Madras High Court Expands GST Search Safeguards, Requires DIN Compliance And Voluntary Payments

On 5 August, the Madras High Court laid down additional safeguards governing GST searches, including requirements relating to search authorisation, Document Identification Numbers (DIN) and voluntary payments under the GST law.

Justice G.R. Swaminathan while allowing a writ petition filed by Bhima Enterprises, a jewellery dealer, held that Goods and Services Tax (GST) officers cannot recover tax during search proceedings and that any payment made before issuance of a show cause notice must be shown to have been made voluntarily. He observed:

“Section 74(5) of the Act talks about paying penalty equivalent to 15% of the tax. But in the case on hand, GST DRC-03 indicates that 100% penalty was paid. This itself runs counter to the statute. The petitioner has however not taken such a plea before me that he had paid 100% penalty. If the payment is made under Section 74(5) of the Act, the penalty cannot be 100%. It can can only be 15%.”

Bhima Enterprises contended that GST officials conducted a search at its business premises, alleged discrepancies in stock and obtained payment of Rs. 32.62 lakh during the search through coercion. The department, however, maintained that the amount was voluntarily paid under Section 74(5) of the Central Goods and Services Tax (CGST) Act, 2017 (which permits payment of tax, interest and penalty before issuance of a show cause notice).

The Court examined the statutory framework governing inspection, search and seizure under Section 67 of the CGST Act (which empowers GST officers to inspect, search and seize goods or documents in specified circumstances), observing that such powers seriously affect taxpayers' rights and must be exercised strictly in accordance with law.

A key issue before it was the absence of a DIN on the search authorisation. The Court held that a mere claim of technical glitches cannot justify failure to generate the DIN and that the department must maintain records showing the attempts made to generate it and the reasons for non-generation.

Further, it held that even if a DIN is generated subsequently, it must be communicated to the taxpayer. It observed that the purpose of introducing the DIN system is to enable taxpayers to verify the genuineness of departmental communications and prevent arbitrary exercise of power. If the DIN is not shared, the safeguard becomes meaningless and the objective of transparency stands defeated.

On the payment made during the search, the Bench reiterated that GST officers have no authority to recover tax during search proceedings. It held that while Section 74(5) permits a taxpayer to voluntarily pay tax before issuance of a show cause notice, such payment must arise from the taxpayer's own ascertainment of liability and cannot be obtained through pressure or coercion. It explained that a valid payment under Section 74(5) requires the taxpayer to first ascertain the tax liability, communicate such ascertainment to the proper officer and make payment in accordance with the statutory procedure.

The Court also noted that where payment is made before issuance of a show cause notice, the statute contemplates only a 15% penalty. However, the payment reflected in GST DRC-03 showed a 100% penalty, which was contrary to the statutory scheme. It observed:

“If during search, goods are seized, the official is obliged to inform the person searched in writing that he is entitled to obtain provisional release of the seized goods by executing bond and furnishing security.”

Moreover, the Bench expanded the safeguards laid down by the Gujarat High Court in Bhumi Associates v. Union of India and added additional requirements governing GST search proceedings.

Firstly, the it clarified that inspection, search and seizure are distinct statutory powers. An authorisation issued for inspection does not automatically empower officers to conduct a search or seize goods. The authorisation issued in Form GST INS-01 must specifically mention the power being exercised, and officers cannot travel beyond the scope of such authorisation.

Secondly, it held that GST authorities cannot authorise searches mechanically. Before invoking powers under Section 67 of the CGST Act, the proper officer must possess valid “reasons to believe” based on relevant material. The existence of such reasons remains open to judicial review.

Thirdly, it strengthened the safeguards relating to DIN. It held that every communication issued by GST authorities must bear a DIN. If a DIN cannot be generated due to technical difficulties, the communication itself must record that fact. The concerned officer must contemporaneously record the nature of the technical difficulty in the official file and immediately inform the superior officer. The burden lies on the department to justify invocation of this exception.

Finding serious infirmities in the search proceedings, including failure to comply with DIN requirements and absence of material showing that the payment was voluntary, the Court directed GST authorities to initiate fresh assessment proceedings after issuing proper notice to Bhima Enterprises.

Accordingly, the High Court held that the question of whether the amount deposited by Bhima Enterprises is liable to be refunded shall be decided in the fresh proceedings and excluded the intervening period for the purpose of limitation.

For Petitioner: Mr. R. Karthik Ranganathan

For Respondent: Mr. A.R.L. Sundaresan, Additional Solicitor General, assisted by Mr. N. Dilip Kumar