Dept cannot retain Tax Deposited During Search Till  Adjudication of Notice: Punjab and Haryana HC [Read Order]

In a significant case, the Punjab and Haryana High Court has held that deposits of tax during searches cannot be retained by the department until the adjudication of the notice.

Modern Insecticides Ltd., the petitioners sought a refund of an amount of Rs.2.54 crores and supply copies of Panchnama dated 05.03.2020 and 15.01.2021 along with other electronic gadgets, including mobiles, resumed from the premises of the petitioner.

Officials of the respondents searched the factory premises of the petitioner and resumed the entire record lying there. On 07.03.2020, they got deposited a sum of Rs.39,15,583/-.  The respondents conducted the second search on 15.01.2021 and took away the Director and Chartered Accountant of the petitioner to their office at Rishi Nagar, Ludhiana.

The department detained Mr Avtar Singh, Director and Mr Sahil Sharma, Chartered Accountant of the petitioner till 1.00 A.M. They were released on the condition of a deposit of Rs.2.15 crores, which was deposited through a reversal of Input Tax Credit (ITC) from electronic credit ledger and surrender of refund already applied.

The respondents did not supply copies of Panchnama, copies of the resumed record and electronic gadgets, which are necessary to file returns and comply with the requirement of banks. The petitioners have taken a plea that as per Section 16 of the Central Goods and Service Tax Act (CGST) Act, 2017 read with Rule 36 of CGST Rules, 2017, a registered person may avail of Input Tax Credit (ITC) of inputs which are used in the furtherance of business.

The ITC under CGST is principally the same as Cenvat Credit Scheme under Central Excise Act, 1944 read with Cenvat Credit Rules, 2004.  The Cenvat Credit Rules recognized only two stage dealers i.e. first stage dealer and second stage dealer. 

The petitioner is a manufacturer of pesticides for the last more than 30 years and is purchasing inputs to manufacture finished goods. The petitioner is selling its product in the domestic market as well as exporting out of the country.

The question before the court was whether the amount paid by the petitioner on January 16, 2021, could be retained by the department without issuing the show cause under Section 74 (1) of the CGST Act, and that too after the expiration of two years.

The Punjab and Haryana High Court Bench observed that the amount was deposited during the search and cannot be taken to be voluntary. Since no proceedings under Section 74 (1) of the CGST Act have been initiated to date, the department cannot even issue Form GST DRC-01A to ask the petitioner to make payment of tax, interest, and penalties due.

The two-judge bench of Justice Ritu Bahri and Justice Kuldeep Tiwari has directed the department to return the amount of Rs.2.54 crores to the petitioner(s) along with simple interest at the rate of 6% per annum from the date of deposit till the payment is made. 

To Read the full text of the Order CLICK HERE

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