CONFISCATION FOR NON MAINTENANCE OF ACCOUNTS UNDER GST LAWS

[Mr. M. GOVINDARAJAN]

Maintaining of records

Section 35 (1) of Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides that Every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of-

• production or manufacture of goods;
• inward and outward supply of goods or services or both;
•  stock of goods;
• input tax credit availed;
• output tax payable and paid; and
• such other particulars as may be prescribed.

The first proviso to this section provides that where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business.  The second proviso to this section provides that the registered person may keep and maintain such accounts and other particulars in electronic form in such manner as may be prescribed.

Section 35(6) of the Act provides that where the registered person fails to account for the goods or services or both in accordance with the provisions of sub-section (1), the proper officer shall determine the amount of tax payable on the goods or services or both that are not accounted for, as if such goods or services or both had been supplied by such person and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of such tax.

Rule 56 of Central Goods and Services Tax Rules, 2017 provides that every registered person shall keep and maintain, in addition to the particulars mentioned in sub-section (1) of section 35,

• a true and correct account of the goods or services imported or exported or of supplies attracting payment of tax on reverse charge along with the relevant documents, including invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers and refund vouchers;
• the accounts of stock in respect of goods received and supplied by him, and such accounts shall contain particulars of the opening balance, receipt, supply, goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample and the balance of stock including raw materials, finished goods, scrap and wastage thereof.
• a separate account of advances received, paid and adjustments made thereto;
• containing the details of tax payable, tax collected and paid, input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.

Every registered person shall keep the books of account at the principal place of business and books of account relating to additional place of business mentioned in his certificate of registration and such books of account shall include any electronic form of data stored on any electronic device.

Accounts maintained by the registered person together with all the invoices, bills of supply, credit and debit notes, and delivery challans relating to stocks, deliveries, inward supply and outward supply shall be preserved for the period as provided in section 36 and shall, where such accounts and documents are maintained manually, be kept at every related place of business mentioned in the certificate of registration and shall be accessible at every related place of business where such accounts and documents are maintained digitally.

Every registered person shall, on demand, produce the books of accounts which he is required to maintain under any law for the time being in force.

Rule 57 provides that where the accounts and records are stored electronically by any registered person, he shall, on demand, provide the details of such files, passwords of such files and explanation for codes used, where necessary, for access and any other information which is required for such access along with a sample copy in print form of the information stored in such files.

Issue

The issue for discussion in this article is whether non maintaining of accounts lead to confiscation of goods under GST laws and imposition of penalty with reference to decided case law. 

Section 122 of the Act provides for penalties for certain offences.  Section 122 (1) (xvi) provides that penalty will be imposed on the registered person who fails to keep, maintain or retain books of account and other documents in accordance with the provisions of this Act or the rules made there under.  Therefore non maintenance of records by the registered person will lead to the imposition of penalty. 

Section 130 of the Act provides for confiscation of goods or conveyances and levy of penalty.  Section 130(1) provides that if any person-

• supplies or receives any goods in contravention of any of the provisions of this Act or the rules made there under with intent to evade payment of tax; or
• does not account for any goods on which he is liable to pay tax under this Act; or
• supplies any goods liable to tax under this Act without having applied for registration; or
• contravenes any of the provisions of this Act or the rules made there under with intent to evade payment of tax; or
• uses any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made there under unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance, then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to penalty under section 122.

Case law

In ‘Meternere Limited v. Union of India and other’ – 2020 (12) TMI 790 – Allahabad High Court, the petitioner is engaged in manufacture of lead ingots falling under GST Tariff Chapter Heading No. 7804.   On 6.1.2018 Anti Evasion Department of GST, Greater Noida visited the factory premises of the petitioner for verification of the records.   The petitioner claimed that it produced all the records, however, the records of GST were not available in the factory premises as the same were kept at head office of the petitioner situated at Ghazipur.

On 10.1.2018 another team from the same department visited the factory premises and passed an order of detention detaining 12,979 metric tonnes of entire stock of the petitioner.  Subsequently the records were produced on various dates on 16.1.2018, 20.1.2018, 23.1.2018 and 31.1.2018.   An order dated 4.4.2018 was passed seizing the goods detained on 10.1.2018.   A show cause notice dated 21.5.2018  wherein the petitioner was called upon to show cause as to why the goods valued at ₹ 1,07,99,43,351/-, which were seized, should not be confiscated and penalty should not be imposed.  The show cause notice also proposed to impose personal penalty should not imposed upon Shri Raman Gupta, Director of Metenere Limited.

The petitioner filed its reply to the show cause notice denying the charges and that any verification of the stock was conducted.   The petitioner contended that no document showing unaccounted cash was found.   The petitioner also denied its liability and requested for dropping of the show cause notice and proposed penalty.

The petitioner filed a writ petition against the show cause notice issued to the petitioner.  The High Court disposed the said writ petition directing the Department to decide the issue within a period of three weeks.  Accordingly the Department heard the case and passed an order of confiscating the entire seized goods.  However the petitioner was given an option of redeeming the confiscated goods on payment of redemption fine amounting to Rs. 12 crores.  A penalty of Rs.  19,43,89,804/- was imposed upon the petitioner.  Further a penalty amounting to ₹ 50,000/- was imposed on the Managing Director of the Company under Section 122 (3) of the CGST read with Section 122 (3) of the Uttar Pradesh GST.

The petitioner preferred an appeal against the said order whereby the appeal filed was rejected and the order impugned in the appeal was confirmed. Aggrieved against the said two orders passed against the petitioner, present writ petition has been preferred as the Tribunal envisaged under the GST Act has not be constituted.

The petitioner submitted the following before the High Court-

• The petitioner had produced all the Returns of TRANS-1.
• The said stock included the stock manufactured prior to enforcement of GST.
• The records of GST were kept at head office of the petitioner situated at Ghazipur.
• Subsequently the records were produced on various dates.
• Despite production of the records, as sought for, an order dated 4.4.2018 was passed seizing the goods detained on 10.1.2018.
• There is no allegation or averment with regard to evasion of duty nor has any exercise been conducted by the department to establish and ascertain the duty evaded.
• The said search occurred during the period when the transition was happening from the earlier tax regime to the present GST regime and, as such, the documents were being codified and were, thus, kept at the principal place of business, which is situated at Delhi and was also disclosed in the registration certificate issued under the GST.
• Even assuming without admitting the charges levelled against the petitioner the quantum of penalty that could have been imposed for violation of not keeping the documents at the manufacturing premises could not exceed ₹ 10,000/- inasmuch as no exercise for quantifying the "tax evaded" has ever been carried out nor is there any allegation with regard to evasion of tax even in the show cause notice.
• Section 12 clearly specifies that the liability to pay the tax on the goods arises only at the time of supply.
• Section 12 (2) clearly specifies that the time of supply of goods shall be the earlier of the following namely –

• the date of issue of invoice by the supplier; or
• the date on which the supplier receives the payment with respect to such supply.

• There is neither any allegation with regards to issuance of invoices nor is there any allegation with regard to receiving of the payment.
• Even the confiscation is bad in law inasmuch as the confiscation of goods can happen only under Section 130 (1) of the Act on the grounds as enumerated therein and none of the contingencies under Section 130 (1) were alleged even in the show cause notice. 
• Even the detention and seizure of the goods was bad in law as no "reason to believe" which are "sin qua non" for exercise of powers under Section 66 were ever recorded.

The respondents submitted the following before the High Court-

• The order passed against the petitioner is wholly justified inasmuch as on various occasions goods were not recorded in the records, which are liable to be maintained under Section 35.
• The orders passed against the petitioner do not call for any interference in exercise of powers under Article 226 of the Constitution of India.

The High Court heard the submissions put forth by both the parties to the petition.  The High Court observed that the Adjudicating Authority, after recording that the party has failed to maintain the records as required under Section 35 (1) of the Act, held that the goods were liable to be confiscated and proceeded to pass order.  The Adjudicating Authority imposed a penalty on the petitioner to the tune of ₹ 194389804/- and also imposed personal penalty of ₹ 50,000/-  on the Managing Director of the Company.  The Appellate Authority upheld the order of the Adjudicating Authority.

The High Court considering the following points for determination-

• Whether the respondents were justified in recording that the petitioner-appellant has failed to maintain the records as required to be maintained under Section 35 (1) of the CGST Act read with Rules 56 and 57 of the CGST Rules?
• Whether the order of confiscation as passed was justified in facts of the case?
• Whether in the facts and circumstances of the case, the imposition of the penalty, as has been done by means of the impugned order, is in accordance with Section 122 of the CGST Act?

The High Court analyzed the provisions of section 35, 122 and 130.  The High Court observed that-

• Section 35 (1) clearly provides that all the registered person are required to keep and maintain at the principal place of business a true and correct account of things specified in Clause (a) to (f). The Second proviso to Section 35 (1) , Rule 56 and Rule 57 make it further necessary to keep the said documents as specified in Clause (a) to (f) in the electronic form.
• Section 35 (6) of the said Act provides that in the event the person fails to keep their accounts for the goods or the services in accordance with the provisions of Sub-section 1of Section 35, the proper officer is empowered to determine the amount of tax payable on the goods or the service which are unaccounted for as if such goods or services had been supplied by such person and the provisions of Section 73 or 74 shall mutatis mutandis apply for determination of the said tax.

In the present case, the proper officer was empowered to determine the liability of payment of tax in terms of the powers conferred under Section 35 (6) after resorting to the procedure as established under Section 74 of the Act. A perusal of Section 73 and 74 makes it clear that a show cause notice is bound to be served prior to determination of the tax leviable on the ‘deemed supply’ whereas in the present case no such notice is available on record and it is common ground that apart from the said proceedings, no other proceedings have been initiated and concluded under Section 73 or 74 of the Act.

Further the High Court observed the following in the present case-

• Even if it is admitted, for the sake of arguments, that the documents were not maintained at the registered office or the other place of business, there is no finding to the effect that any supply was made with an intent ‘to evade payment of tax’ as is required under Section(i) of Section 130 (1);
• There is nothing on record to establish that the petitioner did not account for any goods on which he is liable to pay tax under the Act;
• There is nothing on record to the effect that any supplies were made without having applied for registration;
• It has not been established that there was any contravention of any provision or any Rules with‘intent to evade payment of tax’;
• There is no averment of using any conveyance.

The High Court held that none of the ingredients which are required for confiscation existed in the present case and thus, the confiscation itself was wholly arbitrary and illegal.

The amount of penalty imposable is provided under Section 122 (xvi), which provides that the quantum of penalty imposable is ₹ 10,000/- or an amount equivalent to tax evaded or tax not deducted under Section 51 or short deducted or deducted but not paid to the Government or tax not calculated under Section 52 or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.  The High Court held that the penalty can be ₹ 10,000/-only as in the said case there is no question of tax evasion.

The High Court set aside the orders of Adjudicating Authority and Appellate Authority  insofar as it relates to confiscation of goods and imposition of penalty in excess of ₹ 10,000/-, as the confiscation has been set aside, there is no question of payment of redemption fine.

Conclusion

From the above said case law it can be inferred that penalty and confiscation of goods can be done if the accounts are not properly maintained with the intention to evade the payment of tax.  The burden of proof lies on the registered person that he is maintaining the records and accounts properly and there is no suppression of facts or he is having no intention to evade the payment of tax.