The Goods and Services Tax Appellate Tribunal (GSTAT), Lucknow Bench, has held that an alleged excess stock discrepancy determined through visual estimation and approximate calculations cannot, by itself, justify confiscation proceedings under Section 130 of the Central Goods and Services Tax Act and the Uttar Pradesh Goods and Services Tax Act, 2017.
The Bench of Santosh Kumar Srivastava (Judicial Member) and Arvind Kumar (Technical Member) dismissed the assessee’s appeal and upheld the first appellate authority’s order setting aside confiscation proceedings against assessee involving a total demand of ₹12,79,877.96 and found serious deficiencies in the stock verification exercise and an absence of independent evidence establishing deliberate tax evasion.
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The taxpayer, a proprietorship concern engaged in manufacturing and trading stainless steel wires, stainless steel bright bars, kitchenware and other household articles, operated from premises in the Sandila industrial area of Hardoi district, Uttar Pradesh.
On May 16, 2025, officers of the Special Investigation Branch, Range-A, State Tax Department, Lucknow, inspected its business premises under Section 67 of the GST enactments.
The department alleged that 30,352.69 kilograms of stainless steel bright bars and 9,046 kilograms of stainless steel wires were available in excess of the quantities recorded in the books. The estimated market value of the alleged excess stock was ₹35,55,215.
Treating this variation as evidence that goods had been kept outside the accounts with an intention to evade GST, the department initiated proceedings under Sections 130 and 122.
The adjudicating authority passed an order on July 26, 2025, confirming amounts of ₹3,19,969.49 under CGST and ₹3,19,969.49 under UPGST, together with a confiscation fine of ₹6,39,938.98 under UPGST.
The taxpayer challenged the order, arguing that the stock discrepancy had been calculated through visual estimates and approximate measurements rather than proper physical weighment.
It also contended that the department had produced no reliable evidence of clandestine removal, unaccounted outward supplies, suppressed turnover or an intention to evade tax.
The Additional Commissioner, Grade-II (Appeal), Sector-2, State Tax, Lucknow, allowed the taxpayer’s appeal on October 4, 2025, and set aside the adjudication order. The Revenue approached GSTAT seeking restoration of the confiscation order.
The taxpayer initially objected that the disputed amount fell below the ₹20 lakh monetary threshold prescribed for departmental appeals under Circular No. 207/01/2024-GST.
The Revenue relied on the circular’s exclusions for disputes involving interpretation of statutory provisions.
The Tribunal accepted that the case raised a legal question concerning the invocation of Section 130, as compared with the demand and assessment mechanisms under Sections 73 and 74, when stock discrepancies are detected.
It therefore overruled the preliminary objection and examined the appeal on merits.
The department argued that the substantial stock variation showed a failure to maintain proper records of purchases, production and inventory.
It relied on Section 130(1)(ii), concerning non-accounting of goods on which tax is payable, and submitted that the physical verification sheets and panchnamas were contemporaneous records deserving evidentiary consideration.
According to the Revenue, the taxpayer had failed to satisfactorily reconcile the excess stock, and the first appellate authority had wrongly interfered with the adjudicating authority’s findings.
The taxpayer disputed the reliability of the verification exercise and highlighted inconsistencies between the records prepared for different business units.
In particular, it submitted that the verification record for Unit L3 referred to 9,537 kilograms attributed to Units L4 and L5, whereas the verification sheet relating to those units allegedly recorded only 4,700 kilograms.
The Tribunal found serious internal and mathematical contradictions in the department’s case.
It observed that the quantities of heavy industrial steel products had been calculated through subjective visual estimation and approximate calculations instead of actual physical weighment. These shortcomings undermined the reliability of the verification sheets.
The Bench also rejected the department’s unsupported allegation that the taxpayer had manipulated its accounts after the survey.
It noted that the inspecting officers had compared the physical inventory with the taxpayer’s book records, indicating that accounts were available and maintained.
The Revenue had produced no independent corroborative evidence—such as unrecorded manufacturing operations, parallel invoice books, hidden transport records or parallel bank accounts—to establish the alleged manipulation.
The Tribunal rejected the department’s argument that Section 130 needed to be invoked to recover redemption fine and penal liabilities that would not otherwise be captured through regular assessment proceedings.
It held that the choice of a penal route could not be dictated by an administrative desire to collect higher fines.
Confiscation depended on establishing the applicable statutory prerequisites. A quantitative difference between stock sheets and accounting records did not automatically prove an intention to evade tax.
The Bench further noted that portal records showed the taxpayer regularly filed GSTR-1 and GSTR-3B returns. On the facts of the case, it found that the department had failed to establish an intention to evade tax.
The Tribunal emphasised that confiscation is an extraordinary power requiring satisfaction of the conditions prescribed by law.
An alleged discrepancy in stock records could not automatically or mechanically be treated as conclusive proof of clandestine supply or deliberate tax evasion.
The taxpayer had also relied on Section 35(6), submitting that the GST law provides a mechanism for determining liability where goods are not accounted for in the prescribed manner.
On the facts before it, the Tribunal held that any tax liability had to be determined through the appropriate demand and assessment provisions, referring to Sections 73 and 74, rather than by mechanically invoking Section 130. These decisions distinguish stock-accounting discrepancies from the statutory conditions necessary for confiscation and hold that excess stock detected during inspection does not, by itself, justify action under Section 130.
The Tribunal also recorded that the Supreme Court had dismissed the Revenue’s challenges to those decisions on April 4, 2025, and April 15, 2025, respectively.
The order records that the taxpayer deposited ₹12,79,876 through Form GST DRC-03 on May 17, 2025.
The taxpayer contended that the payment had been made under pressure during the inspection proceedings and could not be treated as an admission of tax evasion or acceptance of the confiscation action.
The Tribunal’s operative order dismisses the Revenue’s appeal and upholds the first appellate order. It does not separately specify a refund amount or refund timeline for this deposit.
Finding the first appellate authority’s conclusions well reasoned and supported by the record, GSTAT dismissed the departmental appeal and upheld Order-in-Appeal No. ZD091025124609D dated October 4, 2025.
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