Penalty proceedings under Section 130 of the CGST Act cannot be initiated if excess stock was found

The Allahabad High Court has ruled that penalty proceedings under Section 130 of the CGST Act cannot be initiated simply because excess stock was found. Instead, if excess stock is discovered, the relevant proceedings should be initiated under Section 73 or Section 74 of the CGST Act. This decision clarifies that Section 130 is not the appropriate avenue for penalties related to discrepancies in stock levels.

The Hon'ble Allahabad High Court in the case of PP Polyplast (P.) Ltd. v. Additional Commissioner Grade 2 [Writ Tax No. 1183 of 2024 dated July 30, 2024] allowed the writ petition and held that no penalty proceedings under Section 130 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") is maintainable on the ground of excess stock. It was further stated that the proceedings relating to Section 73/74 should be initiated if prima facie view arises that excess stock was found.

Facts:

PP Polyplast (P.) Ltd. ("the Petitioner") filed a writ petition against the order dated April 16, 2024 ("the Impugned Orders") passed by the Revenue Department Appellate Authority ("the Respondent") relating to orders passed by exercising the powers under Section 130 of the CGST Act.

The Petitioner contended that no actual weighment of stock was done by the Respondent Authorities. Further, it was submitted that no penalty proceedings under Section 130 could be initiated and proceedings under Section 73/74 of the CGST Act should be initiated. In this regard reliance was placed upon the judgment of the Hon'ble Allahabad High Court in the case of Dinesh Kumar Pradeep Kumar v. Additional Commissioner Grade 2 [State Tax [Writ Tax No. 1082 of 2022 dated July 25, 2024].

Issue:

Whether penalty proceedings under Section 130 of the CGST Act can be initiated if excess stock was found?

Held:

The Hon'ble Allahabad High Court in the case of Writ Tax No. 1183 of 2024 held as under:

• Noted that, the survey was conducted at the business premises of the Petitioner. Further, it has been admitted that the excess stock was found which led to initiation of proceedings.
• The Hon'ble High Court relying upon the case of Dinesh Kumar Pradeep Kumar v. Additional Commissioner Grade 2, State Tax [Writ Tax No. 1082 of 2022 dated July 25, 2024] wherein the Hon'ble High Court in aforesaid case noted that:

12. In the light of what has been decided by this Court in the case of M/s Metenere Limited (supra), it is clear that the entire exercise resorted to under Section 130 of the GST Act for assessment/ determination of the tax and the penalty is neither stipulated under the Act, nor can be done in the manner in which it has been done, more so, in view of the fact that the department itself had undertaken the exercise of quantifying the tax due, by taking recourse under Section 74.

13. As the entire tax has been determined and the penalty has been levied only on the basis of a survey by taking recourse under Section 130 of the GST Act and not taking a recourse to Section 74, the order impugned is clearly unsustainable.

15. On a plain reading of the allegations levelled against the petitioner with regard to the improper accounting of goods, the only stipulation contained in Clauses (ii) and (iv) of sub-section (1) of Section 130 can at best be invoked by the department, however, in the present case, even assuming for the sake of argument, that the goods were lying in excess of the goods in record, the case against the petitioner would not fall under Clause (ii) of sub-section (1) of Section 130 for the simple reason that the liability to pay the tax arises at the time of point of supply, and not at any point earlier than that. On a plain reading, the scope of Clause (ii) of sub-section (1) of Section 130 is that any assessee who is liable to pay tax and does not account for such goods, after the time of supply is occasioned, would be liable to penalty under Clause (ii). Analyzing Clause (iv) of sub-section (1) of Section 130, the contravention of any provision of the Act or the Rules should be in conjunction with an intent to evade payment tax and penalty can be levied by invoking Clause (iv) only when the department establishes that there were a contravention of the Act and Rules coupled with the ''intent to make payment of tax'. There is no such allegation in the show cause notice or any of the orders.

• Opined that, no proceedings should be initiated under Section 130 of the CGST Act, for excess stock found, as in the said situation, the proceedings under Section 73 or Section 74 of the CGST Act, would be applicable for initiation of proceedings.
• Held that, the writ petition was allowed and the Impugned Orders were set aside.