Court quashes penalty for alleged undervaluation of goods, rules detention invalid

Case Name:

M/S Shamhu Saran Agarwal And Company vs. Additional Commissioner Grade-2 And 2 Others (High Court of Allahabad)

Key Takeaways:

**Headline:** **Summary:** **Key Takeaways:** - Tax authorities cannot detain goods solely on suspicion of undervaluation - Proper procedure under Sections 73 or 74 of the UP GST Act must be followed for undervaluation cases - Allowing arbitrary detention on undervaluation grounds would give authorities unchecked powers **Issue:** Whether the tax authorities had the power to detain the petitioner's goods and impose penalties solely on the grounds of alleged undervaluation of the goods. **Facts:** The petitioner's goods were detained by the tax authorities on suspicion of undervaluation. A show cause notice was issued, and subsequently, penalties were imposed by the tax officer and the appellate authority on the grounds of undervaluation. **Arguments:** - Petitioner argued that the detention was invalid as per the circular issued by the Commissioner of Commercial Tax, which stated that goods should not be detained solely on grounds of undervaluation. - Petitioner relied on the judgment of the Kerala High Court in Hindustan Coca Cola Private Limited vs. Assistant State Tax Officer, which held that in case of a bona fide dispute over valuation, the authorities can only detain goods for preparing relevant papers and not impose penalties. **Key Legal Precedents:** - Hindustan Coca Cola Private Limited vs. Assistant State Tax Officer (2020 NTN (73)-58) - J.K Synthetics Limited V. Commercial Taxes Officer (1994 (4) SCC 276) **Judgement:** The court quashed the penalty orders dated December 20, 2020, and September 17, 2021, ruling that the detention of goods solely on grounds of undervaluation was invalid. The court held that if such detentions were allowed, it would give unchecked powers to the authorities. The court stated that the proper procedure under Sections 73 or 74 of the UP GST Act must be followed for undervaluation cases, and penalties under Section 129 cannot be imposed based on mere speculation of undervaluation. **FAQs:** Q: What is the significance of this judgment? A: This judgment clarifies that tax authorities cannot arbitrarily detain goods solely on suspicion of undervaluation. They must follow the proper procedure under Sections 73 or 74 of the UP GST Act for undervaluation cases. Q: What is the legal reasoning behind the court's decision? A: The court relied on the circular issued by the Commissioner of Commercial Tax and the precedent set by the Kerala High Court in the Hindustan Coca Cola case, which held that in case of a bona fide dispute over valuation, authorities can only detain goods for preparing relevant papers and not impose penalties. Q: What are the implications of this case for the parties involved? A: The petitioner's penalty orders were quashed, and any deposits made by the petitioner must be returned within four weeks. The tax authorities will have to follow the proper procedure under Sections 73 or 74 of the UP GST Act for undervaluation cases in the future.

1. This is a writ petition under Article 226 of the Constitution of India wherein the petitioner is aggrieved by the penalty order dated December 20, 2020 passed by the respondent No.2/Commercial Tax Officer, Mobile Squad-6, Agra and the order dated September 17, 2021 passed in appeal by the Additional Commissioner Grade-II (Appeal)-II, State Tax, Agra.

2. I have heard Mr. Suyash Agarwal, counsel appearing on behalf of the petitioner, Mr. Ravi Shanker Pandey, Additional Chief Standing Counsel appearing on behalf of the respondents and perused the materials on record.

3. Upon a perusal of the show cause notice dated December 19, 2020, it is clear that the goods were detained on the ground of under valuation.

Subsequently in appeal, the appellate authority affirmed the penalty order on the ground that the goods were under valued.

4. It is evident from the circular issued by the Commissioner, Commercial Tax, Uttar Pradesh dated May 9, 2018 that the goods are not to be detained on the ground of under valuation. The relevant paragraph of the aforesaid circulate is extracted below:-

5. Further more, Mr. Agarwal, appearing for the petitioner, has relied upon a judgment of the Kerala High Court in the case of Hindustan Coca Cola Private Limited vs. Assistant State Tax Officer reported in 2020 NTN (73)-58 wherein the Kerala High Court held as follow:-

“7. From the perusal of the aforementioned findings, it is irresistibly concluded that in case of a bonafide dispute with regard to the classification between a transitor of the goods and the squad officer, the squad officer may intercept the goods and detain them for the purpose of preparing the relevant papers for effective transmission to the judicial assessing officers and nothing beyond. In the present case, it is a case of bonafide miscalculation as to whether the goods would be exigible to 12% or 28%. The judgment cited in N.V.K Mohammed Sulthan Rawtger's case (supra) was also a case where the petitioner firm was a manufacturer of 'Ground Betel Nuts (Arecanuts)' and registered with the Tamil Nadu under the Goods and Service Tax Act.

The goods were intercepted by the inspecting authority to be in contravention of the mis-branding. By relying upon the decision in J.K Synthetics Limited V. Commercial Taxes Officer, 1994 (4) SCC 276, it was held that the charging provisions must be construed strictly but not the machinery provisions which would be construed like any other statute.”

6. In the present case, there is no dispute that the invoice, e-way bill and all other relevant documents were accompanied with the goods.

Furthermore, there was no mismatch in the description of the goods with the documents. The only ground for detention of the goods was that the valuation of the goods as per the invoice was not correct. In my view, this is not a valid ground for detaining the goods as the officer concerned was not competent to carry out such detention.

7. In the event of under valuation, appropriate notice under Sections 73 or 74 of the Uttar Pradesh Goods and Service Tax Act, 2017 (hereinafter referred to as “the Act”) is required to be issued as per the procedure provided therein. If the Court holds such a detention to be valid, it would be open to the authorities to carry out detention on their whims and fancies. The detention of the goods in such a scenario is not envisaged under the Act and the officers have not been vested with such a power to detain the goods and thereafter impose penalty under Section 129 of the Act. Specific provisions have been provided for detection of under valuation and the GST officials have to adhere to the same. It is to be noted that only after issuance of notice under Sections 73 or 74 of the Act, if the goods are found under valued, penalty can be imposed.

8. Accordingly, imposition of penalty under Section 129 of the Act on the speculation that the goods are under valued cannot be allowed.

9. In light of the above, impugned orders dated December 20, 2020 and September 17, 2021 are quashed and set-aside. Consequential reliefs to follow. In the event any deposit has been made by the petitioner to the authorities, the same shall be returned to the petitioner within four weeks from date.

10. The writ petition is, accordingly, allowed.

Order Date :- 31.1.2024

Rakesh

(Shekhar B. Saraf, J.)