In this era of digitisation, self-assessment, self-compliance, self-policing and self-vigilance, recovery provisions of taxes are directed to act as deterrence tools rather than being tyrannical. In a democratic set-up with a progressive vision of nation-building, these provisions are considered as a measure of last resort, adopted only in extreme cases. Yet, in the GST scheme of things attachment provisions have been invoked on multiple occasions and the taxpayers have faced the wrath of this power, especially in cases of fake invoicing. This article discusses the attachment provisions under GST with specific reference to attachments of bank accounts and debtors of tax defaulters.
CONSTITUTIONAL BACKGROUND
The recovery provisions have a Constitutional background in terms of Articles 265 and 300-A. Article 265 sets out the cardinal rule that no taxes can be levied or collected except under authority of law. Recovery provisions fall under the powers of collection by the Executive of the state. On similar lines, Article 300-A protects the right of ownership of the property of the citizen except under authority of law. These articles when applied together frame two important principles under recovery: (a) Taxes recoverable should be under authority of law; and (b) Recovery process infringes ownership rights and should be backed by legal provisions. In District Mining Officer vs. Tata Iron & Steel Co. and Anr. (2001) 7 SCC 3581 , the three-judge Bench observed that not only should the levy of taxes have the authority of law but also its recovery should be under due authority of law. It is in this backdrop that recovery provisions under the GST law should be understood and applied by Revenue authorities.
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1 This
decision has been referred to the larger Bench in Asst. Director of Mines
and Geology vs. Deccan Cements (2008) 3 SCC 451
SUMMARY OF GST PROVISIONS ON RECOVERY
Chapter 15 of the CGST / SGST enactments provide for demands and recovery of taxes. Recovery proceedings can be initiated under the following circumstances:
(i) Taxes not paid, short paid or erroneously refunded,
(ii) Ineligible availment or utilisation of input tax credit,
(iii) Taxes which are not due but collected on supplies,
(iv) Admitted taxes (including turnover reported in GSTR1)2,
(v) Disputed taxes (to the extent of mandatory pre-deposit),
(vi) Disputed taxes to the extent stay is not obtained, and
(vii) Interest and penalties on all or any of the above.
Section 78 provides that recovery proceedings can be initiated at any time after three months from the date of service of the demand order. This time limit coincides with the maximum time limit of three months to file an appeal before the appellate forums. In effect, if the assessee fails to utilise the time to file an appeal within the prescribed limit, it is generally presumed that the matter is not being agitated and powers are thrust on the Revenue to proceed for recovery of taxes due to the Government. As an exception, section 78 permits the proper officer to advance the recovery actions where the circumstances warrant that the collection of taxes may be adversely affected if the entire duration of three months is permitted to the assessee, such as disposal of assets, diversion of funds, etc.
Section 79 provides for various methods of recovery of taxes such as:
(1) Adjustment of refunds held by the said proper officer or any other specified officer,
(2) Sale of goods under detention by the above authorities,
(3) Garnishee proceedings (evaluated below),
(4) Distraint and sale of any movable or immovable property,
(5) Recovery as land revenue, and
(6) Recovery of any amount under bond or security executed before the officer.
Garnishee powers u/s 79 enable the proper officer to serve upon the taxpayer’s debtors (banks, trade debtors / receivables, etc.) a notice (in DRC-14) directing them to deposit the amount specified to the account of the Government and such deposit would be treated as a sufficient discharge of their debt to the taxpayer. Although the Revenue has powers to recover taxes from other assets of the taxpayer, the circumstances may warrant that Revenue would have to protect its interest before the assets are alienated by the taxpayer. In such cases, Revenue would resort to attachments of the properties of the taxpayer in anticipation of a demand to be recovered in future.
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2 Amendment proposed by Finance Bill, 2021
RECOVERY POWERS ARE NOT SEQUENTIAL
The CGST Act provides multiple alternatives to the Revenue officials for recovery of taxes which include attachment of properties (refer above). Are Revenue officials required to exhaust the remedies sequentially prior to proceeding for attachment of properties? Section 79 itself states that recovery can be performed by ‘one or more of the following modes’. This implies that the choice of modes of recovery is purely with the Revenue and it cannot be insisted that each mode has to be exhausted prior to proceeding with an alternative mode of recovery3. Revenue can simultaneously invoke recovery from multiple debtors / assets as long as the overall recovery is capped to the tax arrears.
ATTACHMENT AS A PRECURSOR TO RECOVERY
Attachments of property of the tax defaulter can be a prelude to subsequent recovery of tax arrears. ‘Attachment’ in this context refers to prohibition of transfer, conversion, disposition or movement of property by an order issued under law. It is used to hold the property for the payment of debt [Kerala State Financial Enterprises vs. Official Liquidator (2006) 10 SCC 709]. It is also well established that attachment creates no charge or lien upon the attached property. It only confers a right on the holder to have the attached property kept in custodia legis for being dealt with by the Court in accordance with law. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. The objective is to protect the interest of Revenue until completion of proceedings and enforcing realisation of taxes in arrears to the debtor. On the other hand, the process of recovery involves the actual realisation / liquidation of the property for meeting the tax dues either from assets already under attachment or other properties of the tax defaulter.
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3 2000 (126) E.L.T. 222 (A.P.) G.
Lourdha Reddy vs. District Collector, Warangal
Attachment of fixed deposits before the maturity date
Disputes have emerged whether Revenue can attach and recover fixed deposits prior to their maturity. In Vysya Bank Ltd. vs. Jt. CIT [2000] 109 Taxman 106/241 ITR 178 (Kar.), the Court held that fixed deposits which are lying with banks can be encashed even before their maturity since the Department steps into the shoes of the tax defaulter and can invoke pre-closure of such deposits. On the other hand, rents which are not yet due from the landlord cannot be subjected to attachment or recovery from the debtor.
Attachment of Overdraft / Cash Credit accounts
Overdraft / Cash Credit facilities do not create a debt by the third party in favour of the tax defaulter. Therefore, unutilised overdraft or cash credit facilities cannot be attached by the Revenue for realisation of tax dues. In a recent decision, the Court went a step further and stated that future credits after attachment would also not be subjected to the freeze contemplated in law [2020 (5) TMI 193 – RCI Industries & Technologies Ltd. vs. DGGSTI] – ‘6. In the circumstances, we dispose of this petition with a direction that the attachment would be limited to the amounts which were lying to the credit of the petitioner in CC A/c at the time of freezing and any further credit which may come would not be under attachment.’
Provisional attachment of property
As an exception to the regular course of attachment after confirmation of tax demands, section 83 enables provisional attachment of any property, including bank accounts, of the taxable person for a maximum period of one year during pendency of adjudication / assessment proceedings (as per extant provisions). Rule 159 provides the procedure for provisional attachment of any property, including bank accounts, as follows:
* Commissioner shall pass an order in DRC-22 to that effect mentioning therein the details of the property which is proposed to be provisionally attached,
* Commissioner shall send a copy of the order of attachment to the authority concerned to place encumbrance on the said movable or immovable property, which shall be removed only on the written instructions from the Commissioner to that effect,
* In case of perishable or hazardous goods, the taxable person can obtain an immediate release of the goods on payment of the market price. In case of failure of payment, such goods may be disposed of and adjusted with the recoverable dues, and
* Any objection to attachment should be filed within seven days of attachment and the Commissioner may release the property after hearing the aggrieved.
Drastic nature of provisional attachment
The power of provisional attachment has been held to be drastic in the sense that such actions infringe the liberty of the taxpayer in running its business operations and is to be exercised before any judgement or decision is made. The authority exercising this power should have strong compelling reasons for this extraordinary action with the objective of protecting the interest of Revenue. Generally, taxpayers who have a compliant track record and tangible asset base without any indication of diversion of funds should not be saddled with such drastic actions. The High Court in 2019 (30) GSTL 396 (Guj.) Pranit Hem Desai vs. ADGGI made very assertive observations about the use / misuse of the power of provisional attachment. Though section 83 does not provide any safeguards against misuse of powers (except the approval of a Commissioner, which is generally a routine exercise), the Court stated that the very nature of action warrants circumspection and extreme care and not (its use as) a routine tool for harassment:
‘Further, the orders of provisional attachment must be in writing. There must be some material on record to indicate that the Assessing Authority had formed an opinion on the basis thereof that it was necessary to attach the property in order to protect the interest of the Revenue. The provisional attachment provided under section 83 is more like an attachment before judgment under the Code of Civil Procedure. It is a liability on the property. However, the power conferred upon the Assessing Authority under section 83 is a very drastic, far-reaching power and that power has to be used sparingly and only on substantive, weighty grounds and for valid reasons. To ensure that this power is not misused, no safeguards have been provided in section 83. One thing is clear, that this power should be exercised by the Authority only if there is a reasonable apprehension that the assessee may default the ultimate collection of the demand that is likely to be raised on completion of the assessment. It should, therefore, be exercised with extreme care and circumspection. It should not be exercised unless there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of the whole or any part of his property with a view to thwarting the ultimate collection of the demand. Moreover, attachment should be made of the properties and to the extent it is required to achieve the above object. It should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.’
POWER OF PROVISIONAL ATTACHMENT IS NOT ABSOLUTE
The power of the Commissioner in attaching any property including bank accounts is not absolute. In Bindal Smelting Pvt. Ltd. vs. ADGGI [2020 (1) TMI 569 – P&H] the Court held that the expression ‘is of the opinion’ or ‘has reason to believe’ is of the same connotation and is indicative of subjective satisfaction of the Commissioner which depends upon the facts and circumstances of each case. It is settled law that the opinion must have a rational connection with or relevant bearing on the formation of the opinion. Rational connection postulates that there must be a direct nexus or live link between the protection of interest and available property which might not be available at the time of recovery of taxes and after final adjudication of the dispute. The opinion must be formed in good faith and should not be a mere pretence. The Courts are entitled to determine whether the formation of opinion is arbitrary, capricious or whimsical. In Valerius Industries vs. Union of India 2019 (9) TMI 618 Gujarat High Court, the Court held the following:
* The order of provisional attachment before the assessment order is made may be justified if the assessing authority or any authority empowered in law is of the opinion that it is necessarily to protect the interest of Revenue. A finding to the effect should be recorded prior to pursuing this remedy.
* The above subjective satisfaction should be based on some credible materials or information and should also be supported by some supervening factor.
* The power u/s 83 of the Act could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on substantive weighty grounds and reasons.
* Such power should be exercised only if there is a reasonable apprehension that the assessee may default the ultimate collection of the demand that is likely to be raised on completion of the assessment. It should, therefore, be exercised with extreme care and caution.
* This power should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
* The attachment of bank accounts and trading assets should be resorted to only as a last resort or measure. The provisional attachment u/s 83 should not be equated with the attachment in the course of the recovery proceedings.
* The authority before exercising power u/s 83 for provisional assessment should take into consideration two things,
a) Whether it is a revenue-neutral situation, and
b) The statement of ‘output liability or input tax credit’.
* Having regard to the amount paid by reversing the input tax credit if the interest of the Revenue is sufficiently secured, then the authority may not be justified in invoking such power for the purpose of provisional attachment.
Similar views were voiced in Automark Industries (I) Ltd. vs. State of Gujarat [2016] 88 VST 274 (Guj.) where such provisions were held to be drastic and extraordinary in nature. These decisions consistently hold that these powers should be used sparingly and not as a matter of routine practice.
PROVISIONAL ATTACHMENT OF ENTIRE BUSINESS PREMISES
Revenue authorities were performing attachment of business premises u/s 71 at the time of their visit on the ground of tax evasion. Section 83 is applicable only in specified sections and since section 71 does not form part of the list therein, it does not permit Revenue to invoke attachment of assets on a visit of premises. In Proex Fashion Private Limited [2021 (1) TMI 365], the Court held that attachment pursuant to visit to business premises u/s 71 is not permissible.
This limitation of section 83 is sought to be overcome by the proposed substitution of section 83 (vide Finance Bill, 2021) which encompasses all the sections under Chapters XII, XIV and XV of the CGST Act for invoking provisional attachment. Under the amended section 83, officers would be empowered to provisionally attach the business premises at the time of visit, inspection or search rather than waiting for adjudication of the tax demands.
DISCLOSURE OF REASONS / CIRCUMSTANCES FOR PROVISIONAL ATTACHMENT
Section 83 does not require that the necessary circumstances be communicated to the taxpayer prior to invoking provisional attachment. But such formation of belief can be examined by the Court on being questioned by the tax defaulter. The Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court (Sheonath Singh’s case [AIR 1971 SC 2451]).
Continuation of attachment after one year
Pendency of proceedings is a sine qua non for provisional attachment of any property. Where the provisional attachment has been initiated, the conclusion of the proceedings warrants that the provisional attachment should be lifted and cannot be continued. Revenue authorities would have to lift the encumbrance over the property and invoke other recovery provisions based on the outcome of the adjudication / assessment.
In UFV India Global Education vs. UOI 2020 (43) GSTL 472 (P&H), the Court held that provisional attachments are not valid after completion of the proceedings on the basis of which attachments were initiated. In other words, where the attachment was initiated on the basis of an inspection u/s 67, the attachment would cease to operate on the completion of the proceedings under the said section. As a corollary, where the inspection proceedings migrate to adjudication under sections 73 or 74, a fresh provisional attachment is required to be initiated during the pendency of such adjudication proceedings. However, this position in law is also undergoing alteration by substitution of section 83 where the provisional attachment has been sought to be extended until the conclusion of proceedings of adjudication or one year, whichever is earlier.
Renewal of provisional attachment
In Amazonite Steel Pvt. Ltd. vs. UOI 2020 (36) GSTL 184 (Cal.), the Court reprimanded officers who failed to withdraw the provisional attachment of the property beyond the time limit of one year and imposed heavy costs on the officials concerned. But this does not mean that the Commissioner is not empowered to renew the provisional attachment after the expiry of one year. In Shrimati Priti vs. State of Gujarat [2011 SCC Online Guj. 1869], the Court interpreted the scope of section 45 of the Gujarat Value Added Tax Act, 2003 (similar to section 83) and held that on the one hand section 45 requires the competent officer to review the situation compulsorily at least upon completion of the period, while so doing, it does not limit his discretion to exercise such powers again if the situation so arises. Other things remaining the same, the Court also held that there is nothing in the express wording of section 83 which prohibits the Commissioner from issuing a fresh order for provisional attachment on expiry of one year. Therefore, as long as there is pendency of proceedings under a specified section, Commissioners can form an opinion and renew the provisional attachment of the property. In the context of Income-tax law, the provisional attachment has been specifically stated as not being extendable beyond two years. It is in this context that the Delhi High Court in VLS Finance Ltd. vs. ACIT [2011] 331 ITR 131 (Delhi) held that attachment of property cannot extend the limit specified in law and hence distinguishable from the position under GST.
Though in theory these provisions are held to be extreme actions, it is not unknown that Revenue officers have used this tool to arm-twist taxpayers in recovery of taxes. Apprehension of business breakdown compels enterprises to succumb to such demands. Despite their bona fides being proved during investigations, certain taxpayers also find the removal of attachment to be a herculean task. The tool of deterrence has in certain instances become a tool of harassment. Indeed, with great power comes great responsibility!
