In a development that could reshape the GST enforcement landscape, the Calcutta High Court has restrained the GST department from proceeding further on a penalty notice issued under Section 122 of the CGST/WBGST Act, 2017, without the court’s prior approval. The order comes in the context of a search and seizure operation initiated based on Section 35(6), which pertains to unaccounted supplies of goods or services.The petitioner contested the legality of the notice, arguing that the law does not permit the issuance of a penalty directly under Section 122 following a search. It was submitted that under the CGST framework, officers must first assess and establish tax liability under Section 73 (for non-fraud cases) or Section 74 (for fraud or suppression), before any penalty can be imposed. The petitioner also contended that no satisfaction note was recorded under Section 67, a statutory requirement for conducting search and seizure or confiscating goods.
The Revenue, on the other hand, maintained that the penalty notice was valid since the seized goods were liable for confiscation and hidden books of accounts were recovered during the search.
Given that the goods were supplied to the Ministry of Defence, the High Court directed the petitioner to pay 20% of the disputed tax as a precondition for securing the release of the goods. However, the court observed that, prima facie, the issuance of a notice under Section 122 was legally questionable and that the proper course of action should have been through Section 73 or 74 proceedings.The matter has been posted for further hearing in July 2025. Experts say the case underscores the importance of due process in GST enforcement.Sandeep Sehgal, Partner–Tax at AKM Global, said, “The Calcutta High Court has sent out a strong message that tax authorities must follow proper legal procedures before slapping penalties. In this case, the GST department issued a penalty notice directly under Section 122 after a search, but the Court pointed out that when unaccounted goods or services are found, the law requires officers to first determine the actual liability under Section 73 or 74. Only after that can penalties be imposed. The case will likely have a bearing on GST search and seizure operations. It underlines the importance of following due process and not using penalty provisions as a shortcut.”Implications of the JudgmentThe Court’s interim order and observations could have far-reaching consequences for both tax administrators and businesses:Curbing arbitrary enforcement: The ruling may prevent misuse of penalty provisions by enforcing the sequence of assessment before penalty imposition. This could reduce instances where businesses face financial hardship due to premature or excessive penalties.Standardising procedure across jurisdictions: The case highlights inconsistencies in how different GST field officers interpret and apply provisions like Sections 35(6), 67, 73, 74, and 122. A clear judicial interpretation could push authorities to adopt a uniform, codified enforcement process.Boost to taxpayer rights: If upheld in final orders, the judgment could strengthen legal safeguards for taxpayers during search and seizure operations, especially around confiscation of goods and imposition of penalties.Impact on ongoing and future investigations: Departments may now need to revisit their standard operating procedures to ensure that penalty notices are not issued prematurely. In ongoing cases, businesses may challenge penalty notices that bypass assessment stages.Legal experts also suggest that this could set a precedent for courts across India to examine similar disputes, making this a potentially watershed moment for GST administration jurisprudence.
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