GST | Section 130 Cannot Be Invoked for Excess Stock Without Proof of Intent to Evade Tax: Allahabad High Court

Proceedings under Section 130 Cannot Be Initiated for Excess Stock Found During Survey; Sections 73 or 74 Must Be Followed -  High Court. Allahabad High Court, in the case S/S J.H.V. Steels Ltd. v. Union of India and 4 Others (Writ Tax No. 808 of 2024), delivered a significant judgment that clarified the proper legal provisions to be applied when excess stock is found during a survey. Justice Piyush Agrawal ruled that Section 130 of the Uttar Pradesh Goods and Services Tax Act, 2017 (UPGST Act), which pertains to confiscation, is not applicable in such cases. Instead, tax determination should be conducted under Sections 73 or 74 of the Central Goods and Services Tax Act, 2017 (CGST Act).

The petitioner, J.H.V. Steels Ltd., a manufacturer of iron and steel, challenged an order dated July 18, 2019, passed under Section 130 read with Section 122 of the UPGST Act and the subsequent appellate order dated August 19, 2023. The case arose from a survey conducted on November 30, 2018, at the petitioner’s premises, during which the authorities found excess stock. The petitioner contended that the stock was noted without proper physical verification or video documentation, and argued that the proceedings should have been initiated under Sections 73 or 74 for tax determination rather than under Section 130 for confiscation.

Applicability of Section 130 for Tax Determination: The core issue was whether Section 130, which deals with the confiscation of goods, could be applied solely because excess stock was found during a survey, or whether the correct procedure involved Sections 73 or 74, which govern tax assessment.

Survey and Verification Process: The petitioner argued that the stock documentation process during the survey was flawed, being based on eye estimation without video recording or proper verification.

The court, referencing previous cases such as S/s Dinesh Kumar Pradeep Kumar v. Additional Commissioner, Grade-2 and Metenere Limited v. Union of India, reiterated that proceedings under Section 130 are not applicable for mere discovery of excess stock unless there is clear intent to evade tax.

The court noted that Section 35(6) of the CGST Act mandates that when unaccounted goods are discovered, tax must be determined under Sections 73 or 74.

Justice Agrawal emphasized that for the application of Section 130, the authorities must establish contravention coupled with intent to evade tax, which was not demonstrated in this case.

Metenere Limited v. Union of India: The court held that Section 35(6) directs tax determination to follow Sections 73 or 74 when unaccounted goods are found.

S/s Dinesh Kumar Pradeep Kumar v. Additional Commissioner, Grade-2: Reinforced that excess stock discovered during a survey should not invoke Section 130.

M/s Shree Om Steels v. Additional Commissioner Grade-2: Stated that Section 130 should only be used when there is evidence of intentional tax evasion.

The court quashed the orders dated July 18, 2019, and August 19, 2023, ruling that they were unsustainable as they wrongly invoked Section 130 of the UPGST Act. The proceedings were directed to be conducted under Sections 73 or 74 for proper tax assessment.

This ruling clarifies the procedural application of GST provisions in cases of excess stock discovered during surveys. It upholds the principle that Sections 73 or 74 must be utilized for tax determination, not Section 130 unless there is intent to evade tax proven.

Date of Decision: October 24, 2024

S/S J.H.V. Steels Ltd. v. Union of India and 4 Others