REASON TO BELIEVE FOR INSPECTION AND SEARCH MATTERS IN GST

[Dr. Sanjiv Agarwal]

Reason to Believe

The expression, ‘reason to believe’ is not defined anywhere in law but needs to be understood through judicial interpretation, some of which are as follows:

‘Reason’ means a course or justification. ‘Believe’ means to accept as true or to have faith in it. In DEPUTY DIRECTOR OF INCOME-TAX (INVESTIGATION) AND OTHERS VERSUS MAHESH KUMAR AGARWAL - 2003 (2) TMI 40 - CALCUTTA HIGH COURT, it was observed that it is a statement of fact employed as an argument to justify or condemn some act. When information is received or the basic facts are harnessed in support of an argument, the resultant fact assumes the shape of a ‘reason’ and when a number of reasons are considered in relation to each other, the final result to this consideration assumes the shape of “belief”.

The powers under the present section are wide but not plenary; the words of the section are ‘reason to believe’ and not ‘reason to suspect’. The word “believe” is a much stronger word than “suspect”. Although these reasons cannot be called into question to prevent an inspection, later during adjudication, any “palpable absence” of reasons to believe can be brought out to challenge the correctness of inspection. However, experts hold the view that inspection can be non-specific and general investigation may lead to findings that were not the ‘reasons to believe’ at the start of this exercise.

Reason to believe means to have knowledge of facts which, although not amounting to direct knowledge, would cause a reasonable person, knowing the same facts, to reasonably conclude the same thing. As per Section 26 of the IPC, 1860, “A person is said to have ‘reason to believe’ a thing, if he has sufficient cause to believe that thing but not otherwise.” ‘Reason to believe’ implies an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration. It has to be and must be that of an honest and reasonable person based on relevant material and circumstances.

Although the officer is not required to state the reasons for such belief before issuing an authorization for search, but he should disclose the material on which his belief was formed. ‘Reason to believe’ may not be recorded invariably in each case.

Relevant judicial pronouncements on ‘reason to believe’ in GST regime

• In RASHI PERIPHERALS PRIVATE LIMITED VERSUS UNION OF INDIA AND ORS.- 2021 (3) TMI 1086 - DELHI HIGH COURT, inspection was carried out at assessee’s premises and mismatch found between goods in stock and stock register due to which prohibitory order was issued. It was contended by the assessee that no opportunity was given to him to explain or reconcile the mismatch and that the prohibitory order was passed without there being any reason to believe that said goods were liable to confiscation. The court ordered that assessee shall be permitted to appears before the proper officer for reconciliation of books and physical stock.

• In RCI INDUSTRIES AND TECHNOLOGIES LTD THROUGH ITS DIRECTOR RAJEEV GUPTA VERSUS COMMISSIONER DGST DELHI & ORS. - 2021 (1) TMI 702 - DELHI HIGH COURT, petition was filed to challenge search action, in attempt to wriggle out of commitment made in statement during search action. It was held that reasons to believe shown to demonstrate that Appropriate authority had reasons, as per mandate of Section 67(2) of Delhi Goods and Services Tax Act, 2017 alongwith relevant Rules, for formation of belief to carry out search. Applying test of reasonable man, it cannot be said that no application of mind while issuing search warrant.

• In M/S. R.J. TRADING CO. VERSUS COMMISSIONER OF CGST, DELHI NORTH AND ORS. - 2021 (7) TMI 924 - DELHI HIGH COURT, what is crystal clear upon a perusal of the provisions of sub-sections (1) and (2) of Section 67 is that the expression “reasons to believe” controls the exercise of powers under the said provisions. Therefore, unless the basic jurisdictional facts exist, in a case, the power conferred under sub-sections (1) and (2) of Section 67 cannot be exercised. The expression “reasons to believe” is found in various statutes concerned with revenue laws, and therefore, has undergone a forensic analysis, metaphorically speaking, by Courts, in several cases. The width and amplitude of this expression have been expounded upon by Courts, in particular, the Supreme Court. Therefore, it is well-established that the expression reason to believe does not carry the same connotation as say reason to suspect; the standard of belief is that of a reasonable and honest person and not one based on surmises and conjectures, or mere suspicion. It is open to the concerned authority to form a prima facie view based on evidence that may be direct or circumstantial. In other words, the belief of the concerned authority should be based on some actionable material that he has had an opportunity to peruse. Furthermore, the material placed before the concerned authority, i.e., the proper officer should have nexus with the formation of the belief. [See : INCOME-TAX OFFICER, I WARD, DISTT. VI, CALCUTTA, AND OTHERS VERSUS LAKHMANI MEWAL DAS - 1976 (3) TMI 1 - SUPREME COURT; GANGA SARAN AND SONS PRIVATE LIMITED VERSUS INCOME-TAX OFFICER AND OTHERS - 1981 (4) TMI 5 - SUPREME COURT; and SYNFONIA TRADELINKS PVT. LTD. VERSUS INCOME TAX OFFICER, WARD-22 (4) - 2021 (3) TMI 1177 - DELHI HIGH COURT; [M/S. R.J. TRADING CO. VERSUS COMMISSIONER OF CGST, DELHI NORTH AND ORS. - 2021 (7) TMI 924 - DELHI HIGH COURT].

• In AJE INDIA PRIVATE LIMITED VERSUS UNION OF INDIA AND ORS. - 2020 (12) TMI 1047 - BOMBAY HIGH COURT, investigation was initiated under section 67 against the petitioner on the ground of mis-classification of goods which was based on custom tariff decided in various judgments. It was held that since there was no suppression of taxable transaction or contravention of any provisions to evade payment of tax and petitioner has already offered its assets to secure interest on revenue, it was held that there was no reason to believe trigger under section 67 of CGST Act, 2017.

In this case, the provisional attachment was also done during the pendency of proceedings under section 67. The court held that being possessed of power is one thing and exercise of such power is altogether another thing. Because the Commissioner is conferred with the power of provisional attachment under Section 83 it would not ipso facto mean that he can straight away proceed to provisionally attach any property including bank accounts of a taxable person merely on the ground of pendency of proceedings under section 67.

• In M/S. R.J. TRADING CO. VERSUS COMMISSIONER OF CGST, DELHI NORTH AND ORS. - 2021 (7) TMI 924 - DELHI HIGH COURT,, where a search was conducted by inspector of CGST based on authorization of Additional Commissioner which was further based on investigation of another agency, the court observed that there was no independent application of mind and therefore, search authorization was flawed and unsustainable in law, declared unlawful and order of seizure & prohibition were set aside.

• In MAA BHAGWATI SPONG IRON PVT. LTD., VERSUS THE UNION OF INDIA, THE COMMISSIONER (A.E.) , CGST AND OTHERS - 2021 (6) TMI 763 - PATNA HIGH COURT where a notice was issued under section 71 but search and seizure operations were carried out under section 67, it was held that intent, purpose and scope of both sections are distinct, independent and not subject to each other. However, the court directed the adjudicating authority to adjudicate the matter within three months.

• In P.V. RAO VERSUS SENIOR INTELLIGENCE OFFICER, DIRECTORATE GENERAL OF GST INTELLIGENCE & ORS. - 2020 (11) TMI 716 - DELHI HIGH COURT, the Petitioner was employed by Think and Learn Private Limited (Company) in the capacity of Chief Financial Officer (CFO). The company is engaged in the business of providing online courses, classes etc. through its website and mobile applications by the brand name “BYJU’S”. Respondent, the DGGSTI, carried out an investigation from 27th to 29th October 2020 under Section 67 of the CGST Act to the Company, for evasion of GST on books/printed material being supplied by the Company, by mis-declaring such supplies under an exempted category at Bengaluru.

The Petitioner’s statement was recorded on 28th October, 2020 from 2:00 pm to 6:00 pm. However, owing to his ill health and age-related morbidities, he fell severely unwell during the recording of his statement and accordingly consulted a doctor who prescribed medication and advised rest for three days.

Subsequently, Respondent summoned the Petitioner, requiring him to tender his statement and present evidence before him on 5th November, 2020 at New Delhi. The Petitioner represented that, owing to his ill health and the rising number of COVID-19 infections across the country, it was not safe for him to travel to New Delhi for the recording of his statement and requested that he be permitted to appear through video conference. The said request was declined and the Petitioner was directed to present himself for tendering statement on 10th November, 2020. The Petitioner once again vide letter dated 9th November, 2020 informed the authorities that he will be unable to appear on the said date, owing to health issues. In these circumstances, the Petitioner has approached the Court seeking a writ of Mandamus for directing Respondent to record his statement through video conference to summons issued under section 70 of the CGST Act.

The respondent contended that the investigation is ongoing and the Respondent wants to unearth the role of the Petitioner in the alleged tax evasion by the Company. The previous conduct of the Petitioner, at the stage of inspection when the officers of the Respondents were visiting Bengaluru, demonstrates that the Petitioner consistently avoided recording his statement on one pretext or the other. Thus, having regard to the past noncooperative conduct of the Petitioner, and the mere apprehension or fear of the Petitioner of contracting the COVID-19 infection, it would not like to interdict or interfere in the investigation process. No doubt, due to the recent outbreak of COVID-19, the Courts of this country including the Supreme Court as well as this Court have adopted measures to reduce the physical presence of the lawyers and litigants, and several socialdistancing guidelines had been issued by several health authorities as well as the Government of India. In this process, the use of modern technologies has been put to use for the dispensation of justice by the Courts. It was submitted that if the Petitioner’s statement was recorded through video conferencing, he can have a support system helping him and clarifications/answers can be motivated and influenced, which may adversely affect the ongoing investigation.

Thus, having regard to the past non-cooperative conduct of the Petitioner, and the mere apprehension or fear of the Petitioner of contracting the COVID-19 infection, the court would not like to interdict or interfere in the investigation process.

It was observed and held that the evidence being recorded at this stage would impact the entire investigation of tax evasion. The questioning during the investigation has to be based on evaluation and examination of documents. During the process of interrogation, the investigating agency may come across certain relevant facts and discoveries which are germane and crucial for concluding the investigation. Judicial interference at this threshold stage, in such matters relating to the investigation, has to be exercised with circumspection. The concept of balance of convenience, therefore, cannot be tilted in favor of the Petitioner to be allowed to appear through video conferencing, merely because traveling from Bengaluru to New Delhi would be a risk factor for the Petitioner of contracting COVID-19. This mere apprehension of contracting COVID-19 does not persuade the court to grant the relief sought for by the Petitioner. The petitioner was, therefore, dismissed as being devoid of any merit.

• In SURESH KUMAR P.P., ABOOBACKER SIDHIQUE VERSUS THE DEPUTY DIRECTOR DIRECTORATE GENERAL OF GST INTELLIGENCE (DGGI) , THE SUPERINTENDENT, ASSISTANT COMMISSIONER, SENIOR INTELLIGENCE OFFICER, RENN ABRAHAM - 2020 (10) TMI 670 - KERALA HIGH COURT it was held that recording of reason to believe is a requirement for authorization of search and not for seizure order. Further, simultaneous  proceedings of audit under section 65 and investigation proceedings under section 67 cannot be considered as defective.

• In M/S. SANWARIA SWEETS PRIVATE LIMITED VERSUS UNION OF INDIA, DIRECTORATE GENERAL OF GOODS AND SERVICE TAX INTELLIGENCE (DGGSTI) , NEW DELHI AND SH. RAJESH VERMA - 2019 (5) TMI 655 - RAJASTHAN HIGH COURT the instant Writ Petition was filed by the petitioner, M/s. Sanwaria Sweets Private Limited through its Director, Mr. Ajay Sharda inter alia with the prayer that the action of the officers of the respondent namely Directorate General of Goods and Services Tax Intelligence (‘DGGSTI’) in conducting search in the premises of the petitioner at Jaipur be declared arbitrary, malicious, motivated and illegal, being contrary to the provisions of the Central Excise Act, 1944 and also without jurisdiction. It is further prayed that the respondents be directed to return all the documents including original sale/title deeds of various immovable properties taken away on 27-8-2017 during the aforesaid search and the Union of India be directed to take action against the officers of the DGGSTI, in particular against Respondent Mr. RajeshVerma for indulging in vexatious search in the premises of the petitioner.

The brief facts of the case are that an intelligence report  was received in office of DGGSTI that activity of manufacturing Pan Masala of ‘NAZAR’ brand was being carried out by the petitioner in an unregistered premise in a remote location at a village resulting in huge evasion of central excise duty.

Simultaneous search operations were conducted at various premises, which unearthed incriminating documents/records revealing that one of directors of petitioner company was the real owner of unregistered factory and role of director in operation of such unregistered factory was apparent.

The High Court observed that it is trite that an error committed by the Officer in seizing the documents which may ultimately be found not to be useful for or relevant to the proceeding under the Act will not by itself vitiate the search. If prima facie there are grounds to justify the belief of the officer in conducting search, this Court would have no reason not to accept such belief, although it may or may not have entertained such belief. Whether or not the concerned official of the respondents had “reason to believe” cannot be scrutinised by the Court under “legal microscope, with an over-indulgent eye which sees no evil anywhere within the range of its eyesight”. In any case, all those documents, which have been seized, would undergo scrutiny of the concerned Court if and when prosecution is launched against the accused by filing charge sheet. It would not be appropriate for this Court to go into that question at this premature stage.

The court dismissed the petition, being devoid of merit.

• In RIMJHIM ISPAT LIMITED, JUHI ALLOYS LIMITED, L.D. GOYAL STEELS PVT. LTD. VERSUS STATE OF U.P. AND 3 OTHERS, AND 04 OTHERS, AND 2 OTHERS - 2019 (3) TMI 916 - ALLAHABAD HIGH COURT the petitioner had challenged the search and seizure operations carried out at factory as being illegal and against the legal provisions as a mala fide exercise of powers and against mandatory provisions of Section 67.

It was observed by the High Court that the officers concerned had recorded their ‘reasons to believe’ prior to authorizing the search. The ‘reasons to believe’ were based upon information received by the Department fortified by interception of the goods of the petitioner on 11.3.2018 wherein the e-way bill was found to be suspicious and it is based upon this perception that a reason to believe was formed by the Department which led to the search. The Department had ‘reasons to believe’ and, in pursuance of the said reasons, the search and seizure operations were carried as such the writ petition fails as regards in sufficiency of material for carrying out the search and seizure.

On the question of confiscation of goods and conveyance alongwith levy of penalty under Section 130 of the GST law, which was passed ex parte,, it was held that Section 130 of the Act confers the power to confiscate the goods, however, Section 130(4) clearly provides that opportunity of hearing shall be granted prior to passing the order on confiscation. In the present case, the petitioner had informed the authorities concerned to defer the adjudication on confiscation because the issue of validity of the search was engaging the attention of the High Court, despite the fact that there was no stay order restraining the respondents from passing the confiscation order but in all fairness as the hearing was going on at the High Court, the respondent authorities should have awaited the outcome of the challenge made to the search by the petitioner. Considering the view that the challenge by the petitioner to the search is being rejected, the confiscation order passed by Assistant Commissioner was to be quashed and matter remanded to adjudicate on the question of confiscation afresh, after giving an opportunity of hearing to the petitioner, in terms of the mandate given by Section 130(4) in accordance with law.

• In VALERIUS INDUSTRIES VERSUS UNION OF INDIA - 2019 (9) TMI 618 - GUJARAT HIGH COURT, the court observed as under:

36. "The statutory requirement of reasonable belief is to safeguard the citizen from vexatious proceedings."Belief" is a mental operation of accepting a fact as true, so, without any fact, no belief can be formed. It is equally true that it is not necessary for the authority under the Act to state reasons for its belief. But if it is challenged that he had no reasons to believe, in that case, he must disclose the materials upon which his belief was formed, as it has been held by the Supreme Court in Sheonath Singh's case [AIR 1971 SC 2451], that the Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court"

44. It would be a big mistake on the part of the respondents to understand that the reasons to believe necessary for the purpose of carrying out inspection, search and seizure under Section 67 of the Act, 2017 would be sufficient enough for the purpose of formation of the opinion that it is necessary to provisionally attach the goods or other articles for the purpose of protecting the interest of the government revenue. In our opinion, Section 83 of the Act stands altogether on a different footing. The considerations also are quite different for the purpose of exercising the power of provisional attachment under Section 83 of the Act. Just because, some proceedings are initiated under Section 67 by itself would not be sufficient to arrive at the satisfaction that it is necessary to provisionally attach the property for the purpose of protecting the interest of the government revenue. The power has been specifically conferred upon the Commissioner to form such an opinion. The legislature was quite alive to the fact that an order of provisional attachment cannot be as a matter of course. It is one of the drastic measures which the authority may be compelled to take if the situation demands for the purpose of protecting the interest of the government revenue. Under Section 67 of the Act, 2017, the legislature has thought fit to use the words "proper officer not below the rank of Joint Commissioner". In Section 83, even that discretion is taken away and it is only the Commissioner who has been empowered to act under Section 83 of the Act. In our opinion, therefore, the subjective satisfaction, which is required for the purpose of Section 83 of the Act, is not dependent on Section 67 of the Act or to put it in other words, just because, a search has been undertaken resulting in seizure of goods by itself may not be sufficient to arrive at the subjective satisfaction that it is necessary to pass an order of provisional attachment to protect government revenue."

• In M/S GOLDEN COTTON INDUSTRIES VERSUS UNION OF INDIA - 2019 (7) TMI 471 - GUJARAT HIGH COURT, the court held that the statutory requirement of reasonable belief, rooted in the information in possession of Proper Officer under the Act, is to safeguard the citizen from vexatious proceedings. 'Belief' is a mental operation of accepting a fact as true, so, without any fact, no belief can be formed. It is true that it is not necessary for the Proper Officer under the Act to state reasons for his belief. But if it is challenged that he  had no reasons to believe, in that case, he must disclose the materials upon which his belief was formed, as it has been held by the Supreme Court in SHEO NATH SINGH VERSUS APPELLATE ASSISTANT COMMISSIONER OF INCOME-TAX (CENTRAL) , CALCUTTA, AND OTHERS - 1971 (8) TMI 6 - SUPREME COURT, that the Court can examine the materials to find  out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court.