Whether penalty can be levied under section 130 for excess stock found during inspection?

No, the Honorable High Court of Allahabad in the case of M/s Vijay Trading Company vs. Additional Commissioner Grade 2 and Another (Writ Tax no.1278 of 2024 dated 20.08.2024) quashed the assessment order stating that the law is clear on the subject that the proceedings under section 130 of the GST Act cannot be put to service if excess stock is found at the time of the survey.

The Honorable Court observed after carefully reviewing the arguments and the relevant legal provisions, it is evident that the petitioner’s contentions hold merit. It is not disputed that the survey conducted on 11.05.2022 did result in a finding of excess stock. However, this Court has consistently held that when such findings are made, the appropriate legal recourse is to initiate proceedings under Sections 73/74 of the GST Act. These sections provide a structured process for determining and rectifying discrepancies in tax filings or stock records, ensuring that the taxpayer is given a fair opportunity to respond and rectify any issues. Section 130, on the other hand, is intended for more serious cases where there is evidence of fraudulent intent or gross negligence in tax matters. This position was reaffirmed in the recent judgment of this Court in Dinesh Kumar Pradeep Kumar, where it was clearly stated that proceedings under Section 130 should not be invoked for mere discrepancies in stock. The Honorable Court emphasized that the tax authorities must follow the procedures laid out in Sections 73/74 for assessing and resolving such matters. The Honorable Court stated that given these findings, the impugned orders dated 03.04.2024 and 24.01.2023 cannot be sustained in law. The failure to follow the appropriate legal procedures under the GST Act, combined with the questionable method of stock assessment, renders these orders legally unsound. As a result, the orders are hereby quashed.

Author’s Comments
“Due Process” of law demands, the exercise of specific powers conferred to the Proper officer within specific boundaries of the law. Passion to protect the interest of revenue does not authorize the by-passing of the law.

Section 35(6) of the CGST Act, 2017 covers the situation of shortage of stock. In the considered opinion of the Author, there is no provision under the law to cover the situation of excess stock is found. In case of excess stock found, Section 130 of the CGST Act cannot be invoked as decided in this case. Further, there is no cause-of-action to invoke section 74 of the CGST Act. In case of Excess stock, it can be alleged that goods are received without invoice, in such a situation; action can be taken against the supplier only for contravention of the provisions of this law and not against the recipient. Necessary ingredients to establish levy are not attracted in case of excess stock found, to demand tax under section 74 of the Act.

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