ATTACHMENT OF BANK ACCOUNTS – NOT TO BE IN THE NATURE OF DRASTIC MEASURE FOR A TEMPORARY PERIOD AND CANNOT BE EXERCISED IN A ROUTINE MANNER

[Mr. M. GOVINDARAJAN]

In ‘Remark Flour Mills Private Limited v.  State of Gujarat’ – 2018 (4) TMI 1292 - GUJARAT HIGH COURT the petitioner company is engaged in the supply of wheat flour, meslin flour, cereal flour etc.,. They are supply such goods in packets which are branded as well as unbranded.  The packing of more than 25 Kgs. are branded while the others are unbranded.

The Departmental officers visited the petitioners on 20.02.2018 and noticed that the petitioners were not paying GST either on branded or unbranded goods.  Under coercion the Authorities collected three cheques for a mount of ₹ 19.47 lakhs.  The Revenue remitted the cheque which was returned back since the petitioner instructed the bank not to clear the cheques.

On 27.02.2018 the Department issued a show cause notice calling upon the petitioners why CGST and SGST to the tune of ₹ 36.88 lakhs not be recovered for the period from July 2017 to 20.02.2018.   On that date the Officers advised the bank that they are provisionally attaching the accounts of the petitioner.  The banks were further advised to not to transact with the petitioner without the permission of the department.  On 19.03.2018 the Adjudicating Authority issued a fresh show cause notice under section 74(3) of CGST Act calling the petitioner to show cause why a sum of ₹ 1.29  crores towards CGST and SGST not be recovered from the period July 2017 to 20.02.2018. 

The petitioner, before the High Court challenged the following-

• The Departmental authorities forcibly collected cheques even before the petitioner’s tax liability was ascertained;
• The second show cause notice issued is without jurisdiction and the same shall be quashed.
• The provisional attachment of the bank accounts by the Authorities;

First grievance

The High Court in respect of the first grievance of the petitioner that the Departmental authorities forcibly collected cheques even before the tax liability of the petitioner was ascertained.   In this respect the High Court held that the action of the department cannot be countenanced.  The collection of post dated cheques under coercion during raid is not permissible when no tax has been confirmed or crystallized.  This is not to suggest that if the assessee voluntarily gives such cheques in order to avoid harsher measures of provisional attachment of premises, stock or bank accounts, the High Court held that the action of the authorities must fail in such a case. The High Court found that there did not appear to be any justification of the departmental authorities to collect and the petitioners to voluntarily give cheques. The High Court, therefore directed the department to return such cheques to the petitioner.

Second grievance

The second grievance of the petitioner is on the second show cause notice issued on the petitioner by the Department.  The High Court found that the Adjudicating Authority had already issued a show cause notice on 27.02.2018 asking the petitioner to show cause why for the period between July 2017 and 20.02.2018 unpaid CGST and SGST of ₹ 30.88 lakhs not be recovered.   The second notice issued by the authorities also related to the said period in the first show cause notice.  The second show cause notice is for the demand of ₹ 1.29 crores.

The High Court analyzed the provisions of Central Goods and Services Tax Act, 2017.  Section 73 of the Act pertains to the determination of tax unpaid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or willful misstatement or suppression of facts.   Section 74 of the Act provides for determination of unpaid tax or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts.

Section 74(1) of the Act provides that if the proper officer would issue notice for recovery of unpaid tax on account of fraud, willful misstatement or suppression of facts why the amount specified in the notice should not be recovered with interest and penalty.  Section 74(2) provides for time limit for issuance of such notice.  Section 74(3) provides that the proper officer is to serve a statement containing the details of tax unpaid, short paid or erroneously refunded for a period other than covered under section 74(1) where a notice has been issued for any period.   Thus section 74(3) cannot be exercised for expanding or enlarging the liability arising out of show cause notice under section 74(1) from the said period.   Section 74(1) and 74(3) are envisaged to cover separate periods.

The High court held that the respondents are wholly incorrect in issuing a fresh show cause notice for the same period of July 2017 to 20.02.2018 which notice was already issued under section 74(1) of the Act.  The remedy to the Department does not lie in issuing second show cause notice under section 74(3) of the Act.   The High Court quashed the impugned second show cause notice dated 19.03.2018.

Third grievance

The third grievance of the petitioner is attaching the bank accounts provisionally by the Department.  The High Court analyzed the provisions of provisional attachment in the Act.  Section 83(1) of the Act provides that the competent Authority has the power if he is of the opinion that for the purpose of protecting the interest of Government revenue, it is necessary so to do.  Such provisional attachment could be of any property including the bank account of the taxable person.  Section 83(2) provides that every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of which such order has been made.

The High Court relied on the judgment in ‘Automark Industries (I) Limited V. State of Gujarat [ 2015 (3) TMI 258 - GUJARAT HIGH COURT ]’ – 2014 SC Online Gujarat 14217.  The Supreme Court held with reference to VAT Act, the following, on the power of provisional attachment by the Department-

• The power of provisional attachment is in the nature of extraordinary measure available to the revenue authorities for the purpose of protecting the interest of Government revenue.
• Even before any assessment is made, such powers can be exercised if the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary to do so.
• This power is of drastic nature which is coupled with the duty to exercise such power with due care and in appropriate cases.
• The Authority exercising such powers must have a strong prima facie case to show that upon ultimate conclusion of the assessment, there is a likelihood of tax, interest and/or liability being attached on a dealer and further that pending such consideration, it is necessary in the interest of Government revenue to pass order of provisional attachment.
• Such powers cannot be exercised in a routine manner in every case of reopening of assessment.
• Where the nature of the power is drastic, the Court’s scrutiny in the sufficiency of reasons would necessarily be more incisive.

The High Court observed that nothing is demonstrated by the Department either in the orders of attachment or in the affidavit filed before the High Court and not indicated why exercise of such drastic power of attachment of bank accounts was necessary.  The High Court set aside the order for provisional attachments.  At the same time, the High Court would like to provide some security so that eventually, if the tax liability is confirmed, the department is not left with no means to recover the same.

The High Court directed the petitioners to maintain at all time a stock worth minimum sum of ₹ 50 lakhs till the final disposal of the adjudication proceedings arising out of show cause notice dated 27.02.2018 and the petitioner is to file an undertaking before the Court in this regard.