We are trading in packing material, made of plastic, like bottles, containers etc. The goods are sold to different food products manufacturing industries. Goods are also kept in Mall for Sale or sold online to individual customers. We are charging and paying VAT at the rate of 5% on the sales of these products since according to us these goods are covered by the Notification issued by the Government of Maharashtra for Industrial Inputs and Packing Material. Our view is supported by the Bombay High Court judgment in the case of M/s Samruddhi Industries, STR No. 20 of 2006, Judgment dated 23-12-2014. The Investigation Department paid surprise visit to us. They are of the view that these products are covered by residuary entry attracting tax at 12.5%. They wanted us to file revised returns and pay tax at 12.5%. On our refusal they have taken prohibitory action u/s. 35 of The MVAT Act, 2002 and have attached our bank accounts and debtors. Kindly advise.
A. The Section 35 vests a drastic power in administrative authorities. The decisions of the administrative authorities under section 35 have to be reviewed under much stricter standard than other administrative orders and the onus of justification of the Order should be on the administrative authority who passed the Order
B.1 The Section 35 of the MVAT Act reads as follows:
“35. Provisional attachment to protect revenue in certain cases:—
(1) If during the course of inquiry in any proceedings including, proceedings related to recovery of any amount due, in respect of any person or dealer or during any inspection or search in relation to the business of any person or dealer under this Act, the Commissioner is of the opinion that for the purpose of protecting the interests of the revenue it is necessary so to do, then he may, notwithstanding anything contained in any law for the time being in force or any contract to the contrary, attach provisionally by order in writing any money due or which may become due to such person or dealer from any other person or any money which any other person holds or may subsequently hold for or on account of such person or dealer:
Provided that, the Commissioner shall specify in his order the amount of money to which the order applies:
Provided further that, the Commissioner may, by an order, revoke such order, if the dealer furnishes, to the Commissioner, a bank guarantee, in such time, for such period, as may be specified, in the said order.
(2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of service of the order issued under sub-section (1):
Provided that, the Commissioner may, for reasons to be recorded in writing, extend aforesaid period by such further period or periods as he may think fit, so, however that the total period of extension shall not in any case exceed two years.
(3) The powers under this section shall be exercised by the Commissioner himself or the Additional Commissioner having jurisdiction over the entire State or, as the case may be, by any Joint Commissioner to whom the Commissioner has delegated such powers by a notification published in the Official Gazette
(4) Where an order under sub-section (1) is served upon any person, provisionally attaching any money, then such person shall be personally liable, so long as the attachment order is not revoked or has not ceased to have effect, to pay to the Commissioner, the amount of money so attached
(5) If the said person or the dealer makes an application in the prescribed form to the Commissioner within fifteen days of the date of service of the order specified in sub-section (1), or as the case may be, within fifteen days of the date of service of the order extending the period under sub-section (2), then the Commissioner, after affording such person or dealer a reasonable opportunity of being heard, and, having regard to the circumstances of the case, may confirm, modify or cancel the order.
(6) An appeal against any order passed under sub-section (5) shall lie with the Tribunal and all other provisions of section 26 shall apply accordingly.
B.2 Section 35 embodies the powers of provisional attachment as granted by the State Legislature to the administrative authorities under the MVAT Act. The provision is invokable in cases where it is necessary to “protect the interests of Revenue”
B.3 The Section 35 does not expressly provide for a pre-decisional hearing, but provides for a post-decisional hearing as well as an appellate mechanism.
B.4 The nature of the powers vested in the administrative authorities under Section 35 are draconian in nature. Decisions taken under the Section 35 have to be subjected to a much stricter standard of review than other administrative decisions and the onus should be on the administrative authority who exercises such powers to show that the decision taken by it are valid. The authors cite the following factors in support of these propositions:
Extraordinary and drastic power
B.5 The Section 35 provisions relating to provisional attachment by the Revenue are analogous to Order 38 Rule 5 of the Code of Civil Procedure, 1908 which deals with “Attachment before judgment”. With respect to the powers enshrined in Order 38 Rule 5, the Supreme Court has observed in Raman Tech. & Process Engg. Co. & Anr. v. Solanki Traders [(2008) 2 SCC 302]:
“5. The power under Order 38 Rule 5 CPC is a drastic and extraordinary power. Such power should not be exercised mechanically or merely for the asking. It should be used sparingly and strictly in accordance with the Rule. The purpose of Order 38 Rule 5 is not to convert an unsecured debt into a secured debt. Any attempt by a plaintiff to utilise the provisions of Order 38 Rule 5 as a leverage for coercing the defendant to settle the suit should be discouraged. Instances are not wanting where bloated and doubtful claims are realised by unscrupulous plaintiffs by obtaining orders of attachment before judgment and forcing the defendants for out-of-court settlements under threat of attachment.
6. A defendant is not debarred from dealing with his property merely because a suit is filed against him. Shifting of business from one premises to another premises or removal of machinery to another premises by itself is not a ground for granting attachment before judgment. A plaintiff should show, prima facie, that his claim is bona fide and valid and also satisfy the court that the defendant is about to remove or dispose of the whole or part of his property, with the intention of obstructing or delaying the execution of any decree that may be passed against him, before power is exercised under Order 38 Rule 5 CPC. Courts should also keep in view the principles relating to grant of attachment before judgment [See Premraj Mundra vs. Md. Manech Gazi (AIR 1951 Cal 156) for a clear summary of the principles]”
B.6 Thus the power under Order 38 Rule 5 has been described as “extraordinary and drastic” by the Apex Court with an admonition to not allow that power to be used as a “leverage to force out-of-court settlements”.
B.7 Be it noted that the Legislature did not intend that a power like the one enshrined in Section 35 be used to arm-twist dealers into paying taxes on mere difference of opinion as to the classification of goods. It is also not possible to accept that the Legislature could have contemplated a power to provisionally attach bank accounts and debtors when the High Court has already settled the point of interpretation.
B.8 Therefore, the Revenue has to lead strict proof as to the necessity for invoking such a power in a case where the only issue is that of classification of goods.
The Revenue is the judge, prosecutor and the litigant in cases of provisional attachment
B.9 It be noted that the Courts which are empowered to adjudicate the pleas for “attachment before judgment” under Order 38 Rule 5 are impartial tribunals. The Civil Courts are not administrative tribunals which are under the complete control of the Government. However, in case of section 35 of the MVAT Act, a draconian power has been vested entirely in administrative officials. The Commissioner and his delegates, who are interested parties in the proceedings involving tax assessments, have been given the roles of the prosecutor as well as the Judge.
B.10 In the United Kingdom, there is no power of provisional attachment before making an assessment. The Budget 2014 sought to give Her Majesty’s Revenue and Customs (hereinafter “HMRC”) the power to seize bank accounts directly from the taxpayers. Following a public outcry over bypassing the Civil Courts and vesting the adjudicative and confiscatory power in an administrative agency, the House of Commons referred the proposals to the Treasury Committee. The Petitioner seeks to draw attention to the Report of the Treasury Committee of the House of Commons of the Parliament of the United Kingdom wherein the Treasury Committee took a stern view of untrammelled powers in hands of administrative authorities:
“HMRC’s Debt Recovery Powers
237. …..Mr. Haskew gave some examples of the sorts of errors HMRC had been making:
One of our members recently had a letter from HMRC threatening distraint on his assets because he had not paid a tax liability, and the letter he got said his tax liability was nought. HMRC was chasing someone and threatening distraint on a tax that was ostensibly due of nothing.
Another last week was an employer who was being threatened with a collector coming round to collect assets to cover the debt. The debt had been paid in full in January, and this was the end of March.
238. HMRC has, in the past, committed errors on a much larger scale. For example, in 2007, HMRC lost two computer discs containing Child Benefit data which included the name, address, date of birth, National Insurance number and, where relevant, bank details of 25 million people.
244. The proposal to grant HMRC the power to recover money directly from taxpayers’ bank accounts is of considerable concern to the Committee. It could develop into a return to Crown preference by stealth. The Committee considers a lengthy and full consultation to be essential. The greater detail provided by the Government on 6th May will need further and extensive examination, and the Committee will take further evidence on this. Giving HMRC this power without some form of prior independent oversight — for example by a new ombudsman or tribunal, or through the courts — would be wholly unacceptable.
245. The Chancellor argues that this measure can be justified because the Department for Work and Pensions already has the right to take money directly from people’s bank accounts to pay child maintenance. However, the parallel is not exact: in those cases, DWP is acting as an intermediary between two individuals. HMRC would be acting not as an intermediary between two individuals but rather in pursuit of its own objective of bringing in revenue for the Exchequer.
246. This policy is highly dependent on HMRC’s ability accurately to determine which taxpayers owe money and what amounts they owe, an ability not always demonstrated in the past. Incorrectly collecting money will result in serious detriment to taxpayers. The Government must consider safeguards, in addition to those set out in the consultation document, to ensure that HMRC cannot act erroneously with impunity. These might include the award of damages in addition to compensation, and disciplinary action in cases of abuse of the power.
247. The ability directly to have access to millions of taxpayers’ bank accounts raises concerns about the risk of fraud and error, and this should also be covered by the consultation.”
… (Emphasis supplied)
The Chapter relating to the HMRS’s debt recovery powers, from which the above extracts have been taken, are set out in Paras 226 to 247 of the Report of the Treasury Committee on Budget 2014.
C.12 The British Parliament finally enacted the debt recovery powers vide Section 51 read with Schedule 8 of the Finance Act (No. 2) 2015. It is pertinent to note that the power to attach and recover from bank accounts is available in the United Kingdom only qua “established debts” and not for provisional attachment before assessment (as under Section 35 MVAT Act). The section 51(2)(5) of that Act defines an “established debt” as a debt which is due and payable after all possibility of reversal on appeal has passed. It is submitted that the British Parliament has enacted a lengthy list of safeguards to protect innocent taxpayers even where the tax has been finally assessed and after the time table of appeal has passed. A summary of the same have been set out in the ‘Issue Briefing: Direct Recovery of Debts dated 5th August, 2015’ which was published by the HMRC just after the Finance Act (No. 2), 2015 received Royal Assent.
C.13 Similarly in the United States, no power of provisional attachment is vested in the Internal Revenue Service for recovering tax dues before assessment. The strict requirements of the “due process clause” of the United States Constitution has ensured that property cannot be seized in the United States without a Civil Court’s blessings (except in some limited cases like seizing properties of drug cartels, crime syndicates etc. to paralyse their functioning). The power of attachment can only be invoked when the assessment has been completed and the tax is legally due. [See Clause 22.214.171.124.3.1 of the Section 3: “Levy and Sale” of the Part 5 of Chapter 17 of the IRS Manual]. See also the judgment of the United States Supreme Court in United States vs. National Bank of Commerce [472 US 713 (1985)] where that Court says that “Under the succeeding SS. 6322 the lien generally arises when an assessment is made…” and also generally summarises the procedure for seizing any asset.
C.14 The Section 35 ousts the Civil Court’s traditional jurisdiction over matters of attachment before judgment and vests it in an administrative authority. Since the administrative officers under the MVAT Act are the judge, prosecutor as well as an interested party and exercise extraordinary powers which will always affect the property and trade rights of taxpayers, the onus of justifying the provisional attachment is squarely on the Revenue.
Powers granted under Section 35 directly affect the fundamental rights of the person under Article 19(1)(g)
C.14 Be it noted that the powers granted under the Section 35 of the MVAT Act directly affect the fundamental right to trade and profession guaranteed under Article 19(1)(g) of the Constitution of India in all cases. Bank Accounts and Accounts Receivable (i.e. Debtors) constitute vital sources of working capital. Working capital is an absolute essential for any running business. A business cannot survive if its ability to access its working capital is paralysed. When any kind of attachments is levied on Bank Accounts and Accounts Receivable, the ability to pay off creditors is also seriously jeopardised leading to erosion of creditworthiness and trade reputation. It is also well known that the power of provisional attachment is frequently used to harass even those dealers who lawfully pay all taxes and do not engage in any kind of tax evasion. The Revenue exerts immense pressure through raids and provisional attachments for extracting unassessed taxes and terrorise the dealers into filing revised returns which will foreclose the right to appeal what is in substance an admission of an unassessed demand.
C.15 The authors submit that the right to trade under the Article 19(1)(g) includes a right to protection from arbitrary actions which threaten the survival of business.
C.16 In Gandhi Trading v. Assistant Commissioner of Income Tax [(1999) 239 ITR 337 (Bom)], this Hon’ble Court held:
“The power of attachment under this section is in nature of attachment before judgment under the Code of Civil Procedure. It is a drastic power. It should, therefore, be exercised with extreme care and caution. It should not be exercised unless there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of the whole or any part of his property with a view to thwart the ultimate collection of the demand. Moreover, attachment should be made of the properties and to the extent it is required to achieve the above object. It should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee. Attachment should be made as far as possible of immovable properties if that can protect the Revenue. Attachment of bank accounts and trading assets should be resorted to only as a last resort. In any event, attachment under section 28-IB should not be equated with attachment in the course of recovery proceedings.”
C.17 The Section 281B of the Income-tax Act, 1962 allows the attachment of any “property” instead of only “monies due and payable or which would become due and payable” under Section 35 of the MVAT Act. In the context of the wider provisions of Section 28-1B, this Hon’ble Court noted the detrimental effect of such attachment on a running business and held that immovable properties should be attached before bank accounts and debtors are attached. The Section 35 of the MVAT Act thus places a far greater burden on the taxpayers than the contemporary provisions in other tax laws inasmuch there is no option to provisionally attach immovable property.
C.18 The Report on the Standing Committee on Finance (2005-06) 14th Lok Sabha on The Taxation Laws (Amendment) Bill, 2005 which inserted the Sections 28BA in the Customs Act, 1962 and the Section 11DD in the Central Excise Act, 1944 which deal with the powers of provisional attachment under those Acts may also be seen. With respect to the powers of provisional attachment, the Standing Committee observed :
“59. The Committee note that though the proposal to incorporate provisions enabling for provisional attachment of property in the Customs as well as the Central Excise Acts is akin to the existing provisions under the Income-tax Act, serious apprehensions and misgivings have been expressed, particularly by the representatives of the Trade and Industry include, the adverse effect the move may have on business activities of manufacturing units and the possibility of harassment in the hands of tax officials owing to enhanced powers.
60. The Committee’s questioning on the means by which such concerns are to be addressed evoked the response from the Ministry that administrative instructions would be issued to effectively address the apprehensions expressed. As informed by the Ministry, the administrative instructions would clearly stipulate that the Commissioner of Customs/Excise would order attachment of property only upon receipt of a report from the jurisdictional Deputy/Assistant Commissioner, which would be in the nature of ‘speaking order’ detailing the reasons, evidence, and justification for the provisional attachment. Also, the value of the property attached would be equal to the duty liability only; the possibility of attaching movable property would be considered only if the duty liability is not covered by attaching the immovable property; and the personal properties of Directors/Properties would not be provisionally attached on any count. The Government have also expressed in clear terms that the move ‘will not hamper the manufacturing activities’ and ‘the business activities of the assessees will carry on in the normal fashion’.
The relevant portion of the Report of the Standing Committee relating to provisional attachment occur in the Paragraphs 51 to 61 of the Report. Circular No. 874/12/2008-CX dated 30-6-2008 (Excise), and Circular 10/2008-Cus dated 30-6-2008 (Customs) were issued by the Central Board of Excise and Customs laying down a lengthy procedure relating to the powers of provisional attachment when those provisions relating to that power were inserted in the Customs Act, 1962 and the Central Excise Act, 1944.
C.20 It is in the very nature of the power under Section 35 to impair the fundamental right under Article 19(1)(g) and the Constitutional right under Article 300A. Hence it is necessary that the onus should be on the Revenue to justify the provisional attachment.
Post-decisional hearing/appellate mechanism contemplated by the Section 35 is not an adequate safeguard
C.20 The Section 35 does not provide for a pre-decisional hearing, but envisages a post-decisional hearing and an appellate mechanism to contest the levy of provisional attachment. It is a settled proposition in administrative law that an appeal from an administrative decision is not as effective as a pre-decisional hearing. In Institute of Chartered Accountants vs. L K Ratna [(1986) 4 SCC 537], the Supreme Court observed:
“17. It is then urged by learned counsel for the appellant that the provision of an appeal under Section 22-A of the Act is a complete safeguard against any insufficiency in the original proceeding before the Council, and it is not mandatory that the member should be heard by the Council before it proceeds to record its finding. Section 22-A of the Act entitles a member to prefer an appeal to the High Court against an order of the Council imposing a penalty under Section 21(4) of the Act. It is pointed out that no limitation has been imposed on the scope of the appeal, and that an appellant is entitled to urge before the High Court every ground which was available to him before the Council. Any insufficiency, it is said, can be cured by resort to such appeal. Learned counsel apparently has in mind the view taken in some cases that an appeal provides an adequate remedy for a defect in procedure during the original proceeding. Some of those cases as mentioned in Sir William Wade’s erudite and classic work on Administrative Law 5th Edn. But as that learned author observes (at p. 487), “in principle there ought to be an observance of natural justice equally at both stages”, and
“If natural justice is violated at the first stage, the right of appeal is not so much a true right of appeal as a corrected initial hearing: instead of fair trial followed by appeal, the procedure is reduced to unfair trial followed by fair trial.”
And he makes reference to the observations of Megarry, J. in Leary v. National Union of Vehicle Builders [(1971) Ch 34, 49] . Treating with another aspect of the point, that learned Judge said:
“If one accepts the contention that a defect of natural justice in the trial body can be cured by the presence of natural justice in the appellate body, this has the result of depriving the member of his right of appeal from the expelling body. If the rules and the law combine to give the member the right to a fair trial and the right of appeal, why should he be told that he ought to be satisfied with an unjust trial and a fair appeal? Even if the appeal is treated as a hearing de novo, the member is being stripped of his right to appeal to another body from the effective decision to expel him. I cannot think that natural justice is satisfied by a process whereby an unfair trial, though not resulting in a valid expulsion, will nevertheless have the effect of depriving the member of his right of appeal when a valid decision to expel him is subsequently made. Such a deprivation would be a powerful result to be achieved by what in law is a mere nullity; and it is no mere triviality that might be justified on the ground that natural justice does not mean perfect justice. As a general rule, at all events, I hold that a failure of natural justice in the trial body cannot be cured by a sufficiency of natural justice in an appellate body.”
The view taken by Megarry, J. was followed by the Ontario High Court in Canada in Re Cardinal and Board of Commissioners of Police of City of Cornwall [(1974) 42 DLR (3d) 323]. The Supreme Court of New Zealand was similarly inclined in Wislang vs. Medical Practitioners Disciplinary Committee [(1974) 1 NZLR 29], and so was the Court of Appeal of New Zealand in Reid vs. Rowley [(1977) 2 NZLR 472] .
18. But perhaps another way of looking at the matter lies in examining the consequences of the initial order as soon as it is passed. There are cases where an order may cause serious injury as soon as it is made, an injury not capable of being entirely erased when the error is corrected on subsequent appeal. For instance, as in the present case, where a member of a highly respected and publicly trusted profession is found guilty of misconduct and suffers penalty, the damage to his professional reputation can be immediate and far-reaching. “Not all the King’s horses and all the King’s men” can ever salvage the situation completely, notwithstanding the widest scope provided to an appeal. To many a man, his professional reputation is his most valuable possession. It affects his standing and dignity among his fellow members in the profession, and guarantees the esteem of his clientele. It is often the carefully garnered fruit of a long period of scrupulous, conscientious and diligent industry. It is the portrait of his professional honour. In a world said to be notorious for its blase attitude towards the noble values of an earlier generation, a man’s professional reputation is still his most sensitive pride. In such a case, after the blow suffered by the initial decision, it is difficult to contemplate complete restitution through an appellate decision. Such a case is unlike an action for money or recovery of property, where the execution of the trial decree may be stayed pending appeal, or a successful appeal may result in refund of the money or restitution of the property, with appropriate compensation by way of interest or mesne profits for the period of deprivation. And, therefore, it seems to us, there is manifest need to ensure that there is no breach of fundamental procedure in the original proceeding, and to avoid treating an appeal as an overall substitute for the original proceeding.”
… (Emphasis supplied)
C.24 In K. I. Shepherd v Union of India [(1987) 4 SCC
431], the Supreme Court observed:
“16. ….it is common experience that once a decision has been taken, there is a tendency to uphold it and a representation may not really yield any fruitful purpose.”
C.25 Similarly, in H. L. Trehan v. Union of India [(1989) 1 SCC 764], the Apex Court noted:
“12. It is, however, contended on behalf of CORIL that after the impugned circular was issued, an opportunity of hearing was given to the employees with regard to the alterations made in the conditions of their service by the impugned circular. In our opinion, the post-decisional opportunity of hearing does not subserve the rules of natural justice. The authority who embarks upon a post-decisional hearing will naturally proceed with a closed mind and there is hardly any chance of getting a proper consideration of the representation at such a post-decisional opportunity.
C.26 It is submitted that even if a subsequent appeal is provided to the Tribunal, the second appeal becomes more of a hassle than a remedy given the nature of the provisional attachment. The attachment under Section 35 is levied on bank accounts and accounts receivable which has the potential of paralysing the entire business activity immediately. Thus, a two-staged post-decisional hearing may be an adequate safeguard where attachment is levied on immovable properties, but not where attachment brings the very survival of business into question.
C.27 The authors submit that in addition to vesting the power of attachment in an administrative authority who has an interest in attaching properties of citizens to fulfil its own revenue targets and also excluding a pre-decisional hearing, the Section 35 provides an inadequate opportunity of being heard. It is therefore necessary that the decisions under Section 35 are scrutinised against a stricter standard than other administrative decisions.
A. An Order for Provisional Attachment should not be passed if immovable properties can cover the potential tax liability
C.1 Attachment of immovable properties does not affect a running business. The authors submit that no provisional attachment should be levied at all when the immovable properties of the dealer are sufficient to satisfy the potential tax demand. Unlike monies and accounts receivable, there is no danger that an immovable property will be siphoned off out of the jurisdiction of the tax authorities.
C.2 Under Section 57 of the MVAT Act, the Commissioner has sufficient powers to declare any transfer of property to defraud revenue void. Hence, even if the ownership of immovable properties change before the assessment order is passed, the transfer can be declared void after the assessment order is passed.
C.3 The Customs and Excise Circulars dated 30-6-2008 which direct that a pre-decisional hearing be given to taxpayers before invoking the powers of provisional attachment enjoin upon the Revenue Officers to attach the immovable properties first and then the bank accounts and the accounts receivables (according to the law laid down in Gandhi Trading). To allay the fears of siphoning off of properties while the pre-decisional hearing is pending, the Government has directed its officials to invoke the powers of declaring transfers to defraud Revenue (while pre-decisional hearing is pending) void to deal with such cases.
C.4 We advise you to immediately challenge the attachment before the High Court even if the alternate remedy is provided.