Santosh Kumar Gupta Prop. Mahan Polymers vs Commissioner, Delhi GST

The petitioner has filed the present petition principally challenging the search and inspection conducted at his business premises situated at 3460/1, Jai Mata Market, Tri Nagar, Delhi-110039, and Godown at E-285, Sector-4, Bawana, Delhi-110039, on 18.10.2022 under Section 67(1) of the Delhi Goods and Services Tax Act, 2017 (hereafter ‘the DGST Act’). The petitioner claims that during the course of the search and inspection, he was compelled to reverse the Input Tax Credit (hereafter ‘ITC’) amounting to ₹22,14,226/- on account of inadmissible ITC and shortage of cash. The petitioner claims that his statement was recorded at about 11:30 pm on 18.10.2022 and that he was forced to agree to reverse the ITC concerning certain suppliers whose registrations were stated to be canceled. The petitioner alleges that his statement, as well as the reversal of ITC, were made under duress while he was effectively under the control and supervision of the officers of the visiting team. The petitioner further claims that he was under significant stress during the interrogation, as the inspection had been ongoing since 4:00 pm earlier that day. Additionally, the petitioner asserts that although he had filed FORM GST DRC-03, there was no acknowledgment of receipt by the Department through the issuance of FORM GST DRC-04.

The petitioner also claims that the inspection conducted on 18.10.2022 was illegal because the authorization for the same (FORM GST INS-01 dated 18.10.2022) was issued without mentioning any specific reason. The first and foremost question to be examined is whether the inspection conducted by the Delhi GST Authorities was illegal due to the lack of proper authorization. According to the petitioner, the search and inspection conducted on 18.10.2022 under Section 67 of the DGST Act was illegal because the authorization for conducting the search (in FORM GST INS-01) mentioned all the reasons stated in Section 67(1)(a) of the DGST Act. The petitioner contends that the said authorization was issued mechanically and without the application of mind.

Rule 139(1) of the Central Goods and Services Tax Rules, 2017 (hereafter ‘the CGST Rules’) expressly requires that the authorization for conducting a search be issued in FORM GST INS-01. The petitioner argues that the form must specify the reasons for the search to ensure that it is not conducted arbitrarily. The petitioner maintains that the authorization issued on 18.10.2022 did not meet these requirements and therefore rendered the search and inspection unlawful. This mechanical issuance of authorization without specifying the necessary reasons undermines the legal process and violates the principles of natural justice, according to the petitioner. Furthermore, the petitioner points out that the authorities failed to provide any justification for the specific search and inspection, which further highlights the arbitrary nature of their actions.

In light of these circumstances, the petitioner seeks the court’s intervention to declare the search and inspection conducted on 18.10.2022 as illegal and to set aside the actions taken based on the unauthorized search, including the reversal of ITC. The petitioner emphasizes the undue stress and coercion faced during the inspection, which compromised his ability to make voluntary statements and decisions. The petitioner also requests that the court direct the GST authorities to issue proper acknowledgment for the submitted FORM GST DRC-03 and to adhere strictly to the procedural requirements outlined in the CGST Rules to prevent such occurrences in the future. This petition, therefore, raises critical questions about the adherence to legal procedures and the protection of taxpayers’ rights under the GST regime. The petitioner underscores the need for judicial oversight to ensure that tax authorities exercise their powers fairly, transparently, and in accordance with the law, safeguarding the integrity of the GST system and protecting businesses from arbitrary and coercive actions.

In the present case, respondent no. 3 issued the authorization dated 18.10.2022 by selecting all reasons (except that the taxpayer had availed of a refund) as set out in Clause ‘A’ of the said form. The reasons stated comprehensively align with those for issuing such authorization as set out in Section 67(1)(a) of the DGST Act. Therefore, it does not appear that the authorization was issued without specifically noting the relevant reason for the search. However, it is averred by the respondents—and not seriously contested by the petitioner—that the reasons for conducting the search/inspection on 18.10.2022 are recorded in the relevant files. The authorization in FORM GST INS-01 does not require the concerned officer to provide detailed reasons. It merely requires the officer to mention the reason for which the search/inspection is to be conducted under the statute. The detailed reasons are not required to be shared with the taxpayer before the search/inspection. However, the taxpayer is at liberty to request the same, and absent any reason to deny the request, the same ought to be provided to the taxpayer.

It is contended on behalf of the respondents that the inspection/search was conducted because the petitioner had availed of ITC from suppliers whose registrations were canceled. It is also affirmed in the counter affidavit that during the search, it was noticed that the petitioner had availed of ITC amounting to ₹2,39,40,871/- on account of purchases made from suppliers whose registrations were canceled. In view of the above, we find no merit in the contention that the search was illegal and without any reasons to believe that the conditions under Section 67(1)(a) of the DGST Act were satisfied. The second question to be examined is whether the petitioner is entitled to a refund of ITC deposited during the course of the search conducted on 18.10.2022. According to the petitioner, he was compelled to deposit a sum of ₹22,14,226/- by reversing the ITC available in his Electronic Credit Ledger (hereafter ‘the ECL’). The petitioner also claims that the statement to that effect, recorded on 18.10.2022, was made under duress and coercion.

Mr. Rajiv Aggarwal, learned counsel appearing for the respondents, countered the aforesaid submission on essentially two grounds. First, he submitted that the petitioner had not retracted the statement recorded on 18.10.2022 immediately after the search, and therefore, he is precluded from disputing that he voluntarily reversed the ITC amounting to ₹22,14,226/-. Mr. Aggarwal referred to the decision of the Coordinate Bench of this Court in RCI Industries and Technologies Ltd. through its Director Rajiv Gupta v. Commissioner, DGST Delhi & Ors.: 2021 SCC OnLine Del 3450, to substantiate his argument. The court in that case held that in the absence of a prompt retraction, statements recorded during search operations are presumed to be voluntary and correct. Given this precedent, the petitioner’s failure to immediately retract his statement undermines his claim of coercion.

Furthermore, Mr. Aggarwal argued that the petitioner’s voluntary compliance with the demand for ITC reversal indicates acknowledgment of the irregularities found during the search. The petitioner, therefore, bears the onus of proving that the reversal was made under duress, which he has failed to substantiate convincingly. The respondents assert that the procedural requirements under the DGST Act and CGST Rules were duly followed, and the petitioner was given ample opportunity to present his case during and after the search operation. The petitioner’s subsequent actions, including the delayed challenge to the ITC reversal, further weaken his case for refund.

In light of these arguments, the court must determine whether the petitioner’s claim of coercion holds merit and whether the procedural lapses alleged by the petitioner invalidate the actions taken during the search. The petitioner’s contention hinges on proving that the search authorization lacked specificity and that the ITC reversal was not a voluntary act. The respondents, on the other hand, maintain that the search was legally authorized and conducted in accordance with the statutory provisions, and the petitioner’s failure to retract his statement promptly signifies acceptance of the findings. Therefore, this court needs to balance the procedural propriety of the search operation with the petitioner’s right to a fair and just investigation, ensuring that the principles of natural justice are upheld in the adjudication of the present dispute.

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