GST Investigation, Search, Seizure and Arrest on Tax Evasion by Non-Proper Officer is Invalid: Karnataka HC [Read Order]

In a recent ruling, the Karnataka High Court has ruled that the non-proper officers cannot make any investigation, search, seizure and arrest on Good and Services Tax ( GST ) evasion. It is invalid. The court declared the notice void-ab - initio.

Justice M I Arun, referring to the GST provisions including 67, 70 and 74 observed that “it is only a proper Officer who can investigate into evasion of GST and inspection, search and seizure and arrest can be done only by the proper Officer failing which the same will have to be held invalid and based upon the inspection, search and seizure if the proper Officer comes to the conclusion that there is mens rea involved as contemplated under Section 74 of the CGST Act, he can issue a notice under Section 74 and not otherwise.”

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In this case, the petitioner is a transporter registered under the Central Goods and Services Tax Act, 2017 (CGST Act) and the Karnataka Goods and Services Tax Act, 2017 (KGST Act), was accused of evading GST by supplying arecanut to Gutkha manufacturers without paying the applicable tax.

The petitioner challenged the show cause notice issued by the authorities, arguing that the investigation was conducted by an officer who lacked the jurisdiction required under the GST laws.

The petitioner further contended that a payment of ₹50 lakh made during the investigation was under protest and sought its refund. While the respondents argued that the subsequent issuance of the show cause notice by a proper officer validated the proceedings, the court disagreed.

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It held that since the initial investigation, including search and seizure, was conducted by an improper officer, the subsequent proceedings were fundamentally flawed.

On the contrary, the respondents argued that while the majority of the investigation, inspection, search, and seizure were conducted by respondent no.2, respondent no.3, a proper officer, also recorded statements from the petitioner. They maintained that since the show cause notice was ultimately issued by a proper officer, respondent no.1, it should not be invalidated, even if the earlier actions were conducted by an improper officer.

The respondents' counsel cited the precedent of Pooran Mal v. The Director of Inspection (Investigation), New Delhi, where the Supreme Court allowed the use of evidence gathered during an investigation by an improper officer. They argued that, based on this ruling, despite the investigation, search, and seizure being conducted by an improper officer, the evidence could still be used, and the show cause notice issued by a proper officer should not be set aside.

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In response to the respondents' reliance on the Pooran Mal case, the petitioner argued that the decision did not render the search and seizure ab initio void, as it pertained to the use of evidence obtained from an illegal search in the context of income tax law, not GST.

The petitioner further contended that the Pooran Mal judgment was based on the legal principles established in A.K. Gopalan v. State of Madras, 1950, which was the prevailing law at the time but is no longer valid in light of subsequent developments in constitutional law.

The court observed that the majority of the investigation, including search and seizure of materials, was conducted by respondent no.2 (Commissioner of Central Tax), who was not a proper officer under the GST Act. As a result, the court deemed the investigation, inspection, search, and seizure to be void ab initio.

Consequently, the show cause notice issued under Section 74 of the CGST Act, based on the materials seized and the statements recorded by respondent no.2, was found to be illegal. The court noted that there was no independent satisfaction by the proper officer (respondent no.3-Principal Commissioner of Central Tax) for issuing the notice.

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Had the case been transferred to respondent no.3, they were required to redo the investigation and issue a fresh notice based on an independent conclusion. Respondent no.1 could not rely on the "borrowed satisfaction" from respondent no.2.

Therefore, the impugned notice was set aside, and the respondents were ordered to refund the ₹50,00,000 deposited by the petitioner and return the seized materials. The court also allowed the respondents the liberty to initiate appropriate legal action if necessary.

To Read the full text of the Order CLICK HERE

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