laid down the principles for the construction of Section 83 of the SGST/CGST Act. The High Court noted that a provisional attachment on the basis of a subjective satisfaction, absent any cogent or credible material, constitutes malice in law. It further outlined the principles for the exercise of the power:
(4) The power under Section 83 of the Act for provisional attachment should be exercised only if there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of wholly or any part of his/her property with a view to thwarting the ultimate collection of demand and in order to achieve the said objective, the attachment should be of the properties and to that extent, it is required to achieve this objective.
(5) The power under Section 83 of the Act 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.
(6) The attachment of bank account and trading assets should be resorted to only as a last resort or measure. The provisional attachment under Section 83 of the Act should not be equated with the attachment in the course of the recovery proceedings.
(7) The authority before exercising power under Section 83 of the Act for provisional attachment should take into consideration two things: (i) whether it is a revenue neutral situation. (ii) 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.” (emphasis supplied)
b. In Jai Ambey Filament Pvt Ltd v Union of India, 2021 (44) GSTL 41 (Gujarat), the Gujarat High Court reiterated that the subjective satisfaction as to the need for provisional attachment must be based on credible information that the attachment is necessary. This opinion cannot be formed based on “imaginary grounds, wishful thinking, howsoever laudable that may be.” The High Court further held, that on his opinion being challenged, the competent officer must be able to show the material on the basis of which the belief is formed.
c. In Patran Steel Rolling Mill v Assistant Commissioner of State Tax Unit 2,2019 (20) GSTL 732 (Gujarat), the Gujarat High Court cited two instances in which provisional attachment would be apposite, these being where the assessee is a ‘fly by night operator’ and if the assessee will not be able to pay its dues after assessment.
While approving such views Similar to the decisions of the Gujarat High Court, other High Courts have recognized the restrictive nature of the power of provisional attachment under Section 83 of the SGST Act and the need for it to be based on adequate substantive material. The High Courts have also underscored the extraordinary nature of this power, necessitating due caution in its exercise.
The Court proceeded on to conclude on the first issue and referred to Section 107 of the Act;
“107. Appeals to Appellate Authority.—(1) Any person aggrieved by any decision or order passed under this Act or the Central Goods and Services Tax Act, 2017 (No.12 of 2017) by an adjudicating authority may appeal to such Appellate Authority as may be prescribed within three months from the date on which the said decision or order is communicated to such person.”
Sub-Section (2) similarly provides that:
(2) The Commissioner may, on his own motion, or upon request from the Commissioner of central tax, call for and examine the record of any proceeding in which an adjudicating authority has passed any decision or order under this Act or the Central Goods and Services Tax Act, 2017 (No.12 of 2017) for the purpose of satisfying himself as to the legality or propriety of the said decision or order and may, by order, direct any officer subordinate to him to apply to the Appellate Authority within six months from the date of communication of the said decision or order for the determination of such points arising out of the said decision or order as may be specified by the Commissioner in his order.
Sub-Section (2) confers a revisional power on the Commissioner in regard to the legality or propriety of a decision or order passed by an adjudicating authority. The expression ‘adjudicating authority’ is defined by Section 2(4) in the following terms:
“(4) “adjudicating authority” means any authority, appointed or authorized to pass any order or decision under this Act, but does not include the Commissioner, Revisional Authority, the Authority for Advance Ruling, the Appellate Authority for Advance Ruling, the Appellate Authority and the Appellate Tribunal;”
The Court held that
“..the expression ‘adjudicating authority’ does not include among other authorities, the Commissioner. In the present case, the narration of facts indicates that on 21 October 2020, the Commissioner had in exercise of his powers under Section 5(3) made a delegation inter alia to the Joint Commissioner of State Taxes and Excise in respect of the powers vested under Section 83(1). The Joint Commissioner, in other words, was exercising the powers which are vested in the Commissioner under Section 83(1) to order a provisional attachment in pursuance of the delegation exercised on 21 October 2020. This being the position, clearly the order passed by the Joint Commissioner as a delegate of the Commissioner was not subject to an appeal under Section 107(1) and the only remedy that was available was in the form of the invocation of the writ jurisdiction under Article 226 of the Constitution. The High Court was, therefore, clearly in error in declining to entertain the writ proceedings.
Ratio 1 –
There is no efficacious alternative remedy under Section 107 for provisional attachment by Commissioner or Joint Commissioner, rather only writ under Article 226 is the remedy.
The Court observed that the entire procedure which has been followed by the Joint Commissioner in the present case is contrary to the provisions contained in Section 83 read with Rule 159. The Joint Commissioner (acting on behalf of the Commissioner) has proceeded on an understanding that an opportunity of being heard to the person whose property is provisionally attached is a matter of discretion, the discretion of being that of the Commissioner.
Rule 159(5) mandates for observance of two aspects;
Firstly, it permits such a person to submit objections to the order of attachment on the ground that the property was or is not liable for attachment.
Secondly, Rule 159(5) posits an opportunity of being heard. Both requirements are cumulative.
The Commissioner’s understanding that an opportunity of being heard was at the discretion of the Commissioner is therefore flawed and contrary to the provisions of Rule 159(5). There has, hence, been a fundamental breach of the principles of natural justice.
There was also no formation of any opinion in exercising the provision of Section 83 of the Act.
The Court also observed that
It is evident from the facts noted above that the order of provisional attachment was passed before the proceedings against the appellant were initiated under Section 74 of the HPGST Act. Section 83 of the Act requires that there must be pendency of proceedings under the relevant provisions mentioned above against the taxable person whose property is sought to be attached. We are unable to accept the contention of the respondent that merely because proceedings were pending/concluded against another taxable entity, that is GM Powertech, the powers of Sections 83 could also be attracted against the appellant.
Both the earlier and the subsequent orders of provisional attachment are on the same grounds. Therefore, unless there was a change in the circumstances, it was not open for the Joint Commissioner to pass another order of provisional attachment, after the earlier order of provisional attachment was withdrawn after considering the representations made by the petitioner. This is an additional ground to set aside the subsequent order of provisional attachment.
Ratio 2 –
Formation of an opinion on tangible material is a must. It must be followed with time to object the provisional attachment by the taxpayer coupled with an opportunity of personal hearing before effecting the same.
Summary of Order
The Court further concluded its own findings in the order itself as below:
(i) The Joint Commissioner while ordering a provisional attachment under section 83 was acting as a delegate of the Commissioner in pursuance of the delegation effected under Section 5(3) and an appeal against the order of provisional attachment was not available under Section 107 (1);
(ii) The writ petition before the High Court under Article 226 of the Constitution challenging the order of provisional attachment was maintainable;
(iii) The High Court has erred in dismissing the writ petition on the ground that it was not maintainable;
(iv) 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;
(v) 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.
(vi) 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;
(vii) The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue;
(viii) In the facts of the present case, there was a clear non-application of mind by the Joint Commissioner to the provisions of Section 83, rendering the provisional attachment illegal;
(ix) Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards: (a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and (b) An opportunity of being heard; There has been a breach of the mandatory requirement of Rule 159(5) and the Commissioner was clearly misconceived in law in coming into conclusion that he had a discretion on whether or not to grant an opportunity of being heard;
(x) The Commissioner is duty bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached;
(xi) A final order having been passed under Section 74(9), the proceedings under Section 74 are no longer pending as a result of which the provisional attachment must come to an end; and
(xii) The appellant having filed an appeal against the order under section 74(9), the provisions of sub-Sections 6 and 7 of Section 107 will come into operation in regard to the payment of the tax and stay on the recovery of the balance as stipulated in those provisions, pending the disposal of the appeal.
It’s a welcoming order and will also bring a relief to this stage of GST when 4 years are to complete in July,2021 with almost one year in Covid-19 pandemic situations.
The issues which used to crop up during service tax regime regarding provisional attachments are being regularly seen in the GST era as well and same modus operandi of the revenue has been adopted rather than appreciating the real intent and purport of the provision of Section 83 per se for safeguarding the interest of revenue but not while compromising every jurisprudence at large.
The formation of an opinion and observing the principles of natural justice is the bedrock of the proceeding of provisional attachment in any tax arena coupled with the provisions enumerated thereunder. There is no exceptions provided so that the contours of the framework can be denied to any taxpayer.
The seven Principles of alternative remedy as laid down in this order will further enlighten the taxpayers and Courts in a holistic manner.
Finally, it can be concluded that Provisional Attachment must be exercised only after an observance of principles of natural justice & formation of opinion on tangible materials.
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