GST: Adjudication vs. Confiscation (Sections 73, 74 & 130)

Adjudication vs. Confiscation: A Definitive Analysis of Sections 130, 73, and 74 of the CGST Act, 2017

Executive Summary

This report provides a comprehensive analysis of the distinct legal frameworks governing tax determination and confiscation under the Central Goods and Services Tax (CGST) Act, 2017. It delineates the roles of Sections 73 and 74 as the foundational pillars for tax adjudication, addressing bona fide and mala fide contraventions, respectively. In stark contrast, Section 130 is examined as a stringent, quasi-criminal provision authorising the confiscation of goods and conveyances, a measure that can be invoked only upon the establishment of a specific "intent to evade tax." The analysis highlights a consistent pattern of judicial intervention, particularly by the Allahabad High Court, which has been instrumental in demarcating the operational boundaries of these sections. The judiciary has repeatedly affirmed that Section 130 cannot be used as a substitute for the mandatory adjudicatory process prescribed under Sections 73 and 74, thereby reinforcing crucial procedural safeguards for taxpayers against administrative overreach.

Section I: The Anatomy of Confiscation under Section 130

Statutory Framework and Scope

Section 130 of the CGST Act, 2017, provides for the confiscation of goods or conveyances and the levy of penalties under specific, egregious circumstances. It is a severe measure, distinct from the routine demand and recovery procedures. The provision is triggered when a person engages in any of the five contraventions enumerated in Section 130(1):

• (i) Supplies or receives any goods in contravention of the Act or its rules with an intent to evade payment of tax.
• (ii) Does not account for any goods on which tax is liable to be paid.
• (iii) Supplies any goods liable to tax without having applied for registration.
• (iv) Contravenes any provisions of the Act or its rules with an intent to evade payment of tax.
• (v) Uses any conveyance for the transport of goods in contravention of the Act, unless the owner can prove it was used without their knowledge or connivance.

A close reading reveals that clauses (i) and (iv) explicitly require the presence of mens rea, or a guilty mind, through the phrase "intent to evade payment of tax." This element has been judicially interpreted as a foundational requirement for invoking the provision, setting it apart from procedural lapses or bona fide errors.

The Indispensable Prerequisite: "Intent to Evade Payment of Tax" (Mens Rea)

The cornerstone of any action under Section 130 is the establishment of a deliberate intent to evade tax. It is not a provision designed to address mere procedural non-compliance but to penalise fraudulent conduct. Judicial pronouncements have consistently emphasised that confiscation is a harsh, penal measure that should not be invoked lightly. This high threshold distinguishes it fundamentally from the demand and recovery proceedings under Sections 73 and 74, which can be initiated for a much broader range of reasons, including unintentional errors.

Procedural Mandates and Safeguards

The Act embeds principles of natural justice within the confiscation process to prevent arbitrary action.

Notice and Hearing

Section 130(4) provides a critical safeguard, mandating that "No order for confiscation of goods or conveyance or for imposition of penalty shall be issued without giving the person an opportunity of being heard". This process is formally initiated through a notice in FORM GST MOV-10, which details the grounds for the proposed confiscation.

Fine in Lieu of Confiscation

Section 130(2) grants the owner of the goods an option to pay a fine to redeem them, known as a redemption fine. The quantum of this fine is subject to specific conditions: it cannot exceed the market value of the goods less the tax chargeable thereon. However, a crucial floor is established by the second proviso, which states that the aggregate of the redemption fine and the penalty leviable shall not be less than an amount equal to 100% of the tax payable on such goods. This structure ensures that the financial consequence remains punitive.

Consequences of Confiscation

If the redemption fine is not paid, the consequences are severe. Under Section 130(5), once an order of confiscation is passed, the title to the goods or conveyance automatically vests in the Government.¹ The proper officer is then empowered to take possession of the confiscated items and, after providing a reasonable time for payment of the fine, may dispose of them.

The very structure of Section 130 reveals its primary objective is not revenue collection but punitive deterrence. Standard tax recovery provisions aim to quantify and collect the exact tax due to make the exchequer whole. In contrast, Section 130(5) authorizes the state to forfeit the asset itself, a punishment that goes beyond mere recovery. The option to pay a redemption fine is not a payment of tax but a mechanism for the offender to "buy back" their property from this state of forfeiture. This framework—forfeiture with an option for redemption—is fundamentally penal, not fiscal, which logically justifies the high legal bar of proving a guilty mind (mens rea) for its invocation.

Section II: The Demand and Recovery Framework: Sections 73 & 74

Part A: Section 73 - Determination of Tax in Bona Fide Cases

Scope and Applicability

Section 73 governs the determination and recovery of tax in cases where there is no element of fraud, wilful misstatement, or suppression of facts. It applies when tax has been short-paid, not paid, erroneously refunded, or Input Tax Credit (ITC) has been wrongly availed or utilised due to genuine errors, omissions, or misinterpretations of the law.

Procedural Timeline

The provision prescribes a clear timeline for action. A show-cause notice must be issued by the proper officer at least three months before the deadline for passing the final order. The adjudication order itself must be issued within three years from the due date for furnishing the annual return for the relevant financial year or from the date of the erroneous refund.

Penalty Structure & Mitigation

The penalty mechanism under Section 73 is designed to encourage voluntary compliance:

• If the taxpayer pays the outstanding tax and interest before a show-cause notice is issued, no penalty is levied, and the matter is closed.
• If the payment of tax and interest is made within 30 days of the issuance of the notice, still no penalty is payable, and all proceedings are deemed to be concluded.
• Only if the matter proceeds to adjudication will a penalty be imposed, which is capped at 10% of the tax amount or Rs. 10,000, whichever is higher.

Part B: Section 74 - Determination of Tax in Mala Fide Cases

The Elevated Threshold

Section 74 is invoked for the same contraventions as Section 73 but only when they are committed by reason of "fraud, or any wilful-misstatement or suppression of facts to evade tax". This section targets deliberate tax evasion.

Defining the Terms

To ensure clarity, Explanation 2 to Section 74 defines "suppression" as the non-declaration of facts or information that a taxable person is legally required to declare, or the failure to furnish information upon a written request from the proper officer.¹⁰ This definition underscores that suppression requires a deliberate act of concealment, not an inadvertent omission.

Extended Limitation Period

Recognising the complexity of investigating fraud, the law provides an extended limitation period. The proper officer can issue an order within five years from the due date of the annual return for the relevant financial year.

Escalating Penalty Regime

The penalty structure under Section 74 is significantly harsher and is tiered to incentivise early settlement of disputes:

• Payment of tax, interest, and a 15% penalty before the show-cause notice concludes the proceedings.
• Payment within 30 days of the notice requires a penalty of 25% of the tax amount.
• Payment within 30 days of the order requires a penalty of 50% of the tax.
• If payment is not made within 30 days of the order, the penalty escalates to 100% of the tax amount.

The graduated penalty structures within both Sections 73 and 74 are not merely punitive; they function as sophisticated behavioural incentives. They are designed to encourage self-correction and reduce the administrative and judicial burden of prolonged disputes. In a non-fraud case under Section 73, the cost of non-compliance is effectively zero penalty if rectified promptly, encouraging taxpayers to admit bona fide errors without fear of punitive action. In a fraud case under Section 74, where culpability is higher, the law offers a series of significant "discounts" on the penalty based on the stage of compliance, creating a powerful economic incentive to conclude the dispute early. This design philosophy of incentivising compliance is entirely absent in Section 130, which focuses solely on the punishment of the offence, further highlighting their distinct roles in the statutory scheme.

Section III: The Fundamental Distinction: Assessment vs. Penal Action

The CGST Act creates a clear demarcation between the process of determining tax liability (adjudication) and the imposition of penal consequences like confiscation. Sections 73 and 74 are the exclusive domains for the former, while Section 130 is reserved for the latter.

Table 1: Comparative Analysis of Sections 73, 74, and 130 of the CGST Act, 2017

The following table crystallises the key differences between these pivotal sections:

Analysis of the Dividing Line: Adjudication vs. Punishment

The judiciary has consistently held that Sections 73 and 74 are the sole mechanisms for determining tax liability under the Act. Section 130 is not an assessment provision and cannot be used to bypass this mandatory adjudicatory process. In the case of

Maa Mahamaya Alloys Pvt. Ltd. vs State of Uttar Pradesh [(2023) 73 GSTL 612 (All.)], the Allahabad High Court explicitly clarified that "Section 130 is not meant for assessment or determination of tax/penalty and such determination must follow Section 73 or 74". Confiscation, therefore, is a potential consequence that may follow a determination of tax evasion under Section 74, but it can neither precede nor substitute it. 

A critical, often overlooked, distinction lies in the procedural linkage between these sections. A proceeding under Section 74 is a prerequisite for establishing the quantum of "tax sought to be evaded," which in turn forms the legal basis for quantifying the minimum fine and penalty under Section 130. The second proviso to Section 130(1) links the fine to "one hundred per cent. of the tax payable on such goods". The term "tax payable" implies a legally determined amount, not a mere allegation. The statutory machinery for determining this amount in fraud cases is exclusively Section 74, which involves a show-cause notice, consideration of representations, and a reasoned order. When an officer bypasses this process and directly issues a Section 130 notice, they attempt to impose a fine based on an estimated or alleged tax amount that has not been adjudicated. This creates a legal vacuum and is the fatal procedural flaw that courts have consistently identified, reinforcing the principle that punishment (Section 130) can only follow a proper adjudication (Section 74).

Section IV: Judicial Precedents and Interpretive Guidance

The Principle of Procedural Primacy

Courts have strictly enforced the principle that statutory procedures must be followed. The detailed adjudicatory framework of Sections 73 and 74 cannot be circumvented by resorting to the more punitive Section 130. The Allahabad High Court’s ruling in M/s Vijay Trading Company vs Additional Commissioner Grade-2 [(2024) 22 CENTAX 86 (All.)] reiterates the consistent judicial stance that "Section 130 of the GST Act is not a substitute for the adjudicatory framework under Sections 73 and 74". This judgment was upheld by the Supreme Court in (2025) 30 CENTAX 214 (SC).

The "Excess Stock" Cases: A Judicial Consensus

A significant body of case law has emerged from situations where excess stock is found during inspections. In cases such as Dayal Product vs. Additional Commissioner Grade-2 [(2025) 98 GSTL 351], Raj Steel vs. State of Uttar Pradesh (All.)]h [(2025) 99 GSTL 298 (all.)], and M/s J.T. Steel Traders Vs State Of Uttar Pradesh [(2025) 33 CENTAX 220 (All.)], the Allahabad High Court has consistently quashed Section 130 proceedings. The court's reasoning is that a mere discrepancy in stock does not, by itself, prove an "intent to evade tax." Such a finding must first be investigated and adjudicated under the appropriate demand and recovery provisions of Section 73 or 74.

Judicial Scrutiny of "Intent to Evade"

Courts have placed a high evidentiary burden on the tax authorities to prove mens rea. The High Court rulings are pivotal, establishing that the "mere presence of excess stock, without concrete evidence of tax evasion, cannot attract Section 130". This implies that to uphold confiscation, the department must produce positive evidence of wrongdoing, such as parallel sets of books, evidence of clandestine removal, or falsified documents, that unequivocally demonstrates a deliberate intent to defraud the revenue.

The high concentration of consistent rulings from the Allahabad High Court on this specific issue points towards a systemic pattern of misapplication of law by tax authorities. While a single case could be an error, a continuous stream of similar cases suggests a deeper issue, such as a lack of adequate training for field officers or an institutional bias towards using the more coercive Section 130 for quicker results. This judicial trend is therefore more than just a series of legal interpretations; it is a commentary on the state of tax administration on the ground, highlighting the judiciary's vital role in enforcing administrative discipline and safeguarding taxpayer rights against procedural shortcuts.

Section V: Strategic Implications and Recommendations for Taxpayers

Responding to Departmental Actions

Upon receiving a notice, the first crucial step is to identify the section under which it has been issued.

• Notice under Section 130 (FORM GST MOV-10): If the notice is for a matter like a stock discrepancy, the immediate response should challenge the officer's jurisdiction. The primary argument should be that the notice is premature and legally untenable as the prerequisite adjudication under Section 73 or 74 has not been completed.
• Notice under Section 73/74 (FORM GST DRC-01): The response should focus on the merits of the case. If the demand is accepted, taxpayers should utilise the penalty mitigation options by making payments within the prescribed timelines to minimise financial exposure.

Litigation Strategy: The Two-Pronged Defence

When challenging a Section 130 notice, a two-pronged defence strategy is most effective:

1. Procedural Challenge: Argue that the notice is without jurisdiction because tax liability has not been determined through the mandatory process of Section 73 or 74. This threshold argument, supported by the extensive case law, is often the most powerful.
2. Merits-Based Challenge: Concurrently, argue that the essential ingredient of mens rea ("intent to evade tax") is absent. Provide documentary evidence to demonstrate that any discrepancy arose from bona fide accounting errors, inventory management issues, or timing differences, rather than a deliberate attempt to evade tax.

Proactive Compliance and Documentation

To mitigate the risk of facing such proceedings, businesses should adopt proactive compliance measures. This includes maintaining meticulous records, implementing robust inventory management systems, conducting periodic physical stock verifications, and ensuring prompt reconciliation with books of accounts. Any discrepancies identified during internal audits should be documented, and corrective actions, including voluntary tax payments via Form DRC-03, should be taken to establish good faith and prevent departmental action.

The consistent judicial stance has created a powerful strategic advantage for taxpayers facing improper Section 130 notices. The primary battleground has shifted from debating the factual quantum of a discrepancy to challenging the fundamental legality of the proceeding itself. Previously, a taxpayer's defence would be an evidence-heavy argument on facts. The established jurisprudence now provides a clearer, more compelling legal argument: the proceeding is invalid from its inception because the incorrect section of the law has been invoked. This allows taxpayers to file a writ petition in the High Court on a pure question of law, which is often a faster and more decisive remedy than a statutory appeal on facts, representing a fundamental and advantageous shift in litigation strategy

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