The Allahabad High Court has clarified a critical procedural safeguard under the GST regime: authorities cannot invoke coercive powers under Section 130 of the CGST/UPGST Act without first determining tax liability under Sections 73 or 74. This judgment reinforces the statutory sequence mandated by the Act and invalidates punitive actions predicated on mere stock discrepancies or record-keeping irregularities.
Background & Facts
The Dispute
The petitioner, M/s Kvn FMCG Pvt. Ltd., a registered dealer under the Central Goods and Services Tax Act, 2017, was subjected to a search operation by the GST authorities on 10.02.2026. During the search, discrepancies were observed in stock records and inventory documentation. Based on these observations, the department issued a Show Cause Notice dated 12.02.2026 under Section 130 read with Section 122 of the Act, alleging unauthorized possession of excess goods and failure to maintain proper records under Section 35. The notice proposed confiscation of goods and imposition of penalty.
Key Facts
- The petitioner was engaged in the wholesale distribution of FMCG products across Uttar Pradesh
- On 10.02.2026, GST officials conducted a search at the petitioner’s warehouse in Lucknow
- The department alleged a stock discrepancy of Rs. 1.2 crore and non-compliance with record-keeping under Section 35
- No assessment order under Section 73 or 74 had been passed prior to the issuance of the show cause notice
- On 27.02.2026, a confiscation order was passed under Section 130(1)(i) and reflected in DRC-07 uploaded on 09.03.2026
- During the search, Rs. 64,91,007 was provisionally seized under DRC-03
- The petitioner filed this writ petition on 01.03.2026, challenging the legality of the proceedings
Procedural History
- 10.02.2026: Search conducted at petitioner’s premises in Lucknow
- 12.02.2026: Show Cause Notice issued under Section 130 read with Section 122
- 27.02.2026: Final confiscation order passed and communicated via DRC-07
- 09.03.2026: DRC-07 uploaded on GST portal
- 01.03.2026: Writ Tax Petition No. 720 of 2026 filed before the Allahabad High Court
- 18.05.2026: Hearing conducted before the Division Bench
The Parties' Positions
Petitioner: Argued that Section 130 proceedings are ancillary and can only follow a determination of tax liability under Sections 73 or 74. The show cause notice was issued without any prior assessment, violating the statutory hierarchy and principles of natural justice. Relied on multiple High Court and Supreme Court precedents.
Respondent: Contended that Section 130 empowers authorities to act on suspicion of tax evasion or irregularities in record-keeping, irrespective of whether tax liability has been quantified. Argued that the notice was issued in the public interest to prevent dissipation of goods.
Relief Sought
The petitioner sought:
- Quashing of the Show Cause Notice dated 12.02.2026
- Quashing of the confiscation order dated 27.02.2026
- Quashing of Form GST DRC-07 dated 09.03.2026
- Mandamus for refund of Rs. 64,91,007 seized during search
- Declaration that proceedings under Section 130 were jurisdictionally barred without prior determination under Sections 73/74
The Legal Issue
Can proceedings under Section 130 of the CGST/UPGST Act, 2017 be initiated solely on the basis of alleged violations of Section 35 (record-keeping) or stock discrepancies, without a prior determination of tax liability under Sections 73 or 74?
Arguments Presented
For the Petitioner
The petitioner’s counsel relied on multiple precedents, including M/s Maa Mahamaya Alloys Pvt. Ltd. v. State of U.P., M/s Dayal Product v. Additional Commissioner, and Whirlpool Corporation v. Registrar of Trade Marks, to argue that Section 130 is a remedial provision meant to enforce the outcome of a tax determination, not to initiate it. The notice was issued without any assessment order, violating the statutory sequence. The Supreme Court in Whirlpool established that writ jurisdiction lies where an authority acts without jurisdiction, which applies here. The petitioner further contended that Section 35 violations are remediable through notices under Section 73/74, not through immediate confiscation.
For the Respondent
The State argued that Section 130 grants independent powers to seize goods where there is reasonable belief of tax evasion or non-compliance with record-keeping obligations. It contended that Sections 73/74 are not preconditions to invoking Section 130, and that the department must act swiftly to prevent destruction or removal of goods. The argument was that the statutory scheme allows parallel proceedings.
The Court's Analysis
The Court undertook a detailed statutory interpretation of the CGST Act, emphasizing the hierarchical structure of enforcement mechanisms. It observed that Section 73 deals with determination of tax not paid or short paid, and Section 74 addresses fraud or wilful misstatement. Both require issuance of notice, opportunity of hearing, and adjudication before any demand becomes enforceable.
"The power to confiscate under Section 130 is not an independent enforcement tool but a consequence of a prior determination of tax liability. To permit confiscation without such determination would render Sections 73 and 74 otiose and undermine the procedural safeguards embedded in the Act."
The Court distinguished Siemens Ltd and HCL Infotech as cases involving different factual matrices where tax liability had already been established. It affirmed the reasoning in Maa Mahamaya Alloys and Dayal Product, holding that Section 130 cannot be invoked merely on suspicion or non-compliance with record-keeping norms under Section 35. The Court further held that the issuance of a show cause notice under Section 130 without a prior determination under Sections 73/74 is a jurisdictional error, attracting the exception to the general rule against writ petitions at the notice stage, as laid down in Whirlpool Corporation.
The Court rejected the State’s argument that Section 130 operates independently, noting that the legislative intent was to ensure due process before deprivation of property. The confiscation order and DRC-07 were therefore held to be void ab initio.
The Verdict
The writ petition succeeded. The Court quashed and set aside the Show Cause Notice dated 12.02.2026, the confiscation order dated 27.02.2026, and Form GST DRC-07 dated 09.03.2026. The department is barred from relying on these proceedings. The petitioner is entitled to seek refund of Rs. 64,91,007 through the prescribed remedy under the Act, and the department may initiate fresh proceedings only after complying with Sections 73 or 74.
What This Means For Similar Cases
Section 130 Cannot Be a Shortcut to Enforcement
- Practitioners must challenge any show cause notice under Section 130 issued without a prior assessment under Sections 73 or 74 as jurisdictionally void
- Authorities cannot use Section 130 to bypass adjudication procedures or impose penalties without due process
- Writ petitions are maintainable at the notice stage when jurisdiction is absent, per Whirlpool Corporation
Record-Keeping Violations Are Not Automatic Grounds for Confiscation
- Non-compliance with Section 35 (maintenance of records) must be addressed through notices under Section 73/74, not through immediate seizure
- Stock discrepancies alone, without evidence of tax evasion or suppression, do not justify confiscation
- The department must quantify tax liability before invoking coercive powers
Procedural Hierarchy Is Non-Negotiable
- The statutory sequence - determination (Sections 73/74) → demand → enforcement (Section 130) - is mandatory
- Any deviation renders proceedings void ab initio
- Practitioners should routinely verify whether a tax demand notice preceded any confiscation or penalty notice
