The Department Chose Confiscation Instead of Tax Determination
Discovery of excess or unaccounted stock during a survey can justify a detailed investigation. Such a discrepancy may arise from incomplete accounts, unrecorded production, suppressed sales, or an attempt to evade tax. However, the mere existence of excess stock does not automatically permit the Department to invoke any provision it chooses. The officer must first identify the nature of the alleged violation and then proceed under the statutory provision specifically designed to address it. A stock discrepancy may create suspicion, but tax, interest, penalty, or confiscation can be imposed only after following the procedure prescribed by the CGST Act, 2017.
This issue arose in Jitendra Kumar v. M/S R. V. Brick Field, Partner and Others, 2026- VIL- 131- GSTAT- AGR, decided on 17. 09. 2026. The case involved four departmental appeals arising from surveys conducted at different brick kilns. The authorities allegedly found
19,27,289 bricks and 60 metric tonnes of coal in the first case, 15,15,500 bricks in the second, 21,53,500 bricks in the third, and 16,30,000 bricks in the fourth. Treating these quantities as unaccounted stock, the Department initiated proceedings under Section 130 read with Section 122. These proceedings resulted in confiscation- related action, a fine in lieu of confiscation under Section 130(2), and a penalty under Section 122.
The First Appellate Authority set aside the proceedings after concluding that unaccounted stock discovered during a survey should have been dealt with through tax- determination proceedings under Sections 73 or 74, rather than immediate confiscation under Section 130. The Department filed four appeals before the GSTAT, numbered APL/158-161/AGR/2026, but challenged only the setting aside of the fine. It did not challenge the more fundamental finding that the invocation of Section 130 itself was legally unsustainable. This limited challenge proved decisive because the fine could not be restored while the finding invalidating the underlying confiscation proceedings remained unchallenged.
Unaccounted Goods Must First Be Examined Under Sections 73 or 74
Section 35(1) of the CGST Act, 2017 requires every registered person to maintain complete and correct records of production or manufacture, purchases, sales, inward and outward supplies, stock, input tax credit and output tax. Section 35(6) explains what must be done when goods or services are not properly accounted for. In such a situation, the proper officer must determine the tax payable by treating the unaccounted goods or services as if they had been supplied. For this purpose, the procedure contained in Section 73 or Section 74, as applicable, must be followed.
The expression mutatis mutandis used in Section 35(6) simply means that Sections 73 or 74 must be applied with the necessary changes required by the circumstances. The officer must identify the quantity of unaccounted goods, determine their taxable value, apply the correct tax rate and relate the alleged liability to the appropriate tax period. The officer must also decide whether the case involves an ordinary non-payment of tax under Section 73 or fraud, wilful misstatement or suppression attracting Section 74. A proper notice must disclose the factual and legal basis of the proposed demand, and the taxpayer must be allowed to explain the stock difference, challenge the method of valuation and produce relevant books and records before a reasoned order is passed.
This procedure is especially important in brick manufacturing, where all goods found at the premises may not represent finished and saleable stock. The premises may contain raw bricks, semi-burnt bricks, damaged pieces, wastage and finished bricks awaiting dispatch. Quantities may also be estimated by measuring stacks rather than counting every brick individually. A survey estimate, therefore, does not automatically prove the precise quantity of unaccounted finished goods or the corresponding tax liability. These factual questions must be examined through proper tax-determination proceedings under Section 35(6) read with Sections 73 or 74; they cannot be conclusively decided merely from the stock figure recorded during the survey.
A Survey Discrepancy Is Not an Automatic Confiscation Event
Section 130 is a confiscatory provision with serious civil consequences. It applies when one or more specified statutory conditions are established, including the supply or receipt of goods in contravention of the Act with intent to evade tax, failure to account for taxable goods, or the use of a conveyance to carry goods in contravention of the law. Its invocation may result in confiscation, penalty, and a fine offered in lieu of confiscation.
The presence of unaccounted goods may constitute relevant evidence, but it cannot be treated as conclusive proof of all conditions necessary for confiscation. The proper officer must distinguish between a discrepancy that calls for determination of tax and conduct independently satisfying the ingredients of Section 130. Where the real allegation is that certain goods were not reflected in the books and should therefore be treated as supplied, Section 35(6) directs the officer towards Sections 73 or 74.
The decision should not be understood as granting immunity to unaccounted stock or as declaring that Section 130 can never apply in a stock-related matter. Its ratio is narrower and legally more disciplined: mere discovery of excess or unaccounted stock during a survey cannot automatically be converted into confiscation proceedings. If the Department seeks to invoke Section 130, the statutory foundation for confiscation must be independently established. Section 130 cannot be used merely as a faster substitute for determination of tax under Sections 73 or 74.
The Allahabad High Court Had Already Settled the Statutory Sequence
The governing legal position stood supported by three decisions of the Allahabad High Court: M/s Dinesh Kumar Pradeep Kumar v. Additional Commissioner, Grade-II, Writ Tax No. 1082 of 2022, decided on 25.07.2024; M/s Shri Om Steels v. Additional Commissioner, Grade-II, Writ Tax No. 1007 of 2022, decided on 19.07.2024; and V.K. Electricals v. Additional Commissioner, Grade-II, Writ Tax No. 957 of 2024, decided on 23.08.2024.
The First Appellate Authority quoted the decision in Dinesh Kumar Pradeep Kumar while setting aside the adjudication orders. The Tribunal considered the consistent legal position emerging from these authorities. Where excess stock is discovered during a survey, the proper statutory course is determination of the corresponding tax and consequential liability under Sections 73 or 74. Confiscation cannot follow merely because the physical stock exceeds the quantity reflected in the books.
These decisions do not mean the Department must ignore excess or unaccounted stock. The proper officer remains fully empowered to verify the physical stock, examine the books and production records, seek an explanation from the taxpayer, and collect evidence regarding any possible unrecorded supply. If the inquiry indicates that tax has not been paid, proceedings may be initiated under Section 73 or Section 74, as applicable. The notice must clearly disclose the quantity and value of the disputed goods, the relevant tax period, the proposed tax liability, and the evidence relied upon. The taxpayer must then be given an opportunity to explain the discrepancy and contest the proposed demand before a reasoned order is passed.
These decisions prevent an immediate jump from the discovery of excess stock to confiscation. The Department’s authority to investigate and recover tax is not taken away; it is only required to exercise that authority through the correct statutory procedure. This protects revenue by permitting recovery of tax, interest, and penalty wherever legally justified, while also protecting the taxpayer from confiscation based merely on an unexplained or disputed stock difference. Thus, effective tax enforcement and procedural fairness are maintained together.
Fine in Lieu of Confiscation Cannot Survive Without Confiscation
The judgment also draws an essential distinction between penalty and fine in lieu of confiscation. A penalty is imposed for a specified statutory contravention. A fine under Section 130(2), by contrast, is offered as an alternative to actual confiscation of the goods. Although both may arise from the same proceedings, they are legally distinct consequences and should not be described interchangeably.
A fine in lieu of confiscation necessarily depends upon the existence of valid confiscation proceedings. It is not an independent demand that can survive after the confiscation itself has been set aside. Once the First Appellate Authority quashed the proceedings under Section 130 and removed their legal foundation, the consequential fine also lost its independent basis.
The Department contended that the First Appellate Authority had left the question of the fine open. That interpretation could not be reconciled with the operative relief. The adjudication orders, including the proceedings for confiscation, penalty and fine, had been set aside. Nothing in the appellate orders preserved the fine as an independent liability. The consequence could not be severed from the proceeding that created it.
Acceptance of the Foundational Relief Defeated the Limited Appeals
The case's most important procedural feature was the narrow scope of the Department’s appeals. The First Appellate Authority concluded that initiating proceedings under Section 130 was unsustainable and set aside the adjudication orders. The Department did not challenge this foundational conclusion. Its appeals were confined to the fine amount.
The First Appellate Authority had set aside the entire proceedings under Section 130 after concluding that confiscation was not the proper legal course for dealing with the alleged unaccounted stock. The Department did not challenge this basic finding in its appeals before the Tribunal. It challenged only the setting aside of the fine imposed in lieu of confiscation. Consequently, the finding that the confiscation proceedings were invalid remained undisturbed and binding for the purpose of those appeals.
A fine in lieu of confiscation cannot exist independently of a valid confiscation order. Therefore, the Department could not seek restoration of the fine without first challenging the finding that Section 130 had been wrongly invoked. If the Department wanted the fine restored, its appeals had to question the First Appellate Authority’s conclusion that the underlying confiscation proceedings were invalid. Without such a challenge, the Tribunal could not revive only the fine while leaving intact the finding that the proceedings giving rise to that fine were unlawful.
The principle applies more broadly to appellate proceedings. When relief is granted on a basic or foundational finding and other demands are set aside as a consequence of that finding, an appeal must challenge the foundational finding itself. Merely questioning the consequential relief is ordinarily insufficient. A demand that depends upon an unchallenged finding cannot be restored indirectly through an appeal confined only to that demand.
Section 112 Review Requires More Than Mechanical Authorisation
Before directing the filing of an appeal under Section 112, the competent Commissioner must examine the legality and propriety of the order, the grounds available against it, the applicable judicial precedents, and the precise relief that can be obtained. This review is a substantive statutory responsibility. Its purpose is to ensure that a departmental appeal presents a sustainable grievance and does not merely repeat objections already answered by the appellate order.
The four appeals were found to have been filed perfunctorily, without proper application of mind. The Commissioner authorised a challenge confined to the fine, even though the very proceedings from which that fine arose had been quashed. No effective challenge was directed against the principal finding that Section 130 had been wrongly invoked. Consequently, even success on the limited grounds stated in the appeals could not have restored the fine's legal foundation.
A reasoned departmental review should therefore ask whether the proposed grounds challenge the operative basis of the order, whether the liability sought to be restored can survive independently, and whether binding or jurisdictional High Court decisions already cover the controversy. Such scrutiny prevents avoidable litigation and ensures that departmental appeals serve a genuine legal purpose.
Unaccounted Stock Must Be Assessed Before Confiscation Is Considered
The dismissal of the four departmental appeals confirms the proper sequence for dealing with unaccounted goods. Discovery of excess stock during a survey is only the beginning of the inquiry; it is not a final determination of tax liability. The Department must first follow Section 35(6) read with Section 73 or Section 74. It must establish the actual quantity of unaccounted goods, determine their taxable value and the relevant tax period, apply the correct rate, and consider the taxpayer’s explanation. Tax, interest, and any applicable penalty can follow only after these matters have been examined through proper adjudication.
Confiscation under Section 130 is a separate and more severe consequence. It cannot be invoked automatically merely because the physical stock found during a survey does not match the quantity recorded in the books. The Department must independently establish the statutory conditions necessary for confiscation. Similarly, a fine in lieu of confiscation depends on the existence of valid confiscation proceedings. Once those proceedings are quashed, the fine cannot survive on its own, especially when the Department does not challenge the finding that Section 130 was wrongly invoked.
The ruling does not grant immunity to taxpayers who maintain incorrect stock records, nor does it prevent the recovery of tax that is lawfully payable. It requires the Department to use the correct statutory process and establish liability on evidence. If valid proceedings prove unaccounted supplies or tax evasion, the appropriate tax, interest, and penalty may be imposed. What is impermissible is the use of confiscation as a shortcut to avoid tax determination. Unaccounted stock may justify investigation and recovery, but confiscation requires a separate and legally established basis.
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