MAY 31, 2023

By Vijay Kumar

WHAT will happen if a taxpayer finds on a fine morning that all his bank accounts are frozen by GST officers? His life is frozen. GST officers have the power.

One of the first principles that an investigator or an adjudicator should learn is that suspicion, however strong, cannot take the place of proof.

See this case before the Delhi High Court recently. [Sidhivinayak Chemtech Private Limited Vs Principal Commissioner, CGST, Meerut in - 2023-TIOL-601-HC-DEL-GST

The petitioner company has two principal places of business, one in Uttar Pradesh and the other in Haryana. It is registered with the GST Department for both the places.

Our story starts with the summons issued to the petitioners on 20.05.2022 by the Superintendent, (Anti-Evasion). Summons don't come singly. Subsequent summons came on 22.06.2022, 01.07.2022, 04.07.2022, 26.08.2022, 29.08.2022, 31.08.2022. Issuing summons is as easy as dropping a hat.

In view of the repeated summons, petitioner addressed a letter dated 06.08.2022 to the Chief Commissioner, CGST, Meerut Zone, requesting to intervene in the investigation conducted by the Superintendent. Remember the days when you requested the principal to save you from the teacher's wrath?

On 05.09.2022, on becoming aware that its bank account was provisionally attached, the petitioner filed its objection (in Form GST DRC-22A) under Rule 159(5) of the CGST Rules with the Principal Commissioner, CGST followed by e-mails dated 02.11.2022 and 15.11.2022.

The petitioner then approached the High Court, which disposed of the writ petition by an order dated 22.11.2022, inter alia, directing the Principal Commissioner to decide the petitioner's objections under Rule 159(5) after affording the petitioner an opportunity of being heard.

On 05.12.2022, the petitioner filed an application in the disposed of writ alleging wilful non-compliance of the order dated 22.11.2022. The High Court disposed of the application by an order dated 05.12.2022 with directions to the Commissioner to pass a reasoned order on or before 09.12.2022.

In the meantime, the revenue authorities continued the investigations and summoned Shri Raj Kumar, Shri Ankit Bhutani and Shri Raman Kumar (stated to be the directors of the petitioner company) for a hearing on 09.12.2022. At the hearing Shri Raj Kumar and Shri Ankit Bhutani sought an adjournment on the ground that they had ceased to be directors in the petitioner company and were not involved with the day-to-day running of its business.

On 08.12.2022, the Principal Commissioner passed the impugned order confirming the attachment order. Aggrieved petitioner is again before the High Court.

Impugned Order

The Principal Commissioner upheld the attachment order on the grounds that:

1. the petitioner company had fraudulently transferred ITC amounting to Rs.36.6 crore to M/s Best Crop Science Pvt. Ltd. and M/s Best Crop Science LLP, without supplying any goods to the said companies.

2. Shri Raman Kumar, director of the petitioner company, was also an employee at M/s Best Agro Group and on this basis, the petitioner company was created as a dummy company of M/s Best Crop Science Pvt. Ltd. for availing ITC by fraudulent means.

3. the petitioner had not submitted relevant documents, namely, sale invoices, bank statements of all the accounts and trial balance for the year 2017-18, till date.

The Commissioner held that if any proceedings under Chapter XIV of the CGST Act were pending, the Commissioner was empowered to provisionally attach the bank account of the taxable person under Section 83(1) of the CGST Act, for the purpose of protecting the interest of the Government revenue. The Commissioner held that the investigation conducted so far had revealed that the petitioner had fraudulently used ITC amounting to Rs. 36.6 crore.

Submissions

The counsel for the petitioner, assailed the attachment order on, essentially, two fronts:

1. the impugned order is without jurisdiction as the Commissioner did not have the territorial jurisdiction to issue the order.

2. the attachment order did not reflect any valid reasons for attachment of the petitioner's bank account nor referred to any tangible material which would indicate that it was necessary to attach the petitioner's bank account to protect the interest of the Revenue.

He also submitted that the power of the provisional attachment is a draconian power and that the same can be exercised only if it is necessary for protecting the interests of the Revenue.

Findings

The first and foremost question to be addressed by the High Court was whether the Principal Commissioner has the jurisdiction to pass the impugned order attaching the petitioner's bank account.

The petitioner is registered in respect of its two principal places of business. The first being Kundli, Sonipat, and the second being Bulandshahar. Admittedly, the territorial jurisdiction of the Principal Commissioner, CGST, Meerut neither covers Kundli, Sonipat, Haryana nor Bulandshahar, Uttar Pradesh.

The petitioner claims that its place of business falls within the jurisdiction of Gautam Buddha Nagar Commissionerate and not the Meerut Commissionerate.

The Counsel for Revenue did not contest that the respondent Principal Commissioner does not have any territorial jurisdiction in respect of the petitioner.

High Court Findings:

1. The term 'the Commissioner' as used in Section 83 of the CGST Act would necessarily refer to the Commissioner who exercises jurisdiction under the CGST Act in respect of 'the taxable person'.

2. The Commissioner, whose territorial jurisdiction is confined by the Board to a particular territory, would not have the jurisdiction to discharge the functions under the CGST Act beyond its territorial jurisdiction.

3. In the present case, it is conceded that respondent no.1 (Principal Commissioner) does not exercise jurisdiction in respect of territories where the petitioner's principal place of business is located.

4. Thus, he had no jurisdiction to pass the attachment order in respect of the petitioner as 'the taxable person'.

5. The impugned order is, thus, liable to be set aside on this ground alone .

But the High Court considered whether the other conditions necessary for attaching the petitioner's bank account are satisfied and observed:

One of the principal conditions necessary for provisionally attaching a property (including a bank account) under Section 83 of the CGST Act is formation of an opinion by the Commissioner that such attachment is necessary for protecting the interest of the Government Revenue.

It is now well settled that formation of the opinion cannot be a mere subjective satisfaction of the Commissioner but must necessarily be an opinion, which is formed on credible material having live link with formation of the opinion.

The Court enquired from the respondents (GST Department):

1. is there any material in the file, which would establish that the shareholding of M/s Best Agro Group and the shareholders of the petitioner company were common or that the petitioner company held or controlled any share in M/s Best Agro Group?

2. was there any material whatsoever, which would indicate that the sale proceeds of shares of companies of M/s Best Agro Group had been deposited in the bank account of the petitioner?

The answer to both the questions was 'NO'.

High Court held,

It is apparent that the principal reason for attaching the petitioner's bank account - the sale proceeds of shares of M/s Best Agro Group and other group companies are parked in the bank account of the petitioner - is not founded on or has nexus with any tangible material. Thus, any such belief would be clearly in the realm of unsubstantiated suspicion and therefore, cannot be considered as a ground for taking the drastic step of provisionally attaching a taxpayer's bank account.

It is necessary to bear in mind that attachment of a bank account would in effect result in the closure of the business of a taxpayer and has the propensity to cause irretrievable harm. The said drastic action is impermissible merely on the basis of suspicion and without any tangible material.

Section 83 of the CGST Act requires the Commissioner to form an opinion that it is necessary to attach the property of a taxable person. However, the said opinion is required to be based on relevant facts and not merely on grounds of suspicion. It is difficult to imagine that a company would survive if its bank accounts are frozen for a protracted period of time. Thus, the nature of the power makes it necessary that the same is exercised with due caution and only when it is necessary.

Mere suspicion that the petitioner is a dummy company would clearly fall foul of the requirement of forming an opinion, as it does not meet the standards required for taking an action under Section 83 of the CGST Act.

The High Court set aside the attachment order.

The bank account of a taxpayer is attached without jurisdiction and without proper reasons. What can a poor taxpayer do when the might of the State which is there to protect and promote him crushes him? Do the officers realise what happens to a businessman when his bank accounts are frozen? Everything around him comes to a standstill and even his workers will not get their salaries. How will the babus feel if they don't get their salaries?

I was arguing a case of attachment of bank account before a High Court which stayed the attachment. It was a couple of days before Deepavali. I told the Court that I can celebrate Deepavali if my order was given on the same day. The judge asked me, "do you need so much money to celebrate Deepavali?" I said, if my frozen account is unfrozen, my workers will also celebrate the festival. The judge was very kind and lamps illuminated the houses of workers too, thanks to the Court.

The power of provisional attachment shouldn't be wielded like a wild sword but should only be used to protect the interests of the Revenue, like a cautious knight guarding a treasure chest.

But what can we do when the Commissioner's jurisdiction was as elusive as a unicorn and the reasons for the attachment were about as solid as a house made of cards?

Until Next week