Facts of the Case

  • The Search & Seizure Action: The Revenue authorities conducted an investigative raid on the commercial premises of the appellant, M/s Maruti Castings (Proprietor: Nand Kumar Sharma). Consequent to the search operations, the goods found lying inside the premises were formally seized by the department.
  • Demand for Bank Guarantee: In order to secure the provisional release of the seized goods, the respondents demanded that the appellant furnish a bank guarantee amounting to ₹1,51,80,118/-.
  • Prior Deposits by Appellant: During the course of the ongoing investigation, the appellant had already deposited an admitted amount of ₹53,08,574/- with the tax authorities.
  • Single Judge Proceeding: The appellant approached the High Court via a writ petition. Initially, an interim order was passed on 21.05.2021. However, upon an application filed by the Revenue under Article 226(3) of the Constitution of India, the learned Single Judge modified the interim order on 14.09.2021.
  • The Single Judge's Mandate: The modified order directed that, in addition to executing a surety bond equivalent to the total value of the goods, the appellant must furnish a bank guarantee covering the full demanded amount under Section 67(6) of the CGST Act, 2017 read with Rule 140 of the CGST Rules, 2017, without adjusting the prior deposit. Aggrieved by this lack of adjustment, the appellant preferred an intra-court Special Appeal (Writ) before the Division Bench.

Issues Involved

  1. Whether the statutory preconditions for the provisional release of seized goods—specifically the requirement to furnish a bank guarantee under Section 67(6) of the CGST Act, 2017 and Rule 140 of the CGST Rules, 2017—must be strictly complied with as per the rules.
  2. Whether an amount of ₹53,08,574/- already deposited by the assessee during the proceedings can be legally ignored, or if it must be adjusted against the total demanded bank guarantee of ₹1,51,80,118/- to prevent excessive collection by the Revenue.

Petitioner’s (Appellant's) Arguments

  • Prima-Facie Case Against Seizure: The learned counsel for the appellant argued that the Single Judge failed to recognize a strong prima-facie case against the high-handed, illegal seizure action, which bypassed regular statutory frameworks.
  • Non-Compliance with Show Cause Mechanism: It was forcefully contended that the department had failed to issue or comply with the mandatory show cause notice requirements under Sections 73 and 74 of the CGST Act, 2017 prior to taking coercive steps.
  • Argument Against Double Recovery/Excess Collection: The appellant placed heavy reliance on the argument that even if Section 67(2), 67(6), and Rules 140 & 141 apply, the prior deposit of ₹53,08,574/- cannot be ignored. Forcing the appellant to give a bank guarantee for the entire ₹1,51,80,118/- without adjusting what is already sitting in the government treasury would effectively amount to recovering/collecting an amount greater than what was actually demanded by the department.

Respondent’s Arguments

  • No Relaxation of Statutory Preconditions: The learned counsel for the Union of India and the GST department submitted that the provisional release is strictly governed by the preconditions set out in Rule 140 of the CGST Rules, 2017, which cannot be diluted or modified via judicial indulgence.
  • Reliance on Supreme Court Precedent: The Revenue placed heavy reliance on the Hon’ble Supreme Court's ruling in State of Uttar Pradesh and Others Versus Kay Pan Fragrance Private Limited (2020) 5 SCC 811, which establishes that assessees must strictly follow the statutory mechanism for provisional release and cannot be extricated from paying applicable taxes/securities.
  • Procedural Objections: The respondents argued that the plea for adjustment was a fresh plea which was not actively pressed before the learned Single Judge. Furthermore, they contended that seeking an adjustment of the deposited amount runs completely counter to the primary reliefs claimed in the main writ petition. Court's Findings & Order
  • Strict Adherence to Statutory Framework: The Division Bench reviewed Section 67(6) and Rule 140, noting that provisional release strictly demands the execution of a bond in Form GST INS-04 and the furnishing of a bank guarantee equivalent to the applicable tax, interest, and penalty. The court echoed the Supreme Court's position in Kay Pan Fragrance, reiterating that no extraordinary indulgence can be granted to bypass the explicit words of the statute.
  • Principles of Equity & Double Recovery Avoidance: However, taking a balanced and equitable approach, the High Court noted that if an assessee has already deposited a substantial portion of the tax during the investigation, that deposit is an "admitted position on record" and cannot be ignored.
  • Modification of the Single Judge's Order: The Court explicitly held that adjusting the prior deposit while calculating the final bank guarantee amount does not violate the provisions of Section 67(6) or Rule 140.
  • Final Relief: The Division Bench modified the Single Judge's order solely to the extent that the bank guarantee required from the appellant shall be calculated as ₹1,51,80,118/- minus ₹53,08,574/-. No other reliefs were granted, and all other broader issues were left open since the appeal arose strictly from an interim arrangement.

Important Clarification

Key Legal Takeaway: While High Courts cannot bypass or dilute the strict statutory mechanism prescribed under Section 67(6) and Rule 140 for the provisional release of seized goods (as per the SC ruling in Kay Pan Fragrance), they possess the equitable power to direct the adjustment of ad-hoc tax amounts already deposited during investigations. Forcing an assessee to furnish a full bank guarantee without factoring in voluntary or investigative cash deposits amounts to an unfair and excessive recovery of tax security.

Sections Involved

  • Section 67(2) of the CGST Act, 2017: Power of search and seizure of goods, documents, books, or things.
  • Section 67(6) of the CGST Act, 2017: Provisions enabling provisional release of seized goods upon execution of a bond and furnishing of security/payment of tax, interest, and penalty.
  • Section 73 & Section 74 of the CGST Act, 2017: Determination of tax unpaid/short paid or erroneously refunded (Normal and Fraud/Willful Misstatement cases).
  • Rule 140 of the CGST Rules, 2017: Execution of Form GST INS-04 and bank guarantee requirements for provisional release.
  • Rule 141 of the CGST Rules, 2017: Procedure concerning the release of perishable or hazardous goods.
  • Article 226(3) of the Constitution of India: Application for vacation/modification of ex-parte interim orders.

Link to download the order - https://mytaxexpert.co.in/uploads/1783151713_809compressed.pdf

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