Jurisdictional Integrity in GST Investigations: Karnataka High Court Quashes Proceedings Based on Improper Officer Actions

Prefatory Note

The case of M/s. Vigneshwara Transport Company v. Additional Commissioner of Central Tax & Ors.[i], adjudicated by the Hon’ble Karnataka High Court, revolves around the applicability of proper procedural safeguards under the?Central Goods and Services Tax Act, 2017 (‘CGST Act’)?and the?Karnataka Goods and Services Tax Act, 2017 (‘KGST Act’). The Court delves into whether an investigation and show cause notice initiated by an improper officer can form the basis for demanding liability and whether such actions align with the statutory framework. The decision underscores the importance of jurisdictional propriety and adherence to procedural requirements under the GST laws.

Factual Matrix

• M/s. Vigneshwara Transport Company (‘petitioner’) was involved in the transportation of goods and was duly registered under the CGST Act and KGST Act. Allegations were levelled against the petitioner for purportedly engaging in the supply of areca nuts to gutkha manufacturers without paying appropriate GST. This led to an investigation initiated by?Respondent No. 2, who was not a ‘proper officer’ under the CGST Act.
• Respondent No. 2 conducted searches, seizures, and inspections under ch. XIV of the CGST Act, seizing documents and materials from the petitioner. During the investigation, the petitioner was also compelled to deposit Rs.50 lakhs towards probable GST liability.
• Subsequently, realizing the lack of jurisdiction, Respondent No. 2 transferred the case to?Respondent No. 3, the proper officer. However, Respondent No. 3 issued a show cause notice under?s.74 of the CGST Act, relying on the records created by Respondent No. 2.

Contentions of the Petitioner

• The petitioner argued that Respondent No. 2’s investigation, conducted without jurisdiction, was void ab initio, rendering the subsequent show cause notice illegal. It was contended that Respondent No. 3 could not issue a notice based on ‘borrowed satisfaction’ from an improper officer’s investigation.
• Thus, the petitioner sought the following reliefs:

Decision of the High Court

• The Karnataka High Court delivered a comprehensive judgment addressing the procedural lapses and jurisdictional issues under the CGST Act and the KGST Act. It held that the investigation, including searches and seizures conducted by Respondent No. 2, was ab initio void as it was carried out by an officer lacking jurisdiction. Referring to?s.2(91)?and?s.67?of the CGST Act, the Court emphasized that only a ‘proper officer’ is empowered to conduct inspections, searches, and seizures under the Act.
• The Court rejected the validity of the show cause notice issued by Respondent No. 3, finding that it was based on the investigation conducted by an improper officer. It ruled that Respondent No. 3 was obligated to conduct a fresh and independent investigation before issuing a show cause notice under?s.74?of the CGST Act. Borrowed satisfaction, relying entirely on the records of an unauthorized investigation, is impermissible under the law.
• The Court referred to?Pooran Mal v. Director of Inspection[ii], which allowed the use of evidence obtained through irregular searches in certain circumstances. However, the Court distinguished this precedent, noting that it pertained to income tax laws and not GST, which mandates stricter compliance with jurisdictional requirements.
• It also relied on?C. Ramaiah Reddy v. Assistant Commissioner of Income-tax[iii], which held that actions by an officer lacking jurisdiction are void and cannot be used to sustain subsequent proceedings.
• Thus, the Court directed Respondent No. 1 to refund the Rs.50 lakhs deposited by the petitioner within eight weeks. It further ordered the release of all documents and materials seized by Respondent No. 2, acknowledging the lack of lawful authority in their confiscation.
• While quashing the impugned show cause notice, the Court preserved the respondents’ right to initiate appropriate action in accordance with the law, provided they adhere to statutory procedures.

Our Analysis

The High Court’s decision is a reaffirmation of the principle that jurisdictional and procedural safeguards are fundamental to the administration of tax laws. The judgment highlights the necessity for strict compliance with the CGST Act, particularly the provisions governing the powers and responsibilities of officers. Jurisdictional errors cannot be cured through subsequent actions by proper officers. Thus, by declaring the investigation and consequent show cause notice ab initio void, the Court reinforces the principle that statutory procedures must be followed rigorously, failing which proceedings lack legal sanctity.

The rejection of ‘borrowed satisfaction’ as a basis for issuing notices is also a critical takeaway. The Court’s insistence on an independent application of mind by the proper officer prevents the perpetuation of irregularities and ensures that investigations meet the standards of fairness and legality.

Lastly, this judgment sends a strong message to tax authorities about the importance of adhering to statutory mandates. It cautions against overreach and ensures taxpayers are protected from arbitrary actions by officers lacking jurisdiction.

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End Notes

[i]?WP No. 18305 of 2023.

[ii]?(1974) 1 SCC 345.

[iii]?[2012] 20 taxmann.com 781(Karnataka).

Authored by Sanyam Aggarwal , Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.