Goods & Services Tax (GST) in India“Reason to Believe” Sine Qua Non for Conducting Investigation or Search against a taxpayer

The Delhi High Court in Lovelesh Singhal V. Commissioner, Delhi Goods and Services Tax [MANU/DE/8081/2023], held that the investigation and search conducted by the Department should be in accordance of law. Any amount deposited by the taxpayer under coercion is liable to be refunded to the taxpayer.

FACTS

Mr. Lovlesh Singhal (hereinafter referred to as the “Petitioner”) is engaged in trading of PVC Resin under the name of M/s. Shivani Overseas. On 07.10.2022, the proper officer investigated the business premises of the Petitioner. During the course of the investigation,  Commissioner, Delhi Goods and Services Tax, (hereinafter referred to as “the Respondent”) forced the Petitioner to reverse the Input Tax Credit (hereinafter referred to as the “ITC”) amounting to Rs. 18,72,000/- (Rupees Eighteen Lakhs Seventy Two Thousand Only) in respect to the purchases done from M/s. Samridhi Exports. The Respondents informed the Petitioner that the GST registration of M/s. Samridhi Exports was cancelled retrospectively.

The Petitioner was detained in the office of the Respondent and was forced to reverse the ITC under coercion. In the statement of the Petitioner, the mismatch of GSTR1, GSTR 3B and GSTR 2A has been denied by the Petitioner.

Further, the Respondent issued a Show Cause Notice dated 29.03.2023 (hereinafter referred to as the “SCN”) proposing a demand of  Rs.17,83,28,150/- (Rupees Seventeen Crores Eighty-Three Lakhs Twenty Eight Thousand One Hundred Fifty Only) (i.e., CGST and SGST of’ 3,22,91,278/-each) including interest of Rs. 4,91,63,038/- and penalty of ‘ Rs.6,45,82,556/-for the period of April 2022 to February 2023.

Thus, the Petitioner being aggrieved by SCN and the arbitrary actions of the Respondent’s reversal of ITC under duress.

ISSUES BEFORE THE HIGH COURT

1. Whether the investigation and search conducted by the Respondents was authorized by law?

2. Whether the Petitioner was entitled for the reversal of ITC debited from his Electronic Credit Ledger?

CONTENTIONS OF THE PARTIES

The Petitioner contended that the entire search proceedings were without authority of law as the Respondent failed to provide the “reason to believe” for the same. It was also argued that the Petitioner was compelled deposited an amount of Rs.18,72,000/- (Rupees Eighteen Lakhs Seventy Two Thousand Only) under duress without any adjudication of the demand.

The Respondent relied on Suresh Kumar P.P. and Ors. v. The Deputy Director, Directorate  General of  GST Intelligence (DGGI) and Ors.: MANU/KE/2191/2020 and contended that the Petitioner had made a voluntary payment, in order to avoid penalty and interest.

DECISION AND FINDINGS

The Delhi High Court examined the Form GST INS-01 issued under Section 67 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”)  read with Rule 139 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as “CGST Rules”) and held that the Respondents had failed to provide any specific reason for the issuance of the same.

The High Court further observed that the Respondents failed to provide any reason for the initiation of the investigation. Moreover, the retrospective cancellation of GST registration did not have a rational nexus with the “reasons to believe” of the Respondents.

The Delhi High Court further observed that the Petitioner was coerced by the Respondents to reverse ITC amounting to Rs.18,72,000/-, which was done under coercion during the search. Moreover, the Petitioner had denied any such mismatch in the statement recorded by the Respondents.

The High Court relied upon M/s Vallabh Textiles v. Senior Intelligence Officer and Ors.: [MANU/DE/5270/2022: 2022:DHC:005682] and held that the mandatory procedure prescribed under Rule 142 of the CGST Rules was not followed by the Respondents.

The Delhi High Court directed the Respondents to refund of ITC reversed by the Petitioner and disposed of the Petition.

AMLEGALS REMARKS

The Delhi High Court has upheld that any investigation or search conducted by the department should be in accordance with the provisions of the law. The officer conducting such a search should have a “reasonable believe” for the same. Moreover, any amount deposited under duress or coercion cannot be considered to be voluntary payment and shall be refunded to the Petitioner.

– Team AMLEGALS assisted by Mr. Prakhar Gupta