2024 (12) TMI 1511 - HC - GST

Challenge to SCN issued by Proper Officer - When the investigation, inspection, search and seizure is substantially completed by an improper Officer, is the show cause notice issued by a proper Officer under Section 74 of the CGST Act and KGST Act liable to be set aside? HELD THAT - In the instant case, it is not in dispute that respondent no. 1 is the proper officer for inspection, search and seizure and also issuance of show cause notice and not respondent no. 2. Reading of Section 74 of the CGST Act shows that it is only a proper Officer who can investigate into evasion of GST and inspection, search and seizure and arrest can be done only by the proper Officer failing which the same will have to be held invalid and based upon the inspection, search and seizure if the proper Officer comes to the conclusion that there is mens rea involved as contemplated under Section 74 of the CGST Act, he can issue a notice under Section 74 and not otherwise - In the instant case, admittedly, substantial part of the investigation including search and seizure of the materials has been done by respondent no. 2 who is not the proper Officer and under the circumstances, the said investigation, inspection, search and seizure in respect of the petitioner herein has to be considered ab initio void. When the same is considered as ab initio void, notice issued under Section 74 of the CGST Act based upon search, seizure and the statements recorded from the petitioner which has been relied upon, has to be considered illegal and that there is no satisfaction on part of the proper Officer for issuance of the notice under Section 74 of the CGST Act. If respondent no. 2 after investigation has transferred the case to respondent no.3, for issuance of notice under Section 74, respondent no.3 was required to redo the investigation and come to an independent conclusion as contemplated under Section 74 of the CGST Act and only thereafter a fresh notice requires to be issued. Respondent no. 1 cannot issue a notice under Section 74 on the 'borrowed satisfaction'. Conclusion - It is only a proper Officer who can investigate into evasion of GST and inspection, search and seizure and arrest can be done only by the proper Officer failing which the same will have to be held invalid. The impugned show cause notice dated 11.04.2023 issued by respondent no. 1 (vide Annexure-G to the writ petition) is hereby set aside insofar as it relates to the petitioner - respondent no. 1 is directed to refund a sum of Rs. 50,00,000/- to the petitioner within eight weeks from the date of receipt of a certified copy of this order - petition disposed off.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in the judgment are:

Whether the investigation, inspection, search, and seizure conducted by an improper officer can form the basis for a show cause notice under Section 74 of the CGST Act and KGST Act.
Whether the show cause notice issued by a proper officer, based on the investigation conducted by an improper officer, is valid.
Whether the petitioner is entitled to a refund of the amount deposited under protest during the investigation.
Whether the materials seized during the investigation should be returned to the petitioner.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Investigation by an Improper Officer

Relevant legal framework and precedents: The CGST Act specifies that only a "proper officer" can conduct investigations, inspections, searches, and seizures. The term "proper officer" is defined under Section 2(91) of the CGST Act.
Court's interpretation and reasoning: The court emphasized that the investigation, inspection, search, and seizure must be conducted by a proper officer as defined under the CGST Act. Any action taken by an improper officer is considered ab initio void.
Key evidence and findings: Substantial parts of the investigation were conducted by respondent no. 2, who was not the proper officer, rendering the investigation void.
Application of law to facts: The court applied the definition and requirements of a proper officer under the CGST Act to determine that the investigation was invalid.
Treatment of competing arguments: The respondents argued that the show cause notice was issued by a proper officer, but the court held that the investigation itself was void, thus invalidating the notice.
Conclusions: The investigation conducted by an improper officer is void, and any subsequent actions based on it are invalid.

Issue 2: Validity of Show Cause Notice

Relevant legal framework and precedents: Section 74 of the CGST Act allows a proper officer to issue a show cause notice if there is evidence of tax evasion.
Court's interpretation and reasoning: The court held that a proper officer cannot issue a show cause notice based on an investigation conducted by an improper officer.
Key evidence and findings: The show cause notice was based on an investigation conducted by respondent no. 2, who was not the proper officer.
Application of law to facts: The court determined that the notice was issued without proper satisfaction by the proper officer, making it invalid.
Treatment of competing arguments: The respondents relied on the decision in Pooran Mal, but the court distinguished the case based on the specific requirements under the CGST Act.
Conclusions: The show cause notice is invalid as it was based on an improper investigation.

Issue 3: Refund of Amount Deposited Under Protest

Relevant legal framework and precedents: The petitioner deposited Rs. 50,00,000/- under protest during the investigation.
Court's interpretation and reasoning: Since the investigation was void, the amount deposited must be refunded.
Key evidence and findings: The deposit was made under protest during an invalid investigation.
Application of law to facts: The court ordered the refund of the amount as the investigation was void.
Treatment of competing arguments: The respondents did not provide a valid reason to retain the deposit.
Conclusions: The petitioner is entitled to a refund of the deposited amount.

Issue 4: Return of Seized Materials

Relevant legal framework and precedents: The materials were seized during an investigation conducted by an improper officer.
Court's interpretation and reasoning: The court held that the materials must be returned as the seizure was void.
Key evidence and findings: The seizure was conducted by respondent no. 2, who was not the proper officer.
Application of law to facts: The court ordered the return of the seized materials to the petitioner.
Treatment of competing arguments: The respondents did not justify the retention of the seized materials.
Conclusions: The materials seized must be returned to the petitioner.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Thus, reading of the aforementioned provisions shows that it is only a proper Officer who can investigate into evasion of GST and inspection, search and seizure and arrest can be done only by the proper Officer failing which the same will have to be held invalid."
Core principles established: Only a proper officer can conduct investigations and issue show cause notices under the CGST Act. Actions taken by an improper officer are void.
Final determinations on each issue:
- The investigation by respondent no. 2 was void.
- The show cause notice issued by respondent no. 1 based on the void investigation is invalid.
- The petitioner is entitled to a refund of Rs. 50,00,000/-.
- The materials seized during the investigation must be returned to the petitioner.