Unfreezing Bank Accounts

Understanding Provisional Attachment of Bank Accounts under the CGST Act

The provisional attachment of a bank account, often carried out under Section 83 of the Central Goods and Services Tax Act, 2017 ("CGST Act"), is a significant action that can have profound implications for businesses. This measure allows tax authorities to temporarily freeze assets, including bank accounts, to protect government revenue. However, legal precedents and statutory conditions underscore that this power is not to be exercised lightly, but rather with extreme caution and strict adherence to established legal principles.

1. Provisional Attachment is a Draconian Power Requiring Strict Compliance

The power to order a provisional attachment of a taxable person's property, including their bank account, is described as "draconian in nature". It is considered an extraordinary power that should be exercised "sparingly, with utmost caution". The statute prescribes specific conditions for its valid exercise, and these conditions "must be strictly fulfilled".

• Supreme Court Guidance: The Hon'ble Supreme Court, in the landmark case of Radha Krishan Industries v. State of Himachal Pradesh and Others (2021) 6 SCC 771, has categorically held that this power must be exercised with extreme caution. It also stated that there must be tangible material on record to justify the attachment, and the mere pendency of proceedings does not automatically warrant it. This power is explicitly not to be exercised as a matter of routine or to cause undue harassment.

• High Court Reinforcement: Echoing this sentiment, the Hon'ble Bombay High Court, in a recent judgment dated June 1, 2024, held that the "Power under Section 83 to attach property is stringent and requires strict compliance with statutory conditions". This court has quashed attachment orders where such compliance was not demonstrated.

2. Formation of Opinion Must Be Based on Tangible Material

Before a provisional attachment order can be issued, the Commissioner must form an opinion that the assessee is likely to defeat the demand if any is raised, and that attachment is therefore necessary to protect government revenue.

• Evidence-Based Opinion: The Supreme Court in the Radha Krishan Industries judgment emphasised that the Commissioner's opinion "must be based on tangible material" indicating the necessity of attachment. There must be a "live link between the material and the formation of the opinion".

• Reasoned Orders: The power must not be exercised in an arbitrary or mechanical manner, and the attachment order itself must be "reasoned and reflect due application of mind". Provisional attachment is a drastic measure and should not be used as a tool to harass the taxpayer.

• Proportionality: Various High Courts have consistently held that the necessity to protect revenue must be demonstrably present and not a mere apprehension. Furthermore, the attachment should not be disproportionate to the alleged dues sought to be protected.

3. Procedural Safeguards and Opportunity of Being Heard

The Supreme Court, again in Radha Krishan Industries, underscored the importance of specific procedural safeguards available under Rule 159(5) of the CGST Rules:

• Right to Object: A taxpayer is entitled to submit objections on the grounds that the property was or is not liable to attachment.

• Opportunity of Hearing: Taxpayers must be provided with an opportunity of being heard.

• Mandatory Compliance: The Court has categorically held that a failure by the Commissioner to provide an opportunity of being heard constitutes a breach of the mandatory requirement of Rule 159(5). The Commissioner is duty-bound to address objections to the attachment by passing a reasoned order, aligning with the spirit of the law to provide avenues for redressal against unwarranted attachments.

4. Effect of Filing an Appeal

The filing of an appeal against an order has specific legal implications concerning provisional attachments. The Hon'ble Supreme Court has clarified that once an appeal is filed, the provisions of sub-sections 6 and 7 of Section 107 of the CGST Act come into operation. These provisions govern the payment of tax and the stay on recovery of the balance as stipulated, pending the disposal of the appeal.

• Commitment to Due Process: When an appeal against initial proceedings is filed and a pre-deposit (e.g., 10% of the demanded amount) is made, this action demonstrates a commitment to engage with the due process of law rather than an intention to evade legitimate dues. In such cases, based on settled legal positions, the provisional attachment may be requested for release.

5. Recent High Court Judgments Supporting Release of Attachment

Several High Courts across India have further elaborated on and reinforced the principles established by the Supreme Court regarding provisional attachments:

• Bombay High Court (June 1, 2024): This court reiterated that "Power under Section 83 to attach property is stringent and requires strict compliance with statutory conditions" and has quashed attachment orders in FORM GST DRC-22 where such compliance was lacking.

• Kerala High Court (May 2, 2025): This court ruled that "provisional attachment under Section 83 of CGST Act cannot extend beyond one year, and fresh attachment on the same grounds is not permissible". This introduces a time limit and restricts repeated attachments without new justification.

• Allahabad High Court: This court has ruled that "a second provisional attachment order issued under Section 83 of GST Act cannot be issued without providing fresh reasons". This reinforces the need for clear, current justification for any subsequent attachment orders.

6. Disproportionate Impact on Business Operations

The freezing of a business's bank account through provisional attachment can have severe and cascading consequences that extend beyond the immediate financial aspect.

• Operational Paralysis: It can severely impact daily business operations, including the ability to pay salaries to employees, meet statutory obligations (like other tax dues), and fulfil commitments to vendors and customers. This disrupts the entire supply chain.

• Irreparable Harm: Such actions cause irreparable harm to the business and its reputation, leading to an inability to meet essential operational expenses. If allowed to continue, especially when the underlying order is under challenge, it could lead to the financial ruin of the business. This outcome ironically jeopardises the very revenue the attachment purports to protect.

7. Balancing the Interests

While the interest of government revenue is undoubtedly important, it must be "balanced against the taxpayer's right to carry on business and pursue legal remedies".

• Fairness and Justice: Continuing a provisional attachment in the face of a pending appeal, particularly without demonstrating any imminent threat of revenue loss that cannot be otherwise secured, would be "disproportionate and unjust". The legal framework seeks to ensure that while revenue is protected, taxpayers are not unduly hampered in their ability to operate or challenge official decisions through the legal process.

In summary, the legal landscape surrounding provisional attachments under the CGST Act is clear: such powers are exceptional, require stringent adherence to statutory and procedural safeguards, and must be based on tangible material and reasoned opinion. The rights of the taxpayer, including the ability to pursue appeals and continue business operations, must be carefully balanced against the state's interest in revenue protection.