Ashok Dhingra1

In any tax regime, establishment of an investigative arm is necessary evil to catch rouge tax payers. These investigative agencies are given wide powers and jurisdiction to facilitate investigations to follow and bring to justice such tax evaders, throughout the country. India too has multiple investigative agencies like Directorate of Revenue Intelligence (DRI), Directorate General of Goods and Services Tax Intelligence (DGGSTI) under the CBIC2, which not only have all India jurisdiction but have zonal, regional, etc. offices throughout the country. Most of the officers posted in these organisations are on deputation from tax department or other agencies for a fixed tenure, which can be extended.

While these agencies have tough job of catching tax evaders and smugglers and have been given every kind of tool and access to information for the purpose, these agencies are also given targets to detect tax evasion and recovery of tax and given monetary rewards on recovery of tax. Hence, recovery targets each financial year have become bane of these agencies, which otherwise have impeccable reputation for professional approach and doing their jobs at times putting to risk their lives.

Recovery of money from alleged fraudsters during raid by the DRI or DGGSTI, is generally treated as a measure of success and efficiency of team leaders or specific officers, which coupled with monetary rewards to the officers, generally lead to using extra-Constitutional means by few over enthusiastic officers. Even local tax officers at times follow the same tactics. This trend is not new but has been going on for decades inspite of large volume of adverse comments by the Hon'ble High Courts and the Supreme Court.

Further, not only these investigative agencies, but the jurisdictional Customs and GST Officers also have the powers of summon and arrest persons under the Customs Act and the Central and States Goods and Services Tax Acts, which is exploited to the hilt. Most of the time when managers of a company under investigation do not agree to deposit disputed demand of taxes, managing directors or directors or senior persons of such company are summoned and forced to make 'voluntary' deposit under threat of arrest.

Based on strictures or directions of the High Court and the Supreme Court or otherwise the CBIC has issued many circulars and guidelines for investigations, summons to senior executives of a company and arrest - not to summon persons at odd hours3, not to summon top management including managing director of a company to pay up disputed demands4, issued further detailed guidelines5, etc. However, these instructions or circulars or guidelines are flouted with impunity, forcing tax payers to seek intervention of Courts.

Most of the time executives are summoned to appear at 11am to the tax office and made to wait for 3 – 5 hours to soften them up and then process of recording their statements starts which sometime continue till wee hours of next day, exhausting such person and obtaining self-incrimating and confessional statements, which are valid in court of law. However, Courts in many judicial pronouncements have set aside demand of taxes purely on the basis of confessional statements in the absence of corroborative evidence.

Before proceeding further, it is apt to refer to recent observation of the Hon'ble High Court of Karnataka in a recent decision6 regarding recovery of amounts during raid and investigation by the officers of the DGGSTI and upholding order of refund of such amount - 27. Before parting with the issue we would like to state that no one in a society governed by rule of law can take resort to a course of action not permissible in law. A Statutory power has to be exercised reasonably and in good faith, and for the purpose for which it is conferred. The power vested in any Authority by law has to be exercised in consonance with the spirit as well as letter of the Act. The broader the sweeper ambit of the power, the more caution and circumspection is required while invoking such power. A statutory power has to be exercised within a system of controls and has to be exercised by relevance and reason. It needs reiteration that a statutory power should not be exercised in a manner, so as to instill fear in the mind of a person.'

It is also useful to refer to an interim order dated May 20, 2022 of the Delhi High Court – 'Apart from anything else, the petitioner is aggrieved by the fact that the respondents/revenue has forced the petitioner to deposit a sum of Rs. 79/- lakhs, albeit without authority of law.

  1. Mr Aditya Singla, who appears on behalf of the respondents, says that the petitioner voluntarily deposited Rs. 79/- lakhs with the respondents/revenue.
  2. We would like to understand from Mr Singla, under which provision of law the said sum was accepted by the respondents/revenue."

Probably, on account of these spate of adverse observations by the Courts, on May 25, 2022 the CBIC issued the following instructions7 to the field officers in the matter:

'During the course of search, inspection or investigation, sometimes the taxpayers opt for deposit of their partial or full GST liability arising out of the issue pointed out by the department during the course of such search, inspection or investigation by furnishing DRC-03. Instances have been noticed where some of the taxpayers after voluntarily depositing GST liability through DRC-03 have alleged use of force and coercion by the officers for making 'recovery' during the course of search or inspection or investigation. Some of the taxpayers have also approached Hon hie High Courts in this regard.

  1. The matter has been examined. Board has felt the necessity to clarify the legal position of voluntary payment of taxes for ensuring correct application of law and to protect the interest of the taxpayers. It is observed that under CGST Act, 2017 a taxpayer has an option to deposit the tax voluntarily by way of submitting DRC-03 on GST portal. Such voluntary payments are initiated only by the taxpayer by logging into the GST portal using its login id and password. Voluntary payment of tax before issuance of show cause notice is permissible in terms of provisions of Section 73(5) and Section 74 (5) of the CGST Act, 2017. This helps the taxpayers in discharging their admitted liability, self-ascertained or as ascertained by the tax officer, without having to bear the burden of interest under Section 50 of CGST Act, 2017 for delayed payment of tax and may also save him from higher penalty imposable on him subsequent to issuance of show cause notice under Section 73 or Section 74, as the case may be.
  1. It is farther observed that recovery of taxes not paid or short paid, can be made under the provisions of Section 79 of CGST Act, 2017 only after following due legal process of issuance of notice and subsequent confirmation of demand by issuance of adjudication order. No recovery can be made unless the amount becomes payable in pursuance of an order passed by the adjudicating authority or otherwise becomes payable under the provisions of CGST Act and rules made therein. Therefore, there may not arise any situation where "recovery" of the tax dues has to be made by the tax officer from the taxpayer during the course of search, inspection or investigation, on account of any issue detected during such proceedings. However, the law does not bar the taxpayer from voluntarily making payment of any tax liability ascertained by him or the tax officer in respect of such issues, either during the course of such proceedings or subsequently.
  1. Therefore, it is clarified that there may not be any circumstance necessitating 'recovery' of tax dues during the course of search or inspection or investigation proceedings. However, there is also no bar on the taxpayers for voluntarily making the payments on the basis of ascertainment of their liability on non-payment/ short payment of taxes before or at any stage of such proceedings. The tax officer should however, inform the taxpayers regarding the provisions of voluntary tax payments through DRC-03.'

Thus, the CBIC has reiterated the principle that recovery of taxes not paid or short paid can be done only after following the due process of law only, which has no meaning unless it is followed in letter and spirit.

Rule of law based society and a non-adversarial tax administration is the need of the hour for the success of Make in India and Ease of Doing Business, the key initiatives of the Federal Government. This can only happen when not only the authorities follow due process of law but also follow fair approach during adjudication of show cause notices. Presently, whenever any show cause notice is issued, the noticee while replying to such show cause notice prepares himself for appeal fully recognising the fact that in the departmental adjudication demand is going to be confirmed and penalty will be imposed, irrespective of a binding judgement of Courts on the issue. This kind of feeling of fate accompli by tax payers does not bode well for a friendly tax administration. Hence, the CBIC need to stand up to challenge and take tough calls.

Merely issue of directions or guidelines by the CBIC is not enough but tougher measurable parameters required to be put in place to monitor spot or forced recovery by enforcement agencies and action should be taken against erring officers. Further, timelines should be provided for completion of investigation leading to closure or issue of show cause notice and adjudication thereof in compliance to law of the land and judicial disciplines. The moment all adjudication orders are reviewed on the touchstone of judicial discipline and action is taken against officers who only follow the motto 'all demands are to be confirmed and penalty imposed', we can really claim of having a non-adversarial tax administration. Till then we will continue to live in the myth of friendly tax regime.


1 Author is partner with Ashok Dhingra Associates and views are strictly personal

2 The Central Board of Indirect Taxes and Customs in the Ministry of Finance (Department of Revenue), is the nodal authority for administration of GST and Customs in India

3 Circular No. 65/88-CX.6, dated September 6, 1988

4 Letter F. No. 208/122/89-CX.6, dated October 13, 1989

5 Instruction F. No. 207/07/2014-CX-6, dated January 20, 2015

6. UOI Vs. Bundl Technologies Private Limited [2002-TOIL-HC-KAR-GST] dated March 3, 2022

7 Instruction No. 01/2022-23 [GST - Investigation], F. No. GST/INV/Instructions/2022-23, Dated 25th May, 2022

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