Provisional Attachment under GST: Supreme Court clarifies powers in Radha Krishan Industries vs. State of Himachal Pradesh (2021)

Introduction

Date of the Judgment: 20 April 2021

Citation: (2021) INSC 228

Judges: Dr Dhananjaya Y Chandrachud, J and M R Shah, J

Can tax authorities provisionally attach a business’s assets, including bank accounts, merely on suspicion of tax evasion? The Supreme Court of India recently addressed this critical question in a case involving M/s Radha Krishan Industries and the State of Himachal Pradesh. The court’s decision clarifies the scope and limitations of the power to order provisional attachment under the Goods and Services Tax (GST) Act, emphasizing the need for fair procedures and substantive justification. This case is a landmark judgement that highlights the balance between protecting government revenue and safeguarding the rights of businesses.

Case Background

M/s Radha Krishan Industries, the appellant, manufactures lead and operates a factory in Himachal Pradesh since 2008. After the introduction of GST, the company registered under the new tax regime from 1 July 2017. On 3 October 2018, the tax authorities issued a notice to the appellant, requesting various documents related to their inward and outward supplies. Subsequently, on 10 October 2018, a ‘detection case’ was registered against one of the appellant’s suppliers, GM Powertech, for allegedly making fraudulent claims of input tax credit (ITC). The partners of GM Powertech were arrested on 3 December 2018.

The appellant received a memo on 15 December 2018, directing them to explain their ITC claims. The appellant responded on 17 December 2018, stating that their ITC claims were valid. On 9 January 2019, the tax authorities issued a provisional attachment notice to one of the appellant’s customers, Fujikawa Power, for an amount of Rs. 5 crores due to the appellant. This order was later withdrawn on 30 January 2019, after the appellant raised objections. On 4 July 2020, the tax authorities issued an intimation to the appellant, stating a tax liability of Rs. 5.03 crores. On 21 October 2020, the Commissioner of State Taxes and Excise delegated his powers under Section 83 of the Himachal Pradesh Goods and Service Tax Act, 2017 (HPGST Act) to the Joint Commissioner. Subsequently, on 28 October 2020, the Joint Commissioner issued orders provisionally attaching the appellant’s receivables from its customers, Fujikawa Power and M/s Deepak International, citing an ITC fraud of Rs. 5.03 crores. The appellant’s objections to these attachments were rejected on 6 November 2020, without a hearing. On 27 November 2020, a show cause notice was issued to the appellant under Section 74(1) of the HPGST Act for recovering the ITC, interest, and penalty. The appellant challenged the provisional attachment orders and the delegation of powers before the High Court, which dismissed the petition on the grounds of an alternative remedy.

Timeline:

Course of Proceedings

The High Court of Himachal Pradesh dismissed the writ petition filed by the appellant, challenging the provisional attachment orders. The High Court held that the appellant had an alternative remedy available under Section 107 of the HPGST Act, which provides for an appeal against orders passed by an adjudicating authority. The High Court stated that it would not entertain a petition under Article 226 of the Constitution if an efficacious remedy is available to the aggrieved person. The High Court also noted that a similar writ petition filed by GM Powertech was also dismissed, and that they had been relegated to avail the alternative remedy. The High Court concluded that the appellant should pursue an appeal under Section 107 of the HPGST Act instead of filing a writ petition.

Legal Framework

The case primarily revolves around the interpretation and application of Section 83 of the Himachal Pradesh Goods and Services Tax Act, 2017, which deals with provisional attachment to protect revenue in certain cases. This section states:

“83. Provisional attachment to protect revenue in certain cases. – (1) Where during the pendency of any proceedings under section 62 or section 63 or section 64 or section 67 or section 73 or section 74, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property, including bank account, belonging to the taxable person in such manner as may be prescribed. (2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order made under sub- section (1).”

The court also considered Rule 159 of the Himachal Pradesh Goods and Service Tax Rules, 2017, which outlines the procedure for provisional attachment of property. Specifically, sub-rule (5) of Rule 159 states:

“(5) Any person whose property is attached may, within seven days of the attachment, file an objection before the Commissioner that the property attached was or is not liable to attachment, and the Commissioner may, after affording an opportunity of being heard to the person filing the objection, release the property by an order in FORM GST DRC-23.”

The court also referred to other relevant sections of the HPGST Act, such as:

• Section 74, which deals with the determination of tax not paid 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 107, which provides for appeals to the Appellate Authority.
• Section 2(4), which defines “adjudicating authority”.

The legal framework also includes the general principles of natural justice and the constitutional provisions under Article 226, which empowers High Courts to issue writs.

Arguments

Appellant’s Submissions:

• Maintainability of the Writ Petition:

  • No effective alternative remedy exists against provisional attachment orders under Section 83 of the HPGST Act, as the GST Appellate Tribunal is not yet constituted.
  • The High Court should exercise its writ jurisdiction when there is a violation of fundamental rights, principles of natural justice, or when the order is without jurisdiction, as per Whirlpool Corporation v Registrar of Trademarks, Mumbai [(1998) 8 SCC 1].
  • The impugned orders were a review of earlier withdrawn orders, which is not permissible under the HPGST Act.
  • The third respondent violated Rule 159(5) of the HPGST Rules by not providing a hearing before rejecting objections to the provisional attachment.
  • The High Court’s reliance on the GM Powertech case was misplaced, as that case involved an assessment order, while this case involves provisional attachment orders.
  • The High Court should not dismiss a writ petition on maintainability if the facts are not disputed by the State, as held in Rajasthan State Electricity Board v Union of India [2008 (5) SCC 632].
  • The High Court can exercise its powers under Article 226 to prohibit tax officers from assessment if the conditions precedent to the exercise of jurisdiction have not been met, as per Calcutta Discount Co. Ltd. v Income Tax Officer, Companies District I, Calcutta [AIR 1961 SC 372] and Commissioner of Income Tax, Gujarat v M/s A Raman and Co. [AIR 1968 SC 49].

• Improper Invocation of Section 83:

  • The power of provisional attachment under Section 83 is a drastic power and must be exercised with extreme caution.
  • The power under Section 83 cannot be exercised unless there is sufficient material to justify that the assessee is about to dispose of its property to thwart the collection of tax.
  • The third respondent failed to show any material to indicate that the appellant is a “fly by night operator” or is disposing of assets to defeat tax collection.
  • The initiation of proceedings under Section 74 against the appellant’s supplier, GM Powertech, is insufficient to invoke provisional attachment against the appellant.
  • The appellant has paid more output tax than the allegedly fraudulent ITC claimed.
  • Attachment of bank accounts and trading assets should be a last resort.
  • Pendency of proceedings under Sections 62, 63, 64, 67, 73, or 74 of the HPGST Act is a pre-condition for invoking Section 83.
  • The provisional attachment was made before proceedings were initiated against the appellant under Section 74.
  • Section 83 does not allow provisional attachment a second time after the first is withdrawn, and the HPGST Act does not grant review powers.
  • Provisional attachment of 100% of the alleged amount is not permissible.
  • The third respondent has taken a contradictory stand regarding tax collection from the appellant.
  • Refusal to grant ITC to the appellant after confirming the tax demand against GM Powertech amounts to double collection of tax.

State’s Submissions:

• The SLP should be dismissed as the appellant has an alternative remedy of appeal under Section 107 of the HPGST Act.
• The SLP has become infructuous due to the order dated 18 February 2021 under Section 74(9) of the HPGST Act.
• The delegation of powers under Section 83 does not imply an irregular exercise of jurisdiction.
• The order under Section 74(9) against GM Powertech has gained finality, and since all purchases of GM Powertech were fraudulent, the transaction between GM Powertech and the appellant was also fraudulent.
• The orders of provisional attachment were issued after proceedings against GM Powertech concluded.
• GM Powertech had no property or business establishment in Himachal Pradesh, and the attachment was necessary to protect revenue.
• The appellant participated in proceedings under Section 83 and did not challenge the orders of provisional attachment.
• The orders were based on a fresh set of allegations.
• Granting an opportunity of hearing after objections was at the discretion of the Commissioner.
• Payment of tax by the appellant does not imply that they did not engage in ITC fraud.
• There was no violation of natural justice as provisional attachment does not require prior notice.
• Necessary prerequisites for triggering Section 83 were complied with.
• The provisional attachment is not only for recovery but to safeguard revenue while proceedings are pending.
• The legislature did not provide any quantum or percentage for provisional attachment under Section 83.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether a writ petition challenging the orders of provisional attachment was maintainable under Article 226 of the Constitution before the High Court.
2. If the answer to (i) is in the affirmative, whether the orders of provisional attachment constitute a valid exercise of power.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered various authorities to arrive at its decision. These authorities are categorized by the legal points they address.

On Maintainability of Writ Petitions:

• Whirlpool Corporation v Registrar of Trademarks, Mumbai [(1998) 8 SCC 1] – Supreme Court of India: The court reiterated that the High Court can exercise its writ jurisdiction when there is a violation of fundamental rights, principles of natural justice, or when the order is without jurisdiction.
• Harbanslal Sahnia v Indian Oil Corpn. Ltd. [(2003) 2 SCC 107] – Supreme Court of India: The court held that the rule of exclusion of writ jurisdiction by availability of an alternative remedy is a rule of discretion and not one of compulsion.
• Seth Chand Ratan v Pandit Durga Prasad [(2003) 5 SCC 399] – Supreme Court of India: The court upheld the principles regarding the High Court’s power under Article 226.
• Babubhai Muljibhai Patel v Nandlal Khodidas Barot [(1974) 2 SCC 706] – Supreme Court of India: The court reiterated the principles regarding the High Court’s power under Article 226.
• Rajasthan SEB v. Union of India [(2008) 5 SCC 632] – Supreme Court of India: The court held that the High Court should not dismiss a writ petition on maintainability if the facts are not disputed by the State.
• Assistant Commissioner (CT) LTU, Kakinada and others v Glaxo Smith Kline Consumer Health Care Limited [AIR 2020 SC 2819] – Supreme Court of India: The court noted that a High Court must not entertain a petition under Article 226 when an effective alternate remedy is available in law.

On Provisional Attachment:

• Raman Tech Process Engg Co and Anr v Solanki Traders [2008(1) R.C.R.(Civil) 195] – Supreme Court of India: The court described the power of attachment before judgment as a drastic and extraordinary power that should be used sparingly.
• Valerius Industries v Union of India [2019 (30) GSTL 15 (Gujarat)] – Gujarat High Court: The court laid down the principles for the construction of Section 83 of the SGST/CGST Act, emphasizing that provisional attachment must be based on credible material.
• Jai Ambey Filament Pvt Ltd v Union of India [2021 (44) GSTL 41 (Gujarat)] – Gujarat High Court: The court reiterated that the subjective satisfaction for provisional attachment must be based on credible information.
• Patran Steel Rolling Mill v Assistant Commissioner of State Tax Unit 2 [2019 (20) GSTL 732 (Gujarat)] – Gujarat High Court: The court cited instances where provisional attachment would be appropriate, such as when the assessee is a ‘fly by night operator’.
• Bindal Smelting Private Limited v Addl. Director General of GST Intelligence [2020 (34 G.S.T.L 592 (P&H)] – Punjab and Haryana High Court: The court recognized the restrictive nature of provisional attachment under Section 83 of the SGST Act.
• Society for Integrated Development of Urban and Rural Areas v Commissioner of Income Tax, A.P. II, Hyd [2001 (252) ITR 642] – Andhra Pradesh High Court: The court recognized the restrictive nature of provisional attachment under Section 83 of the SGST Act.
• Vinod Kumar Murlidhar Prop. Of Chechani Trading Co v. State of Gujarat [Special Civil Application No. 12498 of 2020 dated 9 December 2020] – Gujarat High Court: The court recognized the restrictive nature of provisional attachment under Section 83 of the SGST Act.
• Proex Fashion Private Limited v Government of India [WP(C) 11245 of 2020 dated 6 January 2021] – Delhi High Court: The court outlined the conditions for invoking Section 83 of the SGST Act.
• UFV India Global Education v Union of India [2020 (43) GSTL 472] – Punjab and Haryana High Court: The court held that pendency of proceedings under the sections mentioned in Section 83 is a prerequisite for provisional attachment.
• Kaish Impex Private Limited v Union of India [(2020) 6 AIR Bom R 122] – Bombay High Court: The court held that the proceedings referred to under Section 83 must be pending against the taxable entity whose property is being attached.

On Delegation of Authority:

• Nathanlal Maganlal Chauhan v State of Gujarat [2020 SCC Online Guj 1811] – Gujarat High Court: The court considered the validity of a notification delegating powers under the SGST Act.

On Interpretation of Tax Laws:

• Commissioner of Income Tax v Kelvinator of India Limited [(2010) 2 SCC 723] – Supreme Court of India: The court held that the power to reopen an assessment must be conditioned on the existence of “tangible material”.
• Income Tax Officer, Ward No. 162 (2) v Techspan India Private Limited [(2018) 6 SCC 685] – Supreme Court of India: The court followed the principle that the formation of opinion must be based on tangible material.
• Vishwanath Realtor v State of Gujarat [Special Civil No. 7210 of 2015, decided on 29 April 2015] – Gujarat High Court: The court observed that the satisfaction for provisional attachment must be on some tangible material on objective facts.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Whirlpool Corp. [CITATION]: The court relied on this case to emphasize the High Court’s power to exercise writ jurisdiction in cases of fundamental rights violation, natural justice breaches, and jurisdictional errors.
• Harbanslal Sahnia [CITATION]: The court reiterated that the rule of alternative remedy is discretionary, not compulsory.
• Raman Tech Process Engg Co [CITATION]: The court used this case to highlight the drastic nature of attachment powers, requiring cautious and sparing use.
• Valerius Industries [CITATION]: The court adopted the principles laid down in this case for the construction of Section 83, emphasizing the need for credible material for provisional attachment.
• Kaish Impex [CITATION]: The court relied on this case to emphasize that proceedings under Section 83 must be against the taxable person whose property is being attached.
• Kelvinator of India [CITATION]: The court adopted the test of “tangible material” for forming an opinion, as laid down in this case.
• Vishwanath Realtor [CITATION]: The court adopted the test of “tangible material” for forming an opinion, as laid down in this case.

What weighed in the mind of the Court?

The Supreme Court’s decision in Radha Krishan Industries vs. State of Himachal Pradesh was heavily influenced by the need to ensure that the power of provisional attachment under the GST Act is exercised fairly, transparently, and within the boundaries of thelaw. Several factors weighed heavily on the court’s mind:

• Drastic Nature of Provisional Attachment: The court recognized that the power to attach a business’s assets provisionally is a drastic measure that can have severe consequences for the business. It emphasized that such power should be used sparingly and with extreme caution. The court was mindful that provisional attachment could disrupt business operations, cause financial losses, and damage the reputation of the business. Therefore, it was essential to ensure that this power was not used arbitrarily or without sufficient justification.

• Need for Tangible Material: The court stressed that the decision to provisionally attach property must be based on credible and tangible material. Mere suspicion or general allegations of tax evasion were not sufficient. The court emphasized that tax authorities must have concrete evidence to believe that the assessee is likely to dispose of their assets to evade tax collection. The lack of such tangible material in the case of Radha Krishan Industries was a key factor in the court’s decision to set aside the attachment orders.

• Compliance with Principles of Natural Justice: The court was concerned that the tax authorities had violated the principles of natural justice by not providing the appellant with an opportunity to be heard before rejecting their objections to the attachment. The court noted that Rule 159(5) of the HPGST Rules clearly mandates that a person whose property is attached must be given a chance to present their case. The failure to adhere to this fundamental principle of fairness was a significant factor in the court’s decision.

• Proper Invocation of Section 83: The court was critical of the fact that the provisional attachment was ordered before any proceedings were initiated against the appellant under Section 74 of the HPGST Act. The court clarified that Section 83 requires the pendency of proceedings under specified sections of the Act before the power of provisional attachment can be exercised. The court also noted that the provisional attachment was issued on the same grounds as a previous attachment which was withdrawn, thus being a review of the earlier order which is not permissible under the Act. This demonstrated a lack of due process and a misapplication of the law.

• Availability of Effective Alternative Remedy: The court addressed the issue of whether the appellant had an effective alternative remedy. It noted that the GST Appellate Tribunal was not yet constituted, and therefore, an appeal under Section 107 of the HPGST Act was not a viable option. This lack of an effective alternative remedy was a factor in the court’s decision to allow the writ petition under Article 226 of the Constitution.

• Protection of Taxpayer Rights: The court emphasized the need to protect the rights of taxpayers. It noted that the power of provisional attachment should not be used as a tool to harass or intimidate businesses. The court stressed that tax authorities must act responsibly and within the framework of the law. The court’s decision was aimed at ensuring that tax authorities do not overreach their powers and that taxpayers are treated fairly.

Decision

The Supreme Court allowed the appeal and set aside the judgment of the High Court and the orders of provisional attachment issued by the Joint Commissioner. The court held that the High Court had erred in dismissing the writ petition on the ground of an alternative remedy. The court also held that the orders of provisional attachment were not a valid exercise of power under Section 83 of the HPGST Act. The court noted the following:

• The order of provisional attachment was issued by the Joint Commissioner as a delegate of the Commissioner and was not appealable under Section 107(1) of the HPGST Act.
• The Joint Commissioner did not form the required opinion based on tangible material.
• The Joint Commissioner violated the principles of natural justice by not providing a hearing to the appellant.
• The attachment order was issued before proceedings under Section 74 were initiated against the appellant.
• The provisional attachment was issued on the same grounds as a previous attachment which was withdrawn, thus being a review of the earlier order.

The Supreme Court also clarified that the power of provisional attachment under Section 83 of the GST Act is a drastic power and must be exercised with extreme caution. The court emphasized that the power cannot be exercised unless there is sufficient material to justify that the assessee is about to dispose of its property to thwart the collection of tax.

Flowchart of the Supreme Court Decision

Conclusion

The Supreme Court’s decision in Radha Krishan Industries vs. State of Himachal Pradesh is a landmark judgment that clarifies the scope and limitations of the power to order provisional attachment under the Goods and Services Tax (GST) Act. The court’s decision emphasizes the need for fair procedures, substantive justification, and adherence to the principles of natural justice when exercising this power. This judgment serves as a reminder to tax authorities that the power of provisional attachment is not to be used arbitrarily or without due regard for the rights of taxpayers. The key takeaways from this case are:

• Provisional attachment is a drastic power: It should be used sparingly and with extreme caution.
• Tangible material is required: The decision to attach property must be based on credible and tangible material, not mere suspicion.
• Natural justice must be followed: Taxpayers must be given an opportunity to be heard before their objections to attachment are rejected.
• Proper invocation of Section 83 is essential: Attachment can only be ordered when proceedings under specified sections of the GST Act are pending against the taxpayer.
• High Courts can intervene: High Courts can exercise their writ jurisdiction when there is a violation of fundamental rights, principles of natural justice, or when the order is without jurisdiction.
• Taxpayer rights must be protected: The power of provisional attachment should not be used to harass or intimidate businesses.

This judgment has significant implications for both tax authorities and taxpayers. It provides a clear framework for the exercise of the power of provisional attachment and ensures that the rights of taxpayers are protected. It serves as a guide for tax authorities to act responsibly and within the boundaries of the law.

This case also highlights the importance of the GST Appellate Tribunal being constituted at the earliest, so that taxpayers can have an effective alternative remedy against orders passed by tax authorities.