Illegality Of Search Does Not Make Evidence Gathered Inadmissible In GST Fraud Cases: Karnataka High Court

The High Court of Karnataka at Bengaluru has ruled that the legality of search and seizure proceedings does not, by itself, make the material collected during such proceedings inadmissible for initiating action under Section 74 of the Central Goods and Services Tax Act, 2017, so long as such material is relevant to the issues involved.

Section 74 of the CGST Act covers cases of tax not paid, short-paid, erroneously refunded, or Input Tax Credit (ITC) wrongly availed due to fraud, wilful misstatement, or suppression of facts to evade tax. 

Section 67 of the CGST Act empowers the proper officer to conduct an inspection and to seize documents, books of account, or goods.

The bench held that "The legality or otherwise of the search and seizure proceedings does not, by itself, render the material gathered during such proceedings inadmissible for the purpose of initiating proceedings under Section 74, so long as such material is relevant to the issues involved."

The Division Bench comprising Justice S.G. Pandit and Justice K.V. Aravind was hearing a writ appeal filed by the Revenue against the order of a Single Judge, which had quashed a show cause notice issued to Vigneshwara Transport Company and directed the refund of Rs. 50 lakhs along with the return of seized documents and goods.

The bench opined that "Neither Section 67 nor Section 74 of the CGST Act contains any express or implied prohibition against the use of material collected during search and seizure for the purpose of initiating adjudicatory proceedings under Section 74."

The respondent–assessee is a transporter registered under the CGST and KGST Acts and engaged in the business of transportation of goods.

An investigation initiated by the Mangaluru Commissionerate uncovered a suspected racket involving multiple dealers and transporters engaged in evasion of GST through fake invoicing and manipulation of e-way bills.

The investigation allegedly revealed that the respondent had played a role in transporting goods covered by fake invoices and manipulated e-way bills. It was further alleged that as many as 1,964 e-way bills were involved in the suspected evasion, indicating a systematic modus operandi.

The material gathered by the Mangaluru Commissionerate, along with other inputs, was shared with the Bengaluru North-West Commissionerate, which had jurisdiction over the respondent.

Based on this material and further inquiry, including issuance of summons and recording of statements, the jurisdictional proper officer issued a detailed show cause notice under Section 74 of the CGST Act alleging tax evasion to the tune of Rs. 27.56 crores.

The respondent challenged the show cause notice before the High Court, contending that the entire proceedings were vitiated since the search and seizure operations were conducted by officers of the Mangaluru Commissionerate who lacked jurisdiction over the respondent.

The Single Judge accepted the respondent's contentions and held that the officers of the Mangaluru Commissionerate were not “proper officers” competent to undertake inspection, search and seizure, or to issue the show cause notice.

The Single Judge further held that the issuance of a show cause notice under Section 74 of the CGST Act, founded upon search and seizure proceedings and statements recorded by an officer lacking jurisdiction, cannot be sustained in law

The respondent (assessee) challenged the notice primarily on the ground that the search and seizure operations were conducted by officers of the Mangaluru Commissionerate who allegedly lacked jurisdiction, and therefore, the material collected during such proceedings could not be relied upon. It was also contended that the notice was based on “borrowed satisfaction” and suffered from lack of independent application of mind.

The Revenue, on the other hand, argued that proceedings under Section 74 are independent and can be initiated on the basis of any material available with the proper officer, irrespective of the source. It was further submitted that even if some material was collected by officers of another jurisdiction, the same could be relied upon, especially in cases involving multi-jurisdictional tax evasion. The Revenue also contended that all material relied upon had been furnished to the assessee, who had adequate opportunity to respond during adjudication.

Accepting the Revenue's submissions, the High Court held that Section 74 does not require that the material must originate from a validly conducted search under Section 67.

The Court opined that if the entire scheme and scope of Section 74 of the CGST Act is examined, it becomes evident that the initiation of proceedings thereunder is not necessarily dependent upon an action under Section 67 of the CGST Act.

The bench stated that "Proceedings under Section 74 of the CGST Act constitute an independent adjudicatory mechanism and are not contingent upon action taken under Section 67 of the CGST Act."

The court observed that the provision only requires the existence of material indicating tax evasion and does not prescribe the source or legality of its collection as a condition precedent.

The bench further observed that where materials are gathered by two different Commissionerates in the course of simultaneous or coordinated action undertaken to unearth a tax evasion racket, it is neither practicable nor legally permissible to confine proceedings under Section 74 of the Act solely to the materials collected by the proper officer within his territorial jurisdiction.

The bench stated that "There is no prohibition under the CGST Act preventing the proper officer from relying upon material gathered during investigations conducted by officers of another Commissionerate."

The Court also noted that the assessee would have a full opportunity to contest the reliability, admissibility, and evidentiary value of such material during adjudication and that interference at the stage of the show cause notice was premature.

Accordingly, the High Court set aside the order of the Single Judge, restored the show cause notice, and permitted the Revenue to proceed with adjudication in accordance with law, reiterating that relevant material cannot be excluded merely on the ground of alleged illegality in search proceedings.

For Appellant: Advocate Shishira Amarnath 

For Respondent: Advocate Pranay Sharma Y.