Confiscation under Section 130 not permissible for excess stock found during search without allegation of intent to evade tax; Section 73/74 to be invoked read with Section 35(6): Allahabad High Court

The Allahabad High Court, in its judgment dated 22 May 2025 in Janta Machine Tools v. State of U.P., Writ Tax. No. 1503 of 2024, has reiterated that proceedings under Section 130 of the Central Goods and Services Tax Act, 2017 (CGST Act) cannot be initiated merely due to the presence of excess stock found during the proceedings of Section 67. The Court held that in such cases, proper adjudication under Sections 73 or 74 of the CGST Act is mandatory, and the confiscation provisions under Section 130 cannot be mechanically invoked.

The case arose from a survey conducted at the business premises of the petitioner, a registered firm dealing in machinery and hardware goods. The department, upon discovering excess stock, initiated proceedings under Section 130 read with Section 122, proposing tax, penalty, and fine, each amounting to ₹7,17,560. After the petitioner’s reply, the adjudicating authority passed an order, confirming the demand. Although part relief was granted in appeal, a balance demand of ₹14,58,811 was sustained, prompting the petitioner to file the writ petition.

Hon’ble HC, while allowing the writ, relied on a series of judgments including Dinesh Kumar Pradeep Kumar v. Additional Commissioner Grade 2, Writ Tax No. 1082 of 2022, decided on 25 July 2024, which was subsequently affirmed by the Supreme Court in SLP (C) Diary No. 5879 of 2025. The High Court emphasized that mere excess stock without corresponding evidence of tax evasion or fraud does not justify confiscation under Section 130. Rather, Section 35(6) of the CGST Act is attracted in such cases, which provides that if a taxpayer fails to account for goods or services as required, then such unaccounted items are deemed to have been supplied. However, assessment of tax liability for such deemed supply must follow the adjudicatory route under Section 73 (for non-fraud cases) or Section 74 (for cases involving fraud, willful misstatement, or suppression of facts).

The Court also dealt with the scope of Section 130(1)(ii) and 130(1)(iv). Section 130(1)(ii) covers situations where goods liable to tax are not accounted for after the time of supply, and Section 130(1)(iv) covers contravention of provisions with an intent to evade payment of tax. The Court observed that no such intent to evade was alleged or established, and therefore the invocation of these clauses was unsustainable. The Court further cited the ruling in Metenere Ltd. v. State of U.P., 2020 (12) TMI 790] which had clarified that even in cases of unaccounted stock, the tax and penalty must be determined following the procedures of Section 73 or 74 read with Section 35(6), and not directly under Section 130.

In conclusion, the High Court quashed the impugned orders, and directed that any amount deposited by the petitioner be refunded in accordance with law. The judgment in Writ Tax No. 1503 of 2024 provides critical guidance for both taxpayers and authorities, holding that confiscation under Section 130 is not permissible unless supported by proof of intent to evade and that proper assessment procedures under Sections 73/74 must be strictly followed when excess or unaccounted stock is discovered.

Article is written by CA Ankit Karanpuria and CA. Ankush Karanpuria The author can be reached at karanpuriaankit@gmail.com

The views expressed in the above article are personal and for information purpose. The reader is required to take decision based on his own judgment and analysis. Writer shall not be responsible for any decision taken by the reader in the subject matter.