Tax Vista

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Edn. 280 - 23rd March 2026

Kasi Viswanathan V

Fruits of the Poisonous Tree are not yet Forbidden

The issue arises from a familiar situation. A show cause notice is issued by one Commissionerate, but the material it relies upon comes from search, seizure and statements recorded by another formation, whose authority to act is itself under question.

The registered person approached the High Court in writ proceedings. The Learned Single Judge examined the matter from a jurisdictional standpoint and held that the investigation, including search and seizure, was carried out by an authority who was not the proper officer. On that basis, the entire exercise was treated as void from the outset.

The notice was viewed as resting on borrowed satisfaction, without an independent formation of opinion under Section 74. The notice was set aside, the seized material and amounts deposited during investigation were directed to be returned, while liberty was reserved to the Department to proceed afresh in accordance with law.

The Revenue challenged the matter in an intra-Court Appeal. In appeal, the Division Bench takes a different approach. Relying on Pooran Mal [1973-VIL-31-SC-DT] and its subsequent affirmation in Dr. Naresh Kumar Garg vs. State of Haryana and Others [2026 SCC Online SC 295], the Court proceeds on the principle that unless the statute expressly prohibits it, material obtained even through an irregular or illegal search does not become unusable. The scheme of Section 74 does not qualify the legal source from which the material must originate. What matters is the relevance of the material and the opportunity available to the assessee to contest it during adjudication. On this reasoning, the appeal is allowed and the assessee is directed to respond to the show cause notice.

The Division Bench further holds that if the material gathered during search is excluded, the liberty to initiate fresh proceedings would become illusory. It therefore permits use of the material, leaving questions of relevancy and admissibility to be tested during adjudication.

Two aspects merit closer consideration. The procedural objection that the assessee had not specifically sought a relief (prayer) challenging the action under Section 67 as illegal, and had not filed any appeal against the Single Bench order, has been noticed. While absence of a specific prayer may create difficulty in writ proceedings, the latter aspect may not be of equal concern. Appellate practice does permit a respondent to contest adverse findings through cross-objections under Order 41 Rule 22 of the Code of Civil Procedure. Moreover, there were no adverse findings in this regard.

The observation that Section 74 is not inseparably linked to proceedings under Section 67, on the basis that notices can arise under different contingencies, may not be entirely satisfactory. Once a notice is in fact founded on material gathered during search, the existence of other contingencies becomes largely academic. It is a different question whether such material must arise from a valid search. However, where reliance is placed on search material, its connection with the proceedings under Section 74 cannot be ignored.

The factual backdrop of the case and the additional material available before the Division Bench have influenced the outcome. Material was gathered by more than one Commissionerate in the course of coordinated action. The business as well as residential premises also fell within the jurisdictional fold. In that context, the earlier conclusion that the proceedings were entirely without authority becomes less compelling.

Even otherwise, the Division Bench makes its position clear. Following Pooran Mal, it holds that in the absence of a statutory bar, material gathered even through an invalid search can still be used. The Single Judge had declined to rely on this line of reasoning on the ground that it was not decided in the context of GST. It is relevant to note that the decision pertains to Income Tax and even in income tax, there have been attempts to revisit this principle in light of the recognition of privacy as a fundamental right in K S Puttaswamy v. Union of India (2017). That debate remains open.

For now, the position remains that the fruits of a questionable search are not excluded. It may require an appropriate case for the Courts to more clearly define the 'limits', particularly where the illegality of the investigation is beyond doubt. [Re: 2026-VIL-267-KAR]

A case of Zero-Rated supply and Zero-Refund:

Errors in GST returns are often treated as reconciliation issues. In export cases, they can decide whether a refund is received at all.

The petitioner had exported goods on payment of IGST. However, the exports were reported in GSTR-3B under Table 3.1(a) instead of Table 3.1(b) (similar to the case covered in previous edition - 2026-VIL-01-GSTAA]. In addition, details in Table 6A of GSTR-1 were incorrectly reported as 'Zero'. As a result, the IGST scroll generated on ICEGATE also showed nil refund for three shipping bills exported in July and September 2018.

The petitioner submitted representations (11.09.2020 and 20.03.2021) along with a Chartered Accountant's certificate and complete export documentation, including invoices, shipping bills, bill of lading and proof of tax payment.

Despite these representations, the refund was not sanctioned and the exporter approached the Gujarat High Court. The response from the department in the affidavit was that the exporter was required to amend the GST returns [a recurring issue between GST and Customs as noted in edition no. 267]. The reliance placed on earlier precedent Amit Cotton Industries v. Principal Commissioner of Customs [2019-VIL-315-GUJ] was sought to be distinguished on the ground that there was no "withholding" of refund since the system had processed the claim as filed.

The High Court [2025-VIL-875-GUJ] did not accept this approach. It noted that the petitioner had placed on record sufficient material to establish that exports had in fact taken place and that IGST had been paid on such supplies. The mere mismatch between GST returns and customs data could not be a ground to deny refund when substantive conditions for zero-rated supply stood satisfied. The authorities were directed to grant refund along with applicable interest from the date of shipping bills till actual payment.

The matter reached the Supreme Court, where the order was not interfered with. However, the submission based on the proviso to Rule 96 was kept open to be examined in an appropriate case.

Rule 96 treats the shipping bill as a deemed refund application. The proviso alters this in cases of mismatch by shifting the date of refund application to the date of rectification. The proviso was introduced by Notification No. 14/2022 - Central Tax dated 05.07.2022 with retrospective effect from 01.07.2017. This impacts not only the starting point for interest but also limitation.

While deferring the date for interest calculation may be appropriate considering the error at the exporter's end, there could be serious consequences if limitation is also deferred, given the practical challenges in rectification. [Re: 2026-VIL-23-SC]

[Read previous edition dated 16.03.2026]

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)