Can't Attach Company's Bank Account Merely on Suspicion: Delhi HC
Moneylife Digital Team 24 May 2023
While setting aside an order attaching a company's bank account by a commissioner under the central goods and services tax (CGST), the Delhi High Court (HC) ruled that mere suspicion that the taxpayer is a dummy company is not a valid reason for the provisional attachment of assets. "It is necessary to bear in mind that attachment of a bank account would in effect result in the closure of the business of a taxpayer and has the propensity to cause irretrievable harm," the HC observed. 
In an order passed earlier this month, the bench of justice Vibhu Bakhru and Justice Amit Mahajan says, "...there must be a live nexus between the reasons for provisionally attaching assets and bank accounts and the material available with the commissioner (of CGST). Merely because there was some material (although disputed) to indicate that one of the directors of the petitioner was an employee of another company cannot be the basis to believe that the petitioner company is a dummy company given the material as provided."
Section 83 of the CGST Act requires the commissioner to form an opinion that it is necessary to attach the property of a taxable person. However, the bench says this opinion must be based on relevant facts and not merely on grounds of suspicion. "It is difficult to imagine that a company would survive if its bank accounts are frozen for a protracted period of time. Thus, the nature of the power makes it necessary that the same is exercised with due caution and only when it is necessary."
Further, the HC says, "Mere suspicion that the petitioner is a dummy company, which is founded on the basis of statements that one of the directors of the petitioner company was, or is an employee of Best Agrolife group, and is in complete disregard of the corporate documents of the petitioner, would clearly fall foul of the requirement of forming an opinion, as it does not meet the standards required for taking action under Section 83 of the CGST act."
However, while setting aside the attachment order, the bench clarified that the concerned authorities are not precluded from proceeding against the petitioner as per the law.
New Delhi-based Sidhivinayak Chemtech Pvt Ltd had filed the petition challenging the order passed by the commissioner of CGST, attaching the company's bank account in Punjab National Bank. 
On 20 May 2022, the superintendent in the anti-evasion division under the CGST commissionerate issued a summons to Sidhivinayak Chemtech's director Raman Kumar and supervisor, Indresh Kumar Yadav in connection with the investigation about a fraudulent use of input tax credit (ITC) of Rs36.6 crore by Best Crop Science LLP and Best Crop Science Pvt Ltd. 
Sidhivinayak Chemtech replied to the summons. However, it continued to receive more summons from the CGST commissionerate. On 6 August 2022, the company wrote a letter to the chief commissioner of CGST requesting intervention in the repeated summons and investigation. 
However, on 5 September 2022, Sidhivinayak Chemtech found its bank account provisionally attached. It also filed an objection with the CGST but received no response. The company then filed a writ petition before the HC. 
In an order on 22 November 2022, the Delhi HC directed the CGST authorities to decide on the objections submitted by the company. Further, on 5 December 2022, the company filed an application in the disposed writ petition alleging wilful non-cooperation by the tax authorities. The HC directed CGST authorities to pass a reasoned order on or before 9 December 2022.
In the meantime, the CGST authorities continued their investigations and summoned Raj Kumar, Ankit Bhutani and Raman Kumar, directors of the company, for a hearing on 9 December 2022. At the hearing, Raj Kumar and Ankit Bhutani sought an adjournment on the grounds that they had ceased to be directors in Sidhivinayak Chemtech and were not involved with the day-to-day running of its business.
On 8 December 2022, the CGST authorities passed an order confirming the attachment of assets of Sidhivinayak Chemtech. The company then filed a writ petition before the HC.
During the hearing, the company contended that the principal commissioner of CGST at Meerut does not have territorial jurisdiction for Kundli in Sonepat (Haryana) and Bulandshahar in Uttar Pradesh, where the company carries out its business. 
However, while agreeing that it does not have territorial jurisdiction, the tax authorities argued that it had the jurisdiction to pass the attachment order as Sidhivinayak Chemtech has transferred fraudulent ITC to Best Crop Science Pvt Ltd, being investigated by CGST. 
Referring to Sections 83, 3 and 5 of the CGST Act, the Delhi HC clarified that the CGST commissioner has no jurisdiction to pass the attachment order regarding the company as a taxable person.
Further, it says, "The order of attachment in form GST DRC-22 does not indicate any reason that had led CGST commissioner to form an opinion that the company is liable to defeat any demand of tax or dues if its bank account is not provisionally attached."
During the hearing, senior counsel Harpreet Singh, representing the tax authorities, read relevant notes in the file. The notings indicated only two reasons for attaching Sidhivinayak Chemtech's bank account; the first being that Raman Kumar, director of Sidhivinayak Chemtech, was employed with Best Agro group. The CGST authorities, on this basis, suspect that Sidhivinayak Chemtech is a dummy company controlled by Best Agro group's promoters. The second reason, as indicated, is that the shares of the companies of Best Agro group have been recently sold in the market, and the money has been parked in the bank account of Sidhivinayak Chemtech.
The bench enquired whether there is any material in the file that would establish that the shareholding of Best Agro group and the shareholders of Sidhivinayak Chemtech were common or that Sidhivinayak Chemtech held or controlled any share in Best Agro group. The tax authorities answered in the negative. 
The HC also enquired whether there was any material that would indicate that the sale proceeds of shares of companies of Best Agro group had been deposited in the bank account of Sidhivinayak Chemtech. The CGST authorities fairly stated that there was none.
"It is apparent from the above that the principal reason for attaching the petitioner's bank account – the sale proceeds of shares of Best Agro group and other group companies are parked in the bank account of the petitioner – is not founded on or has nexus with any tangible material. Thus, any such belief would be clearly in the realm of unsubstantiated suspicion and, therefore, cannot be considered as a ground for taking the drastic step of provisionally attaching a taxpayer's bank account," the HC says in the order.
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