- Introduction
Determination of proceedings for recovery of tax takes its own time, passing through the adjudication stage, appellate stages and ultimately judicial review of tax administration’s actions. It is vividly possible that, in the interim the taxpayer may engage in activities which frustrate the tax administration’s recovery proceedings. For illustration, the taxpayer may liquidate the business partly or in whole, dispose significant assets, etc. in order to avoid recovery. In order to address such challenges, the tax administration is entrusted with statutory powers to pre-empt such attempts of the taxpayers to forestall recovery. For illustration, Section 281 of the Income Tax Act, 1961 cloths the tax administration with the power to declare “certain transfers to be void”.[1] In the goods and services tax (GST) laws, the tax administration is entrusted with the power to effect “provisional attachment to protect revenue in certain cases” wherein “any property, including bank account” can be attached provisionally by the tax administration during the pendency of certain proceedings.
In a short span of four years since the enforcement of GST laws, this power of provisional attachment has been exercised in plenitude by the tax administration which has resulted into judicial challenges and detailed judgments of the High Court. Recently the Supreme Court was seized with a controversy regarding provisional attachment of the properties of a taxpayer by the Himachal Pradesh GST authorities. By way of a detailed judgment in Radha Krishan Industries v. State of H.P.[2], the Supreme Court has culled out the relevant facets of this power of GST authorities, its contours, limitations, etc. as also enunciated the role of the courts in monitoring the exercise of this power by the GST authorities. The decision is expected to streamline the exercise of such powers under the GST laws while also balancing the rights of the taxpayers. This case comment explores the decision in greater detail so as to demystify the legal position and envision its impact on GST laws.
- Factual Setting before the Supreme Court
The appellant before the Supreme Court was a manufacturer who was issued a notice under Section 78 of the Himachal Pradesh Goods and Services Tax Act, 2017 (H.P. GST). Post a series of hearings, the Joint Commissioner of State Taxes passed orders provisionally attaching the appellant’s receivables from its customers. The provisional attachment was ordered under Section 83 of the H.P. GST read with Rule 159 framed thereunder. This provisional attachment was challenged by the appellant by way of writ petition before the High Court. Instead of adverting to the merits of the challenge, however, the High Court dismissed the writ petition on the ground of maintainability, citing availability of alternate remedies. This refusal by the High Court to examine the correctness of the provisional attachment order was challenged before the Supreme Court.
- Enunciating the Contours and Limitations on the Power of Provisional Attachment
The relevant provision of the Central Goods and Services Tax Act, 2017 (which has been similarly incorporated under the State GST laws, such as the H.P. GST) states as under:
- Provisional attachment to protect revenue in certain cases.— (1) Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, 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 or any person specified in sub-section (1-A) of Section 122, 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 Supreme Court extensively dissected the statutory scheme under the GST laws whereupon the power of provisional attachment was pedestaled. Noting that in the aforesaid scheme the power was no unbridled and instead was circumscribed by various conditions inherent in the statutory scheme, the Supreme Court laid out the following six parts in which sub-section (1) of Section 83 could be divided, observing thus:
- 42. Sub-section (1) of Section 83 can be bifurcated into several parts. The first part provides an insight on when in point of time or at which stage the power can be exercised. The second part specifies the authority to whom the power to order a provisional attachment is entrusted. The third part defines the conditions which must be fulfilled to validate the power or ordering a provisional attachment. The fourth part indicates the manner in which an attachment is to be levelled. The final and the fifth part defines the nature of the property which can be attached. Each of these special divisions which have been explained above is for convenience of exposition. While they are not watertight compartments, ultimately and together they aid in validating an understanding of the statute. Each of the above five parts is now interpreted and explained below:
(i) The power to order a provisional attachment is entrusted during the pendency of proceedings under any one of six specified provisions: Sections 62, 63, 64, 67, 73 or Section 74. In other words, it is when a proceeding under any of these provisions is pending that a provisional attachment can be ordered.
(ii) The power to order a provisional attachment has been vested by the legislature in the Commissioner.
(iii) Before exercising the power, the Commissioner must be “of the opinion that for the purpose of protecting the interest of the government revenue, it is necessary so to do”.
(iv) The order for attachment must be in writing.
(v) The provisional attachment which is contemplated is of any property including a bank account belonging to the taxable person.
(vi) The manner in which a provisional attachment is levied must be specified in the rules made pursuant to the provisions of the statute.
Explaining the practical purport of this scheme, the Supreme Court opined that formation of “opinion” was sine qua non for exercise of this power and thus is its precondition. Enthralling the salient features of this conditionality, the Supreme Court observed the following:
- 49. Now in this backdrop, it becomes necessary to emphasise that before the Commissioner can levy a provisional attachment, there must be a formation of “the opinion” and that it is necessary “so to do” for the purpose of protecting the interest of the government revenue. The power to levy a provisional attachment is draconian in nature. By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account. The attachment is provisional and the statute has contemplated an attachment during the pendency of the proceedings under the stipulated statutory provisions noticed earlier. An attachment which is contemplated in Section 83 is, in other words, at a stage which is anterior to the finalisation of an assessment or the raising of a demand. Conscious as the legislature was of the draconian nature of the power and the serious consequences which emanate from the attachment of any property including a bank account of the taxable person, it conditioned the exercise of the power by employing specific statutory language which conditions the exercise of the power. The language of the statute indicates first, the necessity of the formation of opinion by the Commissioner; second, the formation of opinion before ordering a provisional attachment; third the existence of opinion that it is necessary so to do for the purpose of protecting the interest of the government revenue; fourth, the issuance of an order in writing for the attachment of any property of the taxable person; and fifth, the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment. Each of these components of the statute are integral to a valid exercise of power. In other words, when the exercise of the power is challenged, the validity of its exercise will depend on a strict and punctilious observance of the statutory preconditions by the Commissioner. While conditioning the exercise of the power on the formation of an opinion by the Commissioner that “for the purpose of protecting the interest of the government revenue, it is necessary so to do”, it is evident that the statute has not left the formation of opinion to an unguided subjective discretion of the Commissioner. The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue.
- 50. By utilising the expression “it is necessary so to do” the legislature has evinced an intent that an attachment is authorised not merely because it is expedient to do so (or profitable or practicable for the revenue to do so) but because it is necessary to do so in order to protect interest of the government revenue. Necessity postulates that the interest of the revenue can be protected only by a provisional attachment without which the interest of the revenue would stand defeated. Necessity in other words postulates a more stringent requirement than a mere expediency. A provisional attachment under Section 83 is contemplated during the pendency of certain proceedings, meaning thereby that a final demand or liability is yet to be crystallised. An anticipatory attachment of this nature must strictly conform to the requirements, both substantive and procedural, embodied in the statute and the rules. The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assesses can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the government revenue.
- 51. These expressions in regard to both the purpose and necessity of provisional attachment implicate the doctrine of proportionality. Proportionality mandates the existence of a proximate or live link between the need for the attachment and the purpose which it is intended to secure. It also postulates the maintenance of a proportion between the nature and extent of the attachment and the purpose which is sought to be served by ordering it. Moreover, the words embodied in sub-section (1) of Section 83, as interpreted above, would leave no manner of doubt that while ordering a provisional attachment the Commissioner must in the formation of the opinion act on the basis of tangible material on the basis of which the formation of opinion is based in regard to the existence of the statutory requirement.
The aforesaid aspect reveals that the Supreme Court has effectively rewritten the scheme regarding the power of the tax administration of provisional attachment whereby (a) heavy onus has been placed upon the tax administration to demonstrate the necessity for the exercise of such power objectively and judicially; and (b) also ensure its limited application, in view of the doctrine of proportionality.
In order to incorporate further safeguards towards protecting the taxpayers against indiscriminate exercise of this power, the Supreme Court culled out the principles prevailing under the income tax laws, namely, the “tangible material” test as the basis for inquiry and exercise of powers. On this point, the Supreme Court observed as under:
- 52. We adopt the test of the existence of “tangible material”. In this context, reference may be made to the decision of this Court in CIT Kelvinator of India Ltd.[3] Mr Justice S.H. Kapadia (as the learned Chief Justice then was) while considering the expression “reason to believe” in Section 147 of the Income Tax Act, 1961 that income chargeable to tax has escaped assessment inter alia by the omission or failure of the assessee to disclose fully and truly all material facts necessary for the assessment of that year, held that the power to reopen an assessment must be conditioned on the existence of “tangible material” and that “reasons must have a live link with the formation of the belief”. This principle was followed subsequently in a two-Judge Bench decision in ITO v. Techspan India (P) Ltd.[4] While adverting to these decisions we have noticed that Section 83 of the H.P. GST Act uses the expression “opinion” as distinguished from “reasons to believe”. However for the reasons that we have indicated earlier we are clearly of the view that the formation of the opinion must be based on tangible material which indicates a live link to the necessity to order a provisional attachment to protect the interest of the government revenue.
To conclude on the legal position, the Supreme Court decision summarises as under:
- 79. …
(iv) The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled.
(v) The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue.
(vi) The expression “necessary so to do for protecting the government revenue” implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment.
(vii) The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue.
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(ix) Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards:
(a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and
(b) An opportunity of being heard.
(x) The Commissioner is duty-bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached.
On the facts of the decision, the Supreme Court rejected the tax administration’s reasoning and declared the provisional attachment to be unlawful.
- Reflections on Role of High Courts in Provisional Attachment Cases
According to the Supreme Court, the Himachal Pradesh High Court[5] erred in refusing to examine on merits the correctness of provisional attachment by dismissing the writ petition as non-maintainable. In the process of addressing the correctness of the High Court decision, the Supreme Court opined that the power of provisional attachment made significant inroads into the property rights of the taxpayers and thus close supervision of the exercise of such powers was necessary. Being of the opinion that under the statutory scheme of GST there was no means to correct errors in the exercise of such powers by the statutory authorities, the Supreme Court declared that it was incumbent upon the High Courts to exercise their extraordinary writ jurisdiction to examine the propriety of the tax administration’s exercise of power of provisional attachment. For such reason, the Supreme Court categorically concluded as maintainable a writ petition challenging an order of provisional attachment. In doing so, the Supreme Court also affirmed the views of various High Courts which had exercise addressed this proposition.[6] Some of the key propositions emanating from the High Court decisions, which were approved by the Supreme Court in Radha Krishan Industries v. State of H.P.[7] are summarised below:
- Decision of the Delhi High Court, in Proex Fashion[8] holding that there are five conditions for invocation of Section 83 of the CGST, which stand approved in para 41 of the Supreme Court decision.
- Decision of the Gujarat High Court, in Valerius Industries[9] which laid down principles for construction of Section 83 of the SGST/CGST Act. The High Court held that provisional attachment on the basis of a subjective satisfaction, absent any cogent or credible material, constitutes malice in law; vague, indefinite, distant, remote or far-fetching material would not warrant provisional The High Court further went on to lay down the conditions which would permit provisional attachment: (a) where there exists “reasonable apprehension” that the assessee may default the collection of the demand; (b) where there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of wholly or any part of his/her property with a view to thwarting the ultimate collection of demand and in order to achieve the said objective, the attachment should be of the properties and to that extent, it is required to achieve this objective; and (c) provisional attachment power is to be used only as a last resort measure. The power under Section 83 of the Act 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.
- In Jay Ambey Filament[10] the Gujarat High Court further expounded the above reasoning, holding that on his opinion being challenged, the competent officer must be able to show the material on the basis of which the belief is formed.
- Decision in UFV India Global Education[11] of the Punjab and Haryana High Court which held that pendency of proceedings under the provisions mentioned in Section 83 (viz. Sections 62 or 63 or 64 or 67 or 73 or 74) is the sine qua nonfor an order of provisional attachment to be directed under Section 83.
- Decision of the Bombay High Court in Kaish Impex[12] which considered a similar question regarding the application of Section 83. In this case the tax authorities traced money trail in tax fraud by an export firm and provisionally attached the bank accounts of the petitioner. The issue before the High Court was whether the petitioner’s assets could be attached considering the fact pattern that the proceedings were against another taxable entity. The High Court noted that the proceedings referred to under Section 83 of the Act must be pending against the taxable entity whose property is being attached. It inter alia observed:
- 18. … Section 83 does not provide for an automatic extension to any other taxable person from an inquiry specifically launched against a taxable person under these provisions. … The format of the order i.e. Form GST DRC-22 also specifies the particulars of a registered taxable person and which proceedings have been launched against the aforesaid taxable person indicating a nexus between the proceedings to be initiated against a taxable person and provisional attachment of bank account of such taxable person.
In short, contextualising the observations of the High Courts, the Supreme Court streamlined the legal position regarding the power of provisional attachment available to GST officers seeking to balance the tax recovery objective underlying the power while preserving the legitimate rights of the taxpayers.
- Conclusion
Any decision of the Supreme Court, given its constitutional authority under Article 141 as being binding on all courts and authorities in India, settled the controversy and lays down the law of the land. However, this decision is relevant on multiple counts not just in the context of the immediate facts but much beyond. Some of the salient aspects are enlisted below:
- First, as discussed above, the Supreme Court has streamlined the legal position regarding the power of provisional attachment available to GST officers. This is crucial because GST is a relatively new tax and, more critically, cited as a reform. Thus, it is crucial that its provisions are interpreted uniformly across the country and that too in a humane manner such that their indiscriminate application does not derail the underlying objective of the new tax regime.
- Second, the decision of the Supreme Court is not just based upon interpretation of the statutory provisions. Instead, it seeks to achieve a delicate balance protecting government revenue and allowing genuine businesses to operate, evidently in furtherance of underlying objective of making the GST law workable.
- Third, the jurisprudential intercourse sought to be embedded in the scheme of provisional attachment related statutory provisions clearly dispels the long-standing tradition of the Supreme Court wherein the principle of natural justice and fair play are sought to be read in the fiscal laws, thereby ensuring that they remain within the constitutional precincts and do not trample upon the fundamental rights of the taxpayers, indulging the right for reasonable and balanced application of fiscal laws. To this effect, inter alia, the Supreme Court rightly dismissed the contention to grant higher sanctity to discretion of the GST Commissioner, thereby ensuring that the rights of the taxpayers are protected by a fair interpretation of the taxing statute.
- Fourth, on a larger level, by confirming High Court’s supervision of tax officers’ actions under the extraordinary writ jurisdiction even though the statutory provisions do not provide any legal remedy to the aggrieved taxpayer, the Supreme Court has not just ensured that the taxpayer is not left remediless and instead introduced a mechanism to ensure tax officers’ accountability. No executive power can be exercised without effective supervision, much less a wide and potent power to attach assets which cannot only put fetters upon business operations of any entity but can also put strenuous effect on the very survival of business. In such circumstance, it is only appropriate that the exercise of such power is supervised by a constitutional court such that it can ensure balance between the law’s objective and the rights of the affected party.
- Fifth, by reading into the law twin tests, the doctrine of proportionality and “tangible material”, the Supreme Court has adverted to the conditions necessary to make the law fair and reasonable which is a constitutional Absence of such tenets do not ipso facto make the law unconstitutional but by reading them into the law, the Supreme Court has ensured that arbitrariness and capricious conduct is not perpetrated in the garb of exercising statutory functions. Thereby the Supreme Court has protected genuine persons from unwarranted harassment and obviated the possibility of unguided discretion leading to peril of arbitrary power.
In short, this decision of the Supreme Court is a welcome addition to tax jurisprudence and incremental vindication of taxpayers’ rights.
† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.
The author would like to thank Vanaj Vidyan, Fourth Year Student at Ram Manohar Lohia National Law University for his able assistance.
[1] The provision states that “[w]here, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under R. 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise”.
[5] Radha Krishan Industries v. State of H.P., 2021 SCC OnLine HP 4566 : (2021) 48 GSTL 3.
[6] Bindal Smelting (P) Ltd. v. Directorate General of GST Intelligence, 2019 SCC OnLine P&H 6015 : (2020) 34 GSTL 592; Society for Integrated Development in Urban and Rural Areas v. CIT, 2001 SCC OnLine AP 1457 : (2001) 252 ITR 642; Vinodkumar Murlidhar Chechani v. State of Gujarat, 2020 SCC OnLine Guj 3010.
[8] Proex Fashion (P) Ltd. v. Govt. of India, 2021 SCC OnLine Del 2082.
[9]Valerius Industries v. Union of India, 2019 SCC OnLine Guj 6866 : (2019) 30 GSTL 15.
[10] Jay Ambey Filament (P) Ltd. v. Union of India, 2020 SCC OnLine Guj 3009 : (2021) 44 GSTL 41.
[11]UFV India Global Education v. Union of India, 2020 SCC OnLine P&H 2796 : (2020) 43 GSTL 472.
[12]Kaish Impex (P) Ltd. v. Union of India, 2020 SCC OnLine Bom 125 : (2020) 6 AIR Bom R 122.
