Understanding Inspection, Search, Seizure & Arrest in Taxation Laws

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Detailed exploration of the provisions related to inspection, search, seizure, and arrest under tax laws, including who may conduct inspections, the reasons for conducting them, the meaning of "reason to believe," and the role of the proper officer. Learn about the powers, procedures, and significance of these actions in tax compliance and enforcement.

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Inspection, Search, Seizure & Arrest V. RAGHURAMAN ADVOCATE

Inspection [Section 67(1)] Who may conduct: Proper officer [ PO ]not below the rank of joint commissioner. When it may be conducted: Where there is a reason to believe that: Taxable person has, with intent to evade tax, suppressed information: Of transaction relating to supply of goods or services Of stock of goods in hand; Of claiming ITC in excess of entitlement; Of contravention of any provisions of the Act. Transporter/warehouse operator: Is keeping goods on which tax has been evaded; Has kept accounts in such manner as is likely to cause evasion. What can be inspected: PO may authorize any other officer of central tax in writing in Form GST INS-01 to inspect: Any place of business of taxable person/transporter/warehouse; Any other place.

Inspection Meaning of Per Black's Law Dictionary, 7th Edn: Inspection means a careful examination of something, such as goods (to determine their fitness for purchase) or items produced in response to a discovery request (to determine their relevance to a law suit). Per CBIC FAQs: Inspection is a new provision under the CGST/SGST Act. It is a softer provision than search to enable officers to access any place of business of a taxable person and also any place of business of a person engaged in transporting goods or who is an owner or an operator of a warehouse or godown.

Proper Officer for Inspection Per Section 2(91) of the Act: proper officer in relation to any function to be performed under this Act, means the Commissioner or the officer of the central tax who is assigned that function by the Commissioner in the Board. Per Circular 03/3/2017-GST dated 05.07.2017: Proper officer to carry out inspection u/s 67(1) is the Additional or Joint Commissioner of Central Tax.

Reason to Believe Meaning of Section 26 IPC: A person is said to have reason to believe a thing, if he has sufficient cause to believe that thing but not otherwise. Reason Meaning of: HL Sibal Vs CIT [1976] 103 ITR 606 (P&H) Reason is a statement of fact employed as an argument to justify or condemn some act. When information is received or facts are harnessed in support of an argument, the resultant effect assumes the shape of a reason. Facts constituting the information must be relevant to the enquiry. They must be such from which a reasonable and prudent man can come to the requisite belief or conclusion. Material must have rational nexus of bearing to the reasons belief. for formation of Reason must be the basis to arrive at conclusion, i.e, by inference, deduction, etc. When a number of reasons are considered in relation to each other, the final result of this consideration assumes the shape of a conclusion.

Reason to Believe Meaning of Belief Meaning of: Rich Udyog Network Ltd Vs CCIT [2016] 386 ITR 136 (All) Belief must be held in good faith. It cannot be a mere pretense or a doubt. Belief should not be based on mere suspicion but must be based on information which is in the possession of the authorizing authority. The said information must be something more than a mere rumor, gossip or hunch. It must form the basis on which the authorizing officer can have reason to believe that an action can be taken.

Judicial Review of Reason to Believe Balwant Singh Vs R.D. Sharma [1969] 71 ITR 550 (Delhi) The existence of 'reason to believe' is subject only to a limited scrutiny and the Court cannot substitute its own opinion for that of the officer carrying out Inspection. Inspection must not lightly or arbitrarily invade the privacy of a subject. Before he acts, he must be reasonably satisfied that it is necessary to do so but the decision must still remain his and not that of the Court. If the grounds on which reason to believe is founded are non-existent or are irrelevant or are such on which no reasonable persons can come to that belief, the exercise of power would be bad and court can interfere. It is also open to the Court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief. DDIT Vs Mahesh Kumar Agarwal [2003] 262 ITR 338 (Cal) Court cannot look into aptness or sufficiency of grounds upon which satisfaction is based. Satisfaction is subjective. If belief is bona fide and cogently supported, court will not interfere.

Place of Business or Any Other Place Meaning of Section 2(85) CGST Act: Place of business includes: A place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or A place where a taxable person maintains his books of account; or A place where a taxable person is engaged in business through an agent, by whatever name called.

Search and Seizure [Section 67(2)] Search Meaning of: Black s Law Dictionary 6thEdition: An examination of a man's house or other buildings or premises, or of his person, with a view to the discovery of contraband or illicit or stolen property, or some evidence of guilt to be used in the prosecution of a criminal action for some crime or offense with which he is charged. Seizure Meaning of: Law Lexicon Dictionary: The act of taking possession of property by an officer under legal process. It generally implies taking possession forcibly contrary to the wishes of the owner of the property or who has the possession and who was unwilling to part with the possession.

Search and Seizure [Section 67(2) r/w 67(11)] Who commissioner. may conduct: Proper officer not below the rank of joint When it may be conducted: Where there is reason to believe that the following is secreted in any place: Goods liable for confiscation; Documents/things/books relevant for proceedings. What can be searched/seized: The following may be searched and seized by making an order in Form GST INS-02: Aforesaid Goods/books/documents/things; Accounts/registers/documents of any person produced before the PO, if PO has reason to believe that such person has evaded or is attempting to evade tax.

Secreted Meaning of: Durga Prasad Vs H.R. Gomes AIR 1966 SC 1209 (1216) In the context of Section 105(1) Customs Act: Secreted means documents which are kept not in the normal or usual place, with a view to conceal them. It may even mean documents or things which are likely to be secreted. It includes, documents or things which a person is likely to keep out of the way or to put in a place where the officer of law cannot find it. What can be called from an assessee in the normal course should not be recovered from him under search proceedings.

Retention and Return of Seized Articles [Section 67(3), (7) and (8)] Retention For How Long: As long as it is necessary for examination / inquiry. When to return: Those goods/documents/things which are not relied upon in the notice must be returned within 30 days of issue of notice. Note: Notice must be issued Within 6 months of seizure unless extended further. Otherwise all goods/documents/things seized are to be returned. Provisional return: This can be done upon: Execution of bond and furnish security; or Payment of tax, interest and penalty.

Detention of Goods [1stProviso to Section 67(2)] If not practicable to seize, PO may serve owner or custodian of goods, an order in Form GST INS-03 not to remove, part with or otherwise deal with goods except with prior permission. Practicable Meaning of: Om Parkash Jindal Vs UOI [1976] 104 ITR 389 (P&H) Seizure is impracticable when the nature or location of the property found on search which is reasonably believed to be undisclosed property and does not allow or the circumstances do not permit the immediate seizure of the same. Order of detention cannot be issued for the purpose of finding out whether the goods are seizable or for further enquiry. Maa Vaishnavi Sponge Ltd Vs DGIT [2012] 21 ITR 413 (Orissa) Sriram Jaiswal Vs UOI [1989] 176 ITR 261 (All) B.K. Nowlakha Vs UOI [1991] 192 ITR 436 (Delhi)

Disposal of Seized Articles [Section 67(8) & (9)] Government may, by notification, specify goods or class of goods which shall be disposed of after seizure by proper officer. In disposing of, regard should be had to the following factors: Perishable nature Hazardous nature Depreciation in value of goods with passage of time Constraints of storage space for goods Any other relevant considerations. An inventory of such goods shall be prepared by the PO after its seizure in Form GST INS-05.

Applicable Provisions of CrPC Regarding Search Section 93 of CrPC Section 165 of CrPC Section 100 of CrPC When search warrant can be issued by a following three cases: If there is reason to believe that a person summons to documents or may not produce the said documents. If the court thinks that it serves the purpose of inquiry, trial or any other proceedings. Search necessary investigation Offence must be such that PO is authorized to investigate [i.e, it must be a cognizable offence] must be for To presence of two respectable witnesses are obligatory. They must be independent, unprejudiced uninterested in [AIR 1974 SC 1224] ensure fair search, court in the whom produce other to and the search. things Occupant of the place, i.e, person residing in or being in charge of searched is attend search. Reasonable must exist for believing that the thing will be found in the place to be searched ground that permitted place to

Applicable Provisions of CrPC Regarding Search Section 93 of CrPC Section 165 of CrPC Section 100 of CrPC If a document or thing is not known to be in possession of any person/place . There undue getting the thing in any other way Grounds regarding of search must be previously recorded. If not, the search will be illegal. would delay be in Officer must prepare list of all things seized (recovery memo) and where it was found and deliver to the occupant after signature of that officer witnesses. Otherwise, accused may be entitled to benefit of doubt. [AIR 1969 Cal 340] An illegal warrant of search and seizure vitiates seizure of the article Sachedev Vs State 1991 CrLJ 300 (Del)]. of belief and the the necessity [Shyam Section 47(2): If ingress into premises cannot be obtained, officer carrying out search may break open any outer or inner door or window of any house or place, whether that of person sought to be searched or any other person.

Whether assessee is entitled to a copy of reasons recorded for issuing a search warrant? DGIT(I) Vs Spacewood Furnitures (P) Ltd [2015] 57 taxmann.com 292 (SC): Recording of reasons is necessary so as to ensure accountability and responsibility in the decision making process. However, that by itself would not confer in the assessee a right to communication of the reasons for the belief at the stage of issuing of the authorization. Any such view would be counter productive of the entire exercise contemplated in the search provisions. It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee.

Whether illegal search vitiates seizure and subsequent proceedings? Radhakrishnan Vs State of UP AIR 1963 SC 122: Even if search is illegal, the seizure of articles and further trial is not vitiated. If search provisions are violated, only the following two consequences could ensue: The person whose premises is sought to be searched can, at best, resist search. Because of the illegality of the search the Court may be inclined to examine carefully the evidence regarding the seizure. State of MP Vs Patlan Mallah 2005 CrLJ 918 SC: Illegality in search does not vitiate search unless it had caused prejudice to the accused. Merely because the accompanying witness is not from the same locality, search evidence cannot be disregarded. ACCE Vs Wilfred Sebastian 1983 (12) ELT 122 (Ker): On examination, if the evidence regarding the seizure of the articles is found to be satisfactory and acceptable, it will not be in the interests of justice to ignore altogether that evidence.

Power to Seal or Break Open [Section 67(4)] Where access is denied to: Door of any premises, almirah, boxes, electronic devises, box, receptacle. In which any goods, registers, accounts, documents of the person are suspected to be concealed. Then, officer authorized for search and seizure has power to seal or break it open.

Allowing to Take Photocopies [Section 67(5)] What is allowed: To make copies of any documents which are seized or take extracts therefrom. Who is allowed: Person documents are seized. When photocopy may be taken: In presence of an authorized officer at such place and time as such officer may indicate. When photocopy cannot be taken: In the opinion of the proper officer, it prejudicially affects the investigation. from whose custody any

Test Purchase [Section 67(12)] Commissioner or officer authorized may: Cause purchase by any third person authorized by them Of goods or services from business premises of a taxable person Object: For the purpose of checking the issue of tax invoice or bill of supply and compliance with provisions. After checking, officer shall return the goods purchased: The taxable person shall refund the amount received. And cancel the tax invoice or bill of supply.

Inspection of goods in movement [Section 68] What are the documents that are required to be carried by the person-in-charge of the conveyance ? Rule 138 of CGST Rules: Every registered person who causes movement of goods of value exceeding fifty thousand rupees shall generate e-way bill: in relation to a supply; or for reasons other than supply; or due to inward supply from an unregistered person The e-way bill to be generated before the commencement of movement of goods and details are to be filed in Form GST EWB-01.

Inspection of goods in movement [Section 68] Rule 138A of CGST Rules: Documents are required to be carried by the person-in-charge of the conveyance: Invoice or bill of supply Delivery Challan Copy of e-way bill in physical or electronic form Consequences of non-compliance with Section 68 r/w Rule 138: General penalty under section 122(1)(xiv) will be attracted and liable to penalty of Rs. 10,000 CGST + 10,000 SGST.

Detention, Seizure and Release of Goods and Conveyance in Transit [Section 129] When goods can be detained: Where any person transports or stores any goods in contravention of provisions of the CGST Act or Rules, then the proper officer is empowered to detain or seize such goods. Questions: Whether the non-compliance of provisions of section 68 r/w rule 138 attracts Section 129? If so, whether penalty u/s 129 is in addition to general penalty u/s 122?

Detention, Seizure and Release of Goods and Conveyance in Transit [Section 129] The proper officer shall release the goods in transit which are detained or seized upon payment of tax and penalty equivalent to or upon furnishing security : Owner comes forward Owner does not come forward Other than Exempted goods Other than Exempted goods exempted goods exempted goods 100 % of the 2% of the value tax payable or 25,000 - WIL 100% tax plus penalty at 50 % of the tax payable 5% of the value or 25,000 - WIL

Detention, Seizure and Release of Goods and Conveyance in Transit [Section 129] Notice: Proper officer is bound to issue notice in respect of detained or seized goods in transit, providing details of tax and penalty payable. Provisional release of goods: The goods seized under section 129 will be released provisionally by the proper officer. The procedure as laid down in section 67(6) shall apply. Deemed conclusion of proceedings: Upon payment of tax and interest under section 129(1), all the proceedings under this section shall be deemed to be concluded. Failure to pay tax and penalty: Tax and penalty to be paid within 14 days, if not paid then the proceedings under section 130 will be initiated (liable to confiscation of goods or conveyance).

Summons and Evidence [Section 70] Who can issue summons: Proper officer being superintendent of central tax. For what summons can be issued: For any inquiry. Such inquiry is a judicial proceeding within the meaning of Section 193 & 228 IPC. Section 193 IPC: Whoever intentionally gives false evidence in judicial proceeding shall be punished with imprisonment of term which may extend to 7 years + fine. Section 228 IPC: Insult or interruption of public servant in a judicial proceeding punishable for upto 6 months imprisonment or fine upto Rs. 1000 or both. How summons may be issued: In the same manner as in case of a civil court as per CPC, 1908. To whom summons can be issued: Any person whose attendance he considers necessary: To give evidence To produce any document or any other thing.

Access to Business Premises [Section 71] Person authorized: below the rank of Joint Commissioner of Central Tax. Any officer authorized by the proper office not Any other persons authorized under this section: Audit party deputed by the proper officer. Chartered Accountant or Cost Accountant nominated u/s 66 to conduct the special audit. Access to: Place of business of registered person. Rights of the officer: Inspect books of account, documents, computer, computer programs and such other things as he may require which are necessary for audit, scrutiny, verification and checks necessary to protect the interest of revenue.

Access to Business Premises [Section 71] Who is person-in-charge: Can be the owner, director, partner or the employee of the organisation. The following documents are to be made available to the proper office: Records maintained by the registered person and declared to the proper officer Trial balance or its equivalent Audited statement of financial accounts Cost Audit reports Income Tax Audit reports Any other relevant records Time Limit: To be produced within 15 working days from the day of demand or within the period as extended by the proper officer.

Other officers to assist Joint Commissioner (section 72) Income Tax officers under Income Tax Act, 1961. Police officers Railway officers Customs officers Revenue officers (land) Village officers and State Tax officers and any other officer

Arrest [Section 69] Who may arrest: Commissioner may authorize proper officer When arrest may be made: Commissioner has reason to believe that any of the following offences are committed which have the following punishments prescribed u/s 132: Offence Penalty Invoice not issued with intention to evade Invoice issued of higher amount to get excessive ITC Amount Involved More than Rs. 5 Cr Impriso nment 5 Yrs + Fine Type of Offence Cognizable and Non- Bailable Availed excessive ITC by issuing fake invoices Tax collected but not paid within 3 months Convicted person re-convicted for same offence Rs. 3 Cr to Rs. 5 Cr 3 Yrs + Fine Non-Cognizable and Bailable Imprisonment for a term which may extend to five years + Fine [Non-Cognizable and Bailable]

Procedure After Arrest [Section 69(2) & (3)] In Cases of Non-Cognizable and Bailable Offences: Subject to CrPC The person arrested shall be admitted to bail or in default of bail, forwarded to the custody of the Magistrate. For the purpose of releasing an arrested person on bail, DC/AC has same powers as officer-in-charge of police station. Cases of Cognizable and Non-Bailable authorized to arrest the person shall inform such person of the grounds of arrest and produce him before a Magistrate within 24 hours. In Offences: The officer Incongruity within Section 69 (PV Ramana Reddy Vs UOI): Even though Section 69(1) does confer power to arrest in case of non-cognizable and bailable, Section 69(3) deals with the grant of bail, remand to custody and the procedure for grant of bail to a person accused of the commission of non-cognizable and bailable offences.

Procedure After Arrest [Section 69(2) & (3)] In Cases of Cognizable and Non-Bailable Offences: Unlike non cognizable and bailable offence, there is no specific provision under Section 69 which provides for power and procedure to grant bail. Does this means no bail is available OR Whether the provisions of CrPC shall be applied to release such person on bail? Obviously then, the provisions of CrPC would be applicable.

Whether Arrest/Prosecution can Precede Assessment? Judgments in Favour PV Ramana Reddy Vs UOI 2019-TIOL-873-HC-TELANGANA-GST: To say that a prosecution can be launched only after the completion of assessment, goes contrary to Section 132. Offences mentioned in Section 132 have no co-relation to and do not depend on any assessment and adjudication. Arrest can be made even when offence is compoundable. Article 226 can be used as a substitute to section 438 CrPC to obtain anticipatory bail. Special Leave to Petition against the above decision is dismissed as reported in 2019-TIOL-216-SC-GST Same view was taken in Bharath Raj Punj Vs CCGST 2019-TIOL-678-HC- RAJ-GST.

Whether Arrest/Prosecution can Precede Assessment? Judgments Against Jayachandran Alloys Vs Superintendent of GST 2019-TIOL-1021-HC-MAD- GST: The term commits clarifies that the act of committal of the offence is to be fixed first before punishment is imposed. When recovery is made subject to determination in an assessment, the Revenue's argument that punishment for the offence alleged can be imposed even prior to such assessment, is clearly incorrect and amounts to putting the cart before the horse. UoI Vs Sapna Jain 2019-TIOL-217-SC-GST matters are referred to larger bench of the SC UOI Vs Makemytrip India Pvt Ltd 2019-TIOL-65-SC-ST: Revenue cannot bypass Section 73A of the Finance Act, 1994 before going ahead with arrest u/s 90, 91 (arrest) of FA, 1994.

36 PROSECUTION

Offences and Prosecution-132 Nature of offence Amount evaded Punishment Cognizance of offence Bailable (a) without issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax; (b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax; supplies any goods or services or both Exceeds 5 crores Upto 5 years of imprisonment and fine Cognizable Non Bailable 2crores s to 5crores Upto 3 years imprisonment and fine Upto 1 year imprisonment and fine Non cognizable Bailable Exceeding 1 crore utpo 2 cores Non Cognizable Bailable (c) invoice or bill referred to in clause (b); (d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due avails input tax credit using such Upto 1 crore No punishment prescribed

Offences and Prosecution-132 Nature of offence Amount evaded Punishment Cognizance of offence Non- Cognizable Bailable (e) credit or fraudulently obtains refund and where such offence is not covered under clauses (a) to (d); (h) acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation under this Act or the rules made thereunder; (i) receives or is in any way concerned with the supply of, or in any other manner deals with any supply of services which he knows or has reasons to contravention of any provisions of this Act or the rules made thereunder; evades tax, fraudulently avails input tax Exceeds 5 crores Upto 5 years of imprisonment and fine Bailable 2crores s to 5crores Upto 3 years imprisonment and fine Upto 1 year imprisonment and fine Non cognizable Bailable Exceeding 1 crore utpo 2 cores Non Cognizable Bailable Upto 1 crore No punishment prescribed believe are in

Offences and Prosecution-132 Nature of offence Amount evaded Punishment Cognizance of offence Non- Cognizable Bailable (k) is required to supply under this Act or the rules made thereunder or (unless with a reasonable belief, the burden of proving which shall be upon information supplied by him is true) supplies false information; or (l) attempts to commit, or abets the commission of any mentioned in clauses (a) to (k) of this section, fails to supply any information which he Exceeds 5 crores Upto 5 years of imprisonment and fine Bailable him, that the 2crores s to 5crores Upto 3 years imprisonment and fine Non congnizable Bailable of the offences Exceeding 1 crore utpo 2 cores Upto 1 crore Upto 1 year imprisonment and fine No punishment prescribed Non Cognizable Bailable

Offences and Prosecution-132 Nature of offence Punishment Cognizance of offence Non cognizable Bailable (f) produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act; (g) obstructs or prevents any officer in the discharge of his duties under this Act; falsifies or substitutes financial records or Imprisonment upto 6 months or fine or both Bailable (j) evidence or documents; tampers with or destroys any material

Meaning of Cognizable and bailable offences CrPC: (a)"bailable offence" means an offence which is shown as bailable in the First Schedule, or which is made bailable by any other law for the time being in force; and "non-bailable offence" means any other offence (c)"cognizable offence" means an offence for which, and "cognizable case" means a case in which, a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant (l)"non-cognizable offence" means an offence for which, and "non-cognizable case" means a case in which, a police officer has no authority to arrest without warrant

Offences by persons handling the GST information Sec 133 Person collecting statistics, Person engaged in operating and maintaining information on Common portion If willfully discloses information Liable to punishment which may extend to 6 months or fine of Rs. 25000 or both No punishment without sanction from Govt, if person is Govt servant in other cases, sanction from Commissioner is required Others Court inferior to Magistrate of first Class cannot take cognizance of the offices Section 134 Presumption as to existence of culpable mental state Sec 135 42

Relevancy of statements Sec 136 statement made before the office during the enquiry of investigation would be relevant (a) when the person who made the statement is dead or cannot be found, or is incapable of giving evidence, or is kept out of the way by the adverse party, or whose presence cannot be obtained without an amount of delay or expense which, under the circumstances of the case, the court considers unreasonable; (b) when the person who made the statement is examined as a witness in the case before the court and the court is of the opinion that, having regard to the circumstances of the case, the statement should be admitted in evidence in the interest of justice. 43

Offence by Companies Sec 137 44 Where Offence is committed by Company, Every person, who at the time of committing of offence Was in charge and was responsible for conduct of business Shall be deemed to be guilty And be liable to be proceeded against and punished Where Offence is committe d by Company It is proved that offence committed With Consent/ Connivance or Attributable to negligence of Director, Manager, Secretary, or Other Officer of Company They shall also be deemed guilty And be liable to be proceeded against and punished

Offence by LLP, Firm, HUF 45 Where Offence is committed by LLP, Firm, HUF or Trust Partner, Kartha and Managing Trustee Shall be deemed to be guilty Liable to be proceeded against and punished Proves that offence was committed Without his knowledge or That person had exercised due diligence To prevent commission of such offence Then such person shall not be liable for punishment Person liable for punishment - Innocent

Compounding of Offences Sec 138 46 Any Offence under the Act Either before or after the institution of prosecution Can be compounded by Commissioner On payment by person accused of the Offence Compounding Amount

Compounding of Offences 47 Compounding Benefit not available to: A person who has already been allowed to compound offence u/s 132(1)(a) to (f) and (l) A person who has been allowed to compound offence Other than offences mentioned above Under the provisions of CGST/ SGST/ IGST In relation to supplies of value exceeding 1 Crore. A person accused of committing an Offence under this Act and other acts such as NDPS Act, 1985 / Customs / Foreign Trade Regulation FEMA, 1999 Any other class of persons as may be prescribed Compounding of offence under this Act will not affect proceedings under other Acts Compounding allowed only after paying tax, interest and penalty.

Compounding of Offences 48 Money to be paid for Compounding the Offence: On payment of Compounding Amount Maximum = Greater of (Rs.30,000/- or 150% of tax involved) Against the accused wrt to offence compounded Criminal proceedings if already initiated, shall abate. Minimum = Greater of (Rs.10,000 or 50% of tax involved) No further proceedings shall be initiated