Company Gets ₹14 Lakh GST Demand Cancelled: Court Says Tax Department Used Wrong Rule for Extra Stock

The Hon'ble Allahabad High Court in M/s Janta Machine Tools vs State of U.P. and 2 Others [WRIT TAX No. 1503 of 2024, dated May 22, 2025] held that proceedings under Section 130 of the GST Act cannot be initiated when excess stock is found during surveys, and instead proceedings under Sections 73/74 of the GST Act should be initiated for determination of tax liability on unaccounted goods.

FACTS OF THE CASE

The Petitioner is a partnership firm engaged in the business of purchase and sale of machines, machinery parts, hardware goods, etc. having GSTIN No. 09AAKFJ9517B1Z9 with its registered place of business situated in Agra. During the course of business, a search was conducted by the 3rd Respondent on the premises of the Petitioner firm on May 4, 2022.

In pursuance of the search, proceedings under the GST Act were initiated by issuing a notice dated July 20, 2022 under Section 130 read with Section 122 of CGST/UPGST Act. The notice proposed a demand of tax of Rs. 7,17,560/- along with penalty of Rs. 7,17,560/- and confiscation fine of Rs. 7,17,560/- against the Petitioner. The Petitioner submitted its reply on July 27, 2022, however, being not satisfied with the same, the impugned order dated September 26, 2022 was passed.

The Petitioner filed an appeal against the impugned order dated September 26, 2022, which was partly allowed to the extent that relief of Rs. 6,93,869/- was granted and the remaining demand of Rs. 14,58,811/- was confirmed vide order dated May 16, 2024 passed by the 2nd Respondent.

The Petitioner was aggrieved by both the orders dated September 26, 2022 passed by the 3rd Respondent and the order dated May 16, 2024 passed by the 2nd Respondent, contending that proceedings under Section 130 of the GST Act could not have been initiated against the Petitioner, rather proceedings under Sections 73/74 of the GST Act should have been initiated. The Petitioner approached the Hon'ble High Court seeking quashing of both impugned orders.

ISSUE

Whether proceedings under Section 130 of the GST Act can be initiated when excess stock is found during surveys, or whether proceedings under Sections 73/74 of the GST Act should be initiated for determination of tax liability on unaccounted goods?

HELD BY THE COURT

The Hon'ble Allahabad High Court in Neutral Citation No. 2025:AHC:86609 held that:

The Court observed that it was not in dispute that a survey was conducted at the business premises of the Petitioner on May 4, 2022, and excess stock was found, which triggered the initiation of the proceedings against the Petitioner. The Court noted that on various occasions, this Court has held that if excess stock is found, then proceedings under Sections 73/74 of the GST Act should be pressed in service and not proceedings under Section 130 of the GST Act read with Rule 120 of the Rules framed under the Act.

The Court held that the issue in hand was squarely covered by the decision of this Court in S/s Dinesh Kumar Pradeep Kumar vs Additional Commissioner, Grade-2 & Another, which has been affirmed by the Apex Court in Special Leave Petition (Civil) Diary No. 5879 of 2025 vide order dated April 17, 2025. The Court extensively relied on the judgment in Metenere Limited case, which established the principle that when unaccounted goods are found, the proper officer is empowered to determine the amount of tax payable on such goods under Section 35(6) of the CGST Act, and while determining the tax payable, the officer is bound to determine the same in accordance with the provisions of Sections 73 and 74 of the Act.

The Court opined that Section 35(6) of the CGST Act provides that in the event a person fails to keep accounts for goods or services in accordance with the provisions of Sub-section (1) of Section 35, the proper officer is empowered to determine the amount of tax payable on the goods or services which are unaccounted for as if such goods or services had been supplied by such person, and the provisions of Section 73 or 74 shall mutatis mutandis apply for determination of the said tax. The Court observed that although unaccounted goods are deemed to be supplied under Section 35(6), the determination and quantification of tax on such deemed supply has to be done in accordance with Section 73 or Section 74 of the Act.

The Court held that the law is clear on the subject that proceedings under Section 130 of the GST Act cannot be put to service if excess stock is found at the time of survey. The Court noted that in M/s Maa Mahamaya Alloys Pvt. Ltd. case, this Court has specifically held that the entire exercise resorted to under Section 130 of the GST Act for assessment/determination of tax and penalty is neither stipulated under the Act, nor can be done in the manner in which it has been done, particularly when the department itself had undertaken the exercise of quantifying the tax due by taking recourse under Section 74.

The Court concluded that the impugned orders dated May 16, 2024 and September 26, 2022 could not be sustained in the eyes of law and were hereby quashed. The Court allowed the writ petition and directed that any amount deposited by the Petitioner shall be refunded to him in accordance with law.

RELEVANT SECTIONS

Section 35(6) of the CGST Act - Provides that where a person fails to keep accounts for goods or services in accordance with Sub-section (1), the proper officer is empowered to determine the amount of tax payable on unaccounted goods or services as if such goods or services had been supplied, and provisions of Section 73 or 74 shall apply for determination of tax.

Section 73 of the CGST Act - Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful misstatement or suppression of facts.

Section 74 of the CGST Act - Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.

Section 130 of the GST Act - Penalty for certain offences including transportation of goods without proper documents, failure to account for goods, and contravention of provisions with intent to evade tax.

Section 122 of the CGST Act - Penalty for certain offences including supplying goods or services without invoice, taking or utilizing input tax credit without actual receipt of goods or services, and issuance of invoice without supply of goods or services.

Rule 120 of the CGST Rules - Penalty proceedings under Section 130.

PARI MATERIA / CASES REFERRED

S/s Dinesh Kumar Pradeep Kumar vs Additional Commissioner, Grade-2 & Another - Writ Tax No. 1082 of 2022, decided on July 25, 2024 (Allahabad High Court), affirmed by Supreme Court in Special Leave Petition (Civil) Diary No. 5879 of 2025 vide order dated April 17, 2025 The Allahabad High Court held that if excess stock is found during surveys, proceedings under Sections 73/74 of the GST Act should be initiated and not proceedings under Section 130.

Metenere Limited case (cited in the judgment) The Allahabad High Court held that Section 35(6) empowers the proper officer to determine tax on unaccounted goods, but such determination must be done in accordance with Sections 73 and 74 of the GST Act. The Court also established that penalty under Section 122 has specific monetary limits and tax determination cannot be done under Section 130.

M/s Shree Om Steels vs Additional Commissioner Grade-2 and Another - Writ Tax No. 1007 of 2022 (Allahabad High Court) The Allahabad High Court held that when excess stock is found, the proper procedure is to follow Sections 73/74 for tax determination rather than Section 130.

M/s Maa Mahamaya Alloys Pvt. Ltd. case (cited in the judgment) The Allahabad High Court held that the exercise of assessment/determination of tax and penalty under Section 130 of the GST Act is neither stipulated under the Act nor can be done in the manner attempted by the department, particularly when quantification should be done under Section 74.