GST Department Cannot Retain Seized Records After Withdrawing Search Authorisation: Madras High Court

On 5 August, the Madurai Bench of the Madras High Court held that the GST Department cannot retain files and documents seized during an inspection once it withdraws the search authorisation under which the seizure was made, and directed the immediate return of all records taken from a jewellery dealer.

A Bench of Justice G.R. Swaminathan allowed the writ petition filed by Bhima Enterprises and noted that the Department lost its statutory authority to retain the seized material after withdrawing the authorisation issued for the inspection conducted on 25 January 2024. He observed:

“...Sub-Section 11 and Sub-Section 2 of Section 67 of the Act have to be read together. The authority to seize files and documents flows from the authorization granted under Sub-Section 2. Once the authorization letter had been withdrawn, the entire basis of the action taken by the department on 25.01.2024 goes. The statement said to have been taken from the petitioner also cannot have any legal consequence. The department is obliged to return all the files and documents obtained on the said date.”

Bhima Enterprises, a jewellery manufacturer and wholesaler, challenged the GST Department's refusal to return files and documents seized during an inspection conducted on 25 January 2024 pursuant to an authorisation issued a day earlier.

The petitioner contended that the inspection violated an earlier status quo order passed by the High Court. In an earlier writ petition challenging the inspection, the GST Department informed the Court that it had withdrawn the authorisation, following which the petition was disposed of.

Despite withdrawing the authorisation, the Department continued to retain the seized records. Relying on an earlier Division Bench decision, it argued that evidence collected during an allegedly illegal search could still be used.

Rejecting the contention, the Court clarified that the issue before it was not the admissibility of evidence but whether the Department could lawfully retain the seized documents after withdrawing the authorisation.

It observed that under Section 67 of the Central Goods and Services Tax Act, 2017 (which empowers GST authorities to conduct inspections, searches and seizures in specified circumstances), the power to seize and retain documents exists only when the seizure is made pursuant to a valid authorisation. It held that once the Department voluntarily withdrew the authorisation without reserving any liberty to retain the seized material, the statutory basis for retaining the records came to an end. It held:

“Such retention is permissible provided the seizure was done by an official duly authorized. If the authorization is illegal or withdrawn, the power to retain stands undermined.”

The Bench further held that the statement recorded from the petitioner during the inspection could not have any legal consequence because the very foundation of the inspection had ceased to exist upon withdrawal of the authorisation.

Accordingly, the High Court allowed the writ petition and directed the respondents to return all files and documents seized from the petitioner on 25 January 2024 without delay.

For Petitioner: R.Karthik Ranganathan, Advocate

For Respondent: AR.L.Sundaresan, Additional Solicitor General