Collection of Post-dated Cheques during Inspection not permissible under GST: Gujarat HC sets aside Provisional Attachment of Bank Accounts [Read Judgment]

In M/s. Remark Flour Mills Pvt. Ltd vs. State of Gujarat, the Gujarat High Court slammed the practice of collecting post-dated cheques during inspection is not permissible under the Goods and Services Tax ( GST ) laws.

The Court, while allowing a petition filed by the assessee, pointed out that the authority had failed to provide reasons for the exercise of such drastic power of attachments of bank accounts.

In the instant case, the departmental authorities visited the petitioners’ work premises and noticed that the petitioners were not paying any tax either on branded or unbranded goods. According to the petitioners, under threat and coercion, the departmental authorities collected three cheques for a total amount of Rs. 19.74 lacs. The petitioners, however, instructed the bank not to clear the cheques. Accordingly, when the departmental authorities produced such cheques for realization, they were returned by the bank. The departmental authorities had forcibly collected cheques even before the petitioners’ tax liability was ascertained.

Further, a show-cause notice was issued to the petitioners proposing to impose CGST and SGST amounting to Rs.36.88 lacs for the period between July 2017 and February 2018. The department also instructed the petitioner’s Banks not to allow the petitioners to operate the accounts without the permission of the department.

Thereafter on 19.03.2018, the adjudicating authority issued fresh notice under section 74(3) of the Central Goods and Services Tax Act calling upon the petitioners to show cause why a sum of Rs. 1.29 Crores towards CGST and SGST not be recovered from the period between July 2017 and February 2018.

The High Court, after considering the first issue, held that the practice of collecting post-dated cheques during the raid is not permissible means of collection of revenue. It noted that many High Courts have categorically frowned upon such practice. The decision of the Division Bench of the High Court in the case of Atul Motors Pvt. Ltd and Anr. vs. State of Gujarat and Anr. was referred. However, the Court distinguished such practice from the case in which the assessee voluntarily hand over cheques in order to avoid harsher measures of provisional attachments. Noting that in the instant case, the cheques were forcibly collected, the Court ordered to return the cheques to the petitioners.

Regarding the second issue, the court found that the two notices related to the same period of time. The second notice had enhanced the demanded penalty. The Court further observed that once a notice is issued with respect to a period of time under Section 74(1) of the Income Tax Act, 1961, then the authorities do not have the power to issue a second notice for the same period on the ground that the liability of tax, interest or penalty has enhanced. “Powers under sub-section (3) of section 74 cannot be exercised for expanding or enlarging the liability arising out of show-cause notice under sub-section (1) from the same period. Essentially, sub-sections (1) and (3) of section 74 are envisaged to cover separate periods.” said the Court.

Addressing the third issue, the Court noted that sub-section 1 of Section 83 of the Income Tax Act, 1961 empowers the authority to make provisional attachments during the pendency of any proceedings for the purpose of protecting the interest of Government revenue. However, the Court also pointed out that the same section stipulates the time period of one year, after the expiry of which the provisional attachment would cease to be in effect. The Court relied on the decision of the Division Bench in the case of Automark Industries (I) Ltd vs. the State of Gujarat, to understand the power of the authorities provided under Section 83 of the Income Tax Act, 1961.

Allowing the petition, the Court observed that the authority had failed to provide reasons for the exercise of such drastic power of attachments of bank accounts. The Court set aside the provisional attachments of the bank accounts, imposing two conditions namely – (1) Petitioner should maintain stock worth minimum sum of Rs.50 lacs till the final disposal of the case & (2) Petitioner shall file an undertaking to this effect.