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Inspection u/s Section 67(1) of CGST Act, 2017 (By Mr. Narendra Sharma)

Narendra Sharma  Advocate
M : 9415127075
9/76, Arya Nagar, Kanpur
e-mail : narendra.advo@rediffmail.com

INSPECTION
Section 67(1) of CGST Act, 2017

Chapter-XVI, contains 6 sections beginning from Section 67 to 72 and each section deals with topics, Power of Inspection, Search and Seizure(67), Inspection of Goods in Movement(68), Power to Arrest(69), Power to summon persons and produce documents(70).  access to business premises(71), and Officers to assist proper officer (72).

Section 67   INSPECTION :

(1)  : This sub- section provides for Inspection but,

(i)    by a proper officer

(ii)   duly authorised by an officer not below the rank of Joint Commissioner,

(iii)   provided the said officer authorising the proper officer has reasons to believe that ......

In context of circumstances, in the case of the taxable person or otherwise  -

(a)  in the case,

there is a suppression of transaction relating to supply of goods and services or both,  excess input tax credit has been claimed,

(b) in the case,

any person is engaged in the business of transporting goods or is owner or is operator of warehouse or any other place,
                        and

has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act.

Certain Phrases used in Section 67(1)  clarified  :

(i)  Suppressed any transaction relating to supply of goods or services or both has acted in contravention of the Acts or Rules with intention to evade tax.

(ii)   Indulging in contravention of any of the provisions of this Act or the rules made thereunder to evade tax.

(iii)  Transporting or keeping goods which escaped payment of tax or manipulating accounts or stocks which may cause evasion of tax.

In suppression of transaction, if there is a prima faice case of contravention of the Acts or Rules with intention to evade tax, goods have been transported, accounts or stocks related to such goods have been maintained in a such manner so as to cause evasion of tax or escapement of payment of tax liability consciously. 

Suppression

The word suppression means some wilful action resulting in evasion of tax. It has been so held by the Courts in various judgements. Hon'ble Supreme Court found that (i) Mere omission to disclosed the correct information is not a suppression of facts  unless it was deliberate to escape the payment of duty.

(ii)As far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word 'wilful', preceding the words "mis-statement or suppression of facts" which means with intent to evade duty.

Suppression of Fact

(i) The expression 'suppression of facts', would mean a deliberate or conscious omission to state a fact with the intention of deriving wrongful gain. 

 (ii) It is settled law that mere failure to declare does not amount to wilful 'suppression of fact'. There must be some positive act on the part of the assesse to find wilful suppression. Mere classification under a different sub-heading by the manufacturer could not amount to 'suppression' of facts.

Likely to cause evasion of Tax

This phrase relates only to event which may occur in future. Therefore, he who is alleging regarding the occurrence of such event in future have to establish beyond is apprehension and also certainty of the event, in future. Therefore, to some extent it is guess work of an expert and experienced competent authority. It is highly debatable point because event may occur or may not occur and merely on future occurrence of the event, this provision is quite wave and suspicious.

Generally, a person is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional.

Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains. 

(1)  Inspection :

‘Inspection’ is a softer provision than search which enables officers to access any place of business or of a person engaged in transporting goods or who is an owner or an operator of a warehouse or godown. As discussed above the inspection can be carried out by an officer of CGST/SGST only upon a written authorization given to an officer by other officer not below the rank of Joint Commissioner or above, but only if he has reasons to believe that the person concerned has done any of the above actions, such  as  :
(2)   Reason to believe :

The phrase Reason to believe is of wide import and has been used in Taxation Laws including Criminal Laws where an authority on the basis of his expertise and certain facts before it, is suppose to act then and there. In such event there should be Reason to believe, and not Reason to suspects  though very thin difference between the two  courts have outline the difference vividly.

(1) Reasonable  grounds necessarily postulate that they must be germane to the formation of the  belief regarding escaped assessment If the grounds are of an  extraneous character, the same would not warrant initiation of proceedings under the above  section. If, however the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the  assessing authority would be clothed with jurisdiction.

(2) This means that the belief must be of a reasonable and a prudent man. It must be based on some relevant  material, and not based on suspicion, gossip or rumour. See Sheo Nath Singh v. S.P. Chaliha. These cases arose under the Income tax Act, but the material provisions of section 21 (U.P. Sales Tax Act)  being in pari  materia, they have been applied to proceedings arising under the Act in the case of Mohd. Yakub & Sons vs. Sales Tax Officer, Fatehgarh Judging from these principles, the letter received by the Sales tax Officer was on which would create a mere suspicion on which he may have started  an inquiry. It could not from the basis of a reasonable  belief required by section 21 to initiate the proceedings.(3)The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-Tax Officer.  It is open to the Court to examine whether the reasons for  the formation of the belief have a rational connection with or relevant  bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.

In another case, related to initiating of proceedings on escaped assessment, under section 21 of the U.P. Trade Tax Act, (4) the Hon'ble High Court found that the Stock Transfer has been examined in details in original assessment proceeding, therefore, in absence of any specific material relating to the escaped assessment, the initiation of the proceeding appear to be on account of only change of opinion, which is not permissible.
While examining contours of Section 147(a) of the Income Tax Act, the Court was of the opinion  that  (5) The expression 'reason to believe' in the said does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence.

Further, the court was of the opinion that  (6)  Mere fear is not belief. A belief can be said to be founded on reasonable grounds only if there is something tangible to go by on the basis of which it can be said that the applicant apprehension that he may be arrested is genuine. (7)  The expression 'reason to believe' is not synonymous with subjective satisfaction of the officer.

The expression 'reason to believe', could be better explained if there is (8) the existence of rational and intelligible nexus between the reasons and the belief, so that on such reasons no one properly instructed on facts and the law could reasonably entertain the belief. 

Reverting back to the provisions of Section 67 where, there is a belief in the opinion of competent authority that there is suppression of transaction relating to supply of goods and services or both, he may act in furtherance of power conferred upon him.

The sufficiency of grounds which induce the ....... is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the ........ did not hold the belief that there had been such non-disclosure. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the ......... in starting proceedings in respect of income escaping assessment is open to challenge in a court of law.

The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. 

The phrase used in Section 147(a) of the I.T. Act,  i.e., "has reason to  believe" and  are stronger  than the words "is  satisfied.".

(1) Commissioner of Sales Tax, U.P. vs. Bhagwan Industries (P) Ltd. 31 STC  293 S.C.

(2)  Lit Light Company vs. Commissioner of Sales Tax  1979, 43 STC 449 (ALL) ‘reason to believe’ and  reason to suspicion’

(3) I.T.O. vs. Lakhmani Mewal Das  1976 AIR (SC) 1753

(4) M/s Asian P.P.G. Industries Ltd., B-7, Meerut Road, Industrial Area, Ghaziabad vs. Additional Commissioner Grade-I, Trade Tax, Ghaziabad Zone, 2010 NTN (Vol. 43) - 55 [Alld. High Court]

(5) I.T.O. vs. Lakhmani Mewal Das  (1976) AIR 1753

(6)  Gurbaksh Singh Sibbia vs. State of Punjab  (1980) 2 SCC 565

(7)  Pratap Singh vs. Director of Enforcement F.E.R. Act (1985) AIRSC 989

(8)  Ganga Saran & Sons vs. I.T. Officer (1981) AIR  SC 1363

Conclusion :

Thus, sub-section(1) of Section 67 has taken enough safeguards before a competent authority starts inspection. He is supposed to be clothed with a due order from an officer not below the rank of Joint Commissioner. Moreover, those officers are required to have reason to believe on one hand and on the other to establish that person or place where inspection is being carried out may provide information/evidence related to evasion of tax, thus, clearly ruling out a possibility without intention to evade tax and this believe is based on sufficient material on record.