All the taxation statutes provide for several field activities in order to detect prevent and evasion of tax. Such activities include inspection of business premises, goods, books of account and conveyances; unannounced visits, disguise operations, engaging informers, data sharing, surveys, searches, seizure, confiscation, etc. It is needless to state that all such activities are to be carried out only within the framework of law, because everyone has the right to privacy, which includes the right not to have their person or home or business premises sealed/ searched, their possessions seized, etc. However the right of privacy is not absolute and an infringement of that right would be justifiable if a statute provides for it. Taxation Acts infringe upon such right of tax payers by necessary provisions, in which case, such infringement would be reasonable as well, justifiable.
GST system of taxation implemented in the country from July, 2017 is no exception. GST Acts contain the provisions relating to such field activities. Important among them are (a) inspection, (b) search, (c) seizure, (d) confiscation, (e) auction, (f) arrest and (g) prosecution. In this first article, we are discussing ‘inspection’.
Whereas the word ‘audit’ has been defined in Section 2(13) of the CGST Act, 2017 (hereinafter referred to as “the Act”) the word ‘inspection’ has not been defined in the Act. ‘Audit’ is defined as follows:-
“2 (13) “Audit” means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made thereunder;”
Conduct of ‘audit’ by the tax authorities has been specified in Section 65 of the Act. In the case of ‘audit’, an advance intimation would be given by the authorised officer and whereas in the case of ‘inspection,’ no such advance intimation would be given. There is an element of surprise in the case of ‘inspection’. An ‘audit’ is not ‘inspection’ and vice versa. Audit contemplates in depth study and analysis of documents. During the course of audit, systems are checked against the pre-set statutory provisions. The goal of audit generally is assessing statutory compliance. Audit consumes more time and whereas inspection is need-based and could be completed in a day or two, by mostly focusing on detecting evasion or avoidance of tax.
According to dictionaries, ‘inspection’ means the act of looking at something carefully, or an official visit to a building or organisation to check that everything is correct and legal and careful or thorough examination or scrutiny. Section 67(1) of the Act provides for ‘inspection.’ Rule 139 of the CGST Rules, 2017 (hereinafter referred to as Rules) prescribes the procedure. Only an authorized officer has power to inspect any place of business, warehouse, godown, conveyance etc. Such authorization in writing in Form GST-INS-01 (It is common for inspection and search. Appropriate item has to be ticked) has to be given by the jurisdictional Joint Commissioner to any other officer subordinate to him, only when he has reason to believe that
“(a) a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand, or has claimed input tax credit in excess of his entitlement under this Act or has indulged in contravention of any of the provisions of this Act or the rules made thereunder to evade tax under this Act; or
(b) any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act.”
In Circular No. 122/41/2019-GST dated 5-11-2019, CBIC has issued instructions that search authorization, inspection notices, summons, etc., shall bear computerised Document Identification Number (DIN). Hence the said authorisation must also bear such DIN. It shall be pertinent to state that such authorisation has to be complied with, within a specified period. It is valid only for (specified) days.
In all the taxation statutes we see the words ‘reason to believe’. It doesn’t mean pure subjective satisfaction of the officer. In the case of S. Narayanappa vs. CIT (63 ITR 219), the Honourable Supreme Court held that the belief must be in good faith and cannot merely be a pretense. In another case of Sheo Nath Sing vs. AAC (82 ITR 147), the Honourable Supreme Court held that suspicion, rumour or gossip cannot be the basis and that the belief must be that of an honest and reasonable person based on reasonable grounds. It has also been held that the ITO would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the provision.
Such inspection must be carried out during ‘reasonable times’. In the case of P. Lakshamanarao and Sons vs. Special CTO (E) Vijayawada (13 STC 860), the Honourable High Court of Andhra Pradesh held as follows, in relation to the inspection of a hotel:-
“The antithesis of “reasonable time” would be “unreasonable time”; so that, if “at all reasonable times” comprehends the period from 4:30 in the morning to 10 in the night, the unreasonable time would only be confined to the period between 10 p.m. and 4:30 a.m., when the establishment is closed. To our mind, “reasonable time” must have some relation to the nature of the business, and to the time of the day in relation to the working hours, so as to enable an inspection to be made for such period or periods during the day conveniently as the circumstances will permit.”
The proper officer conducting inspection is obliged to furnish a copy of the authorisation to the taxable person. It is customary to show the identity proof. It is also expected that the taxable person and his staff must co-operate during the inspection by answering all the relevant questions and by producing the relevant documents. Under Section 71(1) of the Act, inspection would be in relation to books of account, documents, computers, computer programs, computer software whether installed in a computer or otherwise and such other things as the officer may require and which may be available at such place, for the purposes of carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard the interest of revenue. In the case of Miriyala Venkateswara Rao, in re (2 STC 167), the Madras High Court held that money is not goods which can be inspected by the officer. Copy of the statement recorded from the person in-charge at the business premises along with physical stock statement if any taken must be handed over to such person and acknowledgment obtained. In the case of Life Line Devices vs. CTO, Narayanaguda Circle, Hyderabad (119 STC 52), the Honourable High Court of Andhra Pradesh held that the inspecting officers should forthwith stop collecting postdated cheques or money towards the estimated tax or even admitted to be due and leave it to the competent assessing officer to do that part of the job after giving opportunity to the assessee before passing an order in conformity of the Act. The same has been reiterated in the case of Anan Jewellers, Secunderabad vs. DCTO (22 APSTJ 135) by the Honourable Andhra Pradesh High Court. Spot collection of tax, penalty, etc., has been deprecated. Any amount shall be collected after following due assessment procedure.
Under Section 67(4), the officer authorised under sub-section (2) shall have the power to seal or break open the door of any premises or to break open any almirah, electronic devices, box, receptacle in which any goods, accounts, registers or documents of the person are suspected to be concealed, where access to such premises, almirah, electronic devices, box or receptacle is denied. There should be evidence on record about such denial. In the case of Syed Suhail Pasha vs. CTO (Enforcement) South Zone, Bengaluru (104 VST 160) the Honourable Karnataka High Court held that admittedly, at the time of inspection, the dealer was not only present, but also had co-operated with the inspection. Thus, his presence could not be denied. Moreover, the Department could not claim that he had refused to open any part of the building, or prevented the Commercial Tax Officer from inspecting the site. Hence, none of the circumstances mentioned in section 52(1)(f) of the Act was satisfied and the Commercial Tax Officer was not justified in directing that the premises should be sealed forthwith. Since the sealing order was de hors the law, it was clearly in violation of article 21 of the Constitution of India. The Department was not powerless in ensuring that the books of account were produced by the dealer and did not need a court order in order to exercise the power bestowed upon it by law. Under Section 72 of the Act, all officers of Police, Railways, Customs, and those officers engaged in the collection of land revenue, including village officers, officers of State tax, officers of Union territory tax and other notified Officers shall assist the proper officers in the implementation of this Act. Attention of the concerned person, whose premises is proposed to be inspected is drawn to the following para in the authorisation in Form GST-INS-01:-
“Any attempt on the part of the person to mislead, tamper with the evidence, refusal to answer the questions relevant to inspection / search operations, making of false statement or providing false evidence is punishable with imprisonment and /or fine under the Act read with sections 179, 181, 191 and 418 of the Indian Penal Code.”
We conclude this article by extracting relevant portion from the decision in the case of Binny Limited vs. ACTO (Int) LR South Zone, Bangalore (68 STC 366) decided by the Karnataka High Court:—
“The object of conferring the power of inspection on an officer of the department, and for this purpose to enter any premises of a dealer, is for detecting suppression of turnover and evasion of tax. The element of surprise inspection, if it is called for in a given case, and where the officer has reason to believe that the dealer may not produce all books of account when called upon to do so, would be lost and the object of conferment of such powers on officers of the department defeated, if the dealer is given notice to produce such documents or is given advance intimation about the inspection.
These special powers conferred on an officer of the Department are meant to be exercised with due care and caution, in the light of the facts and circumstances of a given case. Such powers are not meant to be exercised in a routine manner without there being sufficient reasons for invoking the said power whether it be for inspection or for seizure. The actions of the officer under any of these provisions, would be subject to judicial review if any breach or contravention or excessive exercise is alleged.”