The Karnataka High Court, in a significant judgment, has clarified the legal position regarding the admissibility of material gathered during alleged illegal search and seizure operations in proceedings under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act). The Court held that such material, if relevant, can be relied upon by the proper officer for the purpose of adjudication, and that the legality of the search does not, by itself, vitiate the proceedings under Section 74.
The case arose from an intra-court appeal filed by the Revenue challenging the order of a Single Judge, which had quashed a show cause notice issued to the respondent-assessee, a registered transporter under the CGST and KGST Acts. The Single Judge had held that the officers of the Mangaluru Commissionerate, who conducted the investigation and search, were not “proper officers” under the Act, and that the show cause notice issued under Section 74, based on material collected by such officers, was unsustainable. The Single Judge further directed the refund of ₹50 lakhs deposited by the assessee and the return of seized documents and goods, while reserving liberty to the Revenue to proceed afresh in accordance with law.
On appeal, the Division Bench examined the statutory scheme of Sections 67 and 74 of the CGST Act. The Court observed that Section 74 is an independent adjudicatory provision, enabling the proper officer to issue a show cause notice in cases of tax evasion, fraud, or wrongful availment of input tax credit. The initiation of proceedings under Section 74 is not contingent upon the validity or outcome of proceedings under Section 67 (inspection, search, and seizure). The Court emphasized that the language of Section 74 does not restrict the source of material that may form the basis of a show cause notice, provided the material is relevant and has been furnished to the noticee for an effective reply.
Addressing the core issue, the Court relied on the Supreme Court’s decision in Pooran Mal v. Director of Inspection (Investigation), which held that evidence obtained in the course of an illegal search is not inadmissible merely on that ground, unless there is an express or implied statutory prohibition. The test for admissibility is one of relevancy, not the legality of the search. The Court also referred to the recent Supreme Court judgment in Dr. Naresh Kumar Garg v. State of Haryana, reiterating that material collected during an illegal search can be acted upon, subject to the rules of relevancy and admissibility.
The Division Bench found that the Single Judge had erred in holding that the show cause notice was vitiated solely because some material was collected by officers allegedly lacking jurisdiction. The Court noted that the respondent had been provided with all material forming the basis of the notice and had the opportunity to contest its relevancy and admissibility during the adjudication process. The Court further clarified that there is no prohibition under the CGST Act against the proper officer relying on material gathered by officers of another Commissionerate, especially in cases involving coordinated investigations across jurisdictions.
On the issue of premature interference by the writ court, the High Court held that the challenge to the show cause notice was not maintainable at the threshold, as the respondent had an effective alternative remedy of submitting a reply and participating in the adjudicatory proceedings under Section 74. The Court observed that the grant of liberty to the Revenue to proceed afresh would be illusory if the foundational material was ordered to be returned to the assessee.
In conclusion, the Karnataka High Court set aside the Single Judge’s order, dismissed the writ petition, and restored the show cause notice. The respondent was granted 15 days to file a reply, and the Revenue was permitted to proceed with the adjudication in accordance with law. All contentions on merits were kept open for consideration during the adjudicatory process.
This judgment establishes that, under the CGST Act, the relevancy of material is the key criterion for its use in proceedings under Section 74, and that alleged irregularities in the manner of collection do not, by themselves, render such material inadmissible or vitiate the proceedings.
Case Reported at:
Case Name: Additional Commissioner of Central Tax Bengaluru North-West Commissionerate and Ors. v. Vigneshwara Transport Company
Case Citation: (2026) taxcode.in 681 HC
