Introduction to Legacy Issue
Allegations of overreach by Investigating authorities during Investigation/Search are very common. Many times, the taxpayer/assessee post completion of the search contest such voluntary payments and allege that payments were made owing to extreme/ duress pressure or to safeguard the personal liberty of Directors/Senior executives of the company. The main bone of contention in such a situation is whether the assessee is eligible to claim a Refund of the amount paid voluntarily. Revenue obviously would contest such a claim on the ground that the assessee has been engaging in tax evasion and has not been paying tax that it is legitimately bound to pay and for this very reason the assessee had voluntarily offered to remit tax. Revenue would therefore argue against such a claim citing the cause of payment as ‘Voluntary’.
The above-stated issues are not new to the GST regime, rather the said issues had been raised before various courts time and again in the erstwhile 1regime. The endeavour of this article is to take readers through a new round of litigation happening in the GST regime on such an age-old issue and apprise readers about the stand taken by various High Courts on this issue.
Legal Provisions in brief
Section 67 of the CGST/Respective State GST Act contains the provisions for Search. Article 265 of the Constitution of India mandates that the collection of tax has to be by authority of law. If tax is collected without any authority of law, the same would amount to depriving a person of his property without any authority of law and would infringe his right under Article 300-A of the Constitution. However, Section 74(5) of the CGST/Relevant SGST Act permits voluntary deposit of tax amount along with interest and penalty during the pendency of any proceedings. Further Rule 142(1A) and Rule 142(2) of the CGST/Relevant State GST Rules lays down the process to be followed.
Gujarat High Court Interim Directions in Bhumi Associate [2021-TIOL-397-HC-AHM-GST]
Hon’ble Gujarat High Court in M/s Bhumi Associate has passed interim order with the following directions:
“The CBIC (Central Board of Indirect Taxes and Customs) as well as the Chief Commissioner of Central/State Tax of the State of Gujarat are hereby directed to issue the following guidelines by way of suitable circular/instructions:
- No recovery in any mode by cheque, cash, e-payment or adjustment of input tax credit should be made at the time of search/inspection proceedings under section 67 of the CGST/GGST (Gujrat State GST) Act under any circumstances.
- Even if the assessee comes forward to make voluntary payment by filing Form DRC-03, the assessee should be asked/advised to file such Form DRC-03 on the next day after the end of search proceedings and after the officers of the visiting team have left the premises of the assessee.
- Facility of filing complaint/grievance after the end of search proceedings should be made available to the assessee if the assessee was forced to make payment in any mode during the pendency of the search proceedings.
- If a complaint/grievance is filed by assessee and officer is found to have acted in defiance of the afore-stated directions, then strict disciplinary action should be initiated against the concerned officer.”
CBIC Instructions on Deposit of Tax during search, inspection, or investigation
Pursuant to Hon’ble Gujarat High Court directions, CBIC has issued Instruction No 01/2020-21 [GST-Investigation] dated 2nd February 2021. Said instructions inter alia, provides, that no recovery of tax should be made during search, inspection, or investigation unless it is voluntary. However Gujarat High Court direction no.2 in Bhumi Associates (supra) viz. if the taxpayer comes forward to make voluntary payment in Form GST DRC-03, the taxpayer should be advised to file the same after the search ended and officers have left the premise of the taxpayer was not incorporated in CBIC instructions.
Thereafter, CBIC issued Instruction No. 01/2022-23 [GST-Investigation] dated 25th May 2022, however, this instruction also has not incorporated Gujarat High Court direction no.2 in Bhumi Associates (supra). However, it was clarified that in terms of Section 79 of the CGST/Relevant State GST Act recovery of tax dues can be made only after following due legal process of issuance of notice and subsequent confirmation of demand by issuance of adjudication order. It was also reiterated that taxpayers are free to make any voluntary payment of tax liability either on self-ascertainment basis or as ascertained by the department during the course of search proceedings or subsequently.
In M/S. Vallabh Textiles vs Senior Intelligence Officer 2022 (12) TMI 1038 – Delhi High Court
As per the factual matrix, Search proceedings commenced on 16.02.2022 at about 03:30 PM and were concluded on the following day i.e., 17.02.2022 at 09:30 A.M. Rs.1,80,10,000/- was deposited in four (4) tranches vide GST DRC-03, on the dates and at the time set forth hereinbelow:
– Rs. 35,00,000/- vide Form GST DRC-03 dated 17.02.2022 at 01:28 AM
– Rs. 1,00,00,000 vide Form GST DRC-03 dated 17.02.2022 at 02:15 AM
– Rs. 20,25,000/- vide Form GST DRC-03 dated 17.02.2022 at 05:04 AM
– Rs. 24,85,000/- vide Form GST DRC-03 dated 17.02.2022 at 07:03 AM
Later on, the assessee claimed that aforesaid payments were not made voluntarily and is a product of coercion and proper procedures were not followed by the proper officer.
High Court has made the following critical observations while delivering judgment:
- In terms of Rule 142(1A) of the CGST/Relevant State GST Rules, Proper officer may before service of Show Cause Notice under Section 73(1) or Section 74(1) communicate details of tax, interest or penalty ascertained by him in Part A of Form GST DRC-01A.
- Further Rule 142(2) of the CGST/Relevant State GST Rules mandates that if the assessee has made voluntary payments in Form GST DRC-03 then an acknowledgement of having received the payment should be made by proper officer in GST DRC-04. Further Issuance of GST DRC-04 is a must even where tax, interest, and penalty are ascertained by the proper officer, under Rule 142(1A). If it is to be assumed, for the sake of argument, that the assessee has made voluntary payment, no document has been placed on record by the /revenue, demonstrating acknowledgement of having accepted the payment.
- Circumstances reveal that the amounts deposited [the cumulative sum being Rs.1,80,10,000/- that too during the early hours 17.02.2022] did not have an element of voluntariness attached to it.
Court thus directed revenue to return Rs.1,80,10,000/- to the petitioner along with interest at the rate of 6% (simple) per annum.
In High Court of Karnataka in Bundl Technologies (P.) Ltd  136 taxmann.com 112 (Karnataka)
The Officers of the Department entered the premises of the Company on 28.11.2019 at 10.30 a.m. During the course of the investigation from 28.11.2019 till 30.11.2019 various statements were recorded by the DGGI Officers. It was alleged that the company has availed ITC on the invoices raised by a non-existent company. On 30.11.2019 at about 4.00 a.m., a sum of Rs. 15 Crores was deposited by the Company under the GST cash ledger. Directors of the Company received summon to appear on 26.12.2019. It is also averred that threats of arrest were held out to directors during the recording of the statement, and they were not allowed to leave till the early hours of 27.12.2019. Petitioner, therefore, made payment of a further sum of Rs. 12.51 Crore at about 1 a.m. on 27.12.2019 in order to secure the release of three directors of the company.
While submitting paid challans petitioner intimated to the Department that it reserves its right to claim a refund of the amount so paid and the same should not be treated as an admission of its liability. A similar remark was also made while filing GST DRC-03. Despite a lapse of about 10 months from the initiation of the investigation, no show-cause notice was issued to the Company. The Company, therefore, submitted a letter seeking a refund of the amount of Rs. 27.51 Crore. Petitioner has also filed a refund application before the jurisdictional GST office. However, the application submitted by the petitioner failed to evoke any response.
Before High Court department could not submit any material on record to establish that guidelines issued by the division bench of Gujarat High Court were followed. Considering facts and circumstances Karnataka High Court came to the conclusion that the amount was not paid voluntarily under section 74(5) of the CGST/Karnataka State GST Act. Relying on Articles 265 and 300-A of the Constitution court ordered a refund of Rs. 27.51 Crore.
In Diwakar Enterprises (P.) Ltd. v. Commissioner of CGST  149 taxmann.com 419 (Punjab & Haryana)
Relying on. Bundl Technologies Pvt. Ltd. (supra) and Vallabh Textiles (supra) Payment made under protest by way of DRC-03 of Rs. Rs.1,99,90,000/- for which no receipt was given by Proper Officer in GST DRC-04 was ordered for a refund with interest @ 6% p.a.
In Shree Ganesh Molasses Trading Co. v. Superintendent, Office of the Commissioner  148 taxmann.com 36 (Gujarat)
Hon’ble Gujarat High Court took cognizance of the fact that the search was commenced on 11.02.2022 and ITC was reversed at 1.09 a.m on 12.02.2022 by way of filing GST DRC-03. Relying on circumstances and transcript of communication between the Son of the partner and superintendent, Court held that the conduct of officials was against t interim direction of the Gujarat High Court and CBIC Instruction No. No. 01/2022-23 dated 25th May 2022. High Court thus ordered recredit of ITC along with 6% p.a. interest.
In Shri Nandhi Dhall Mills India (P.) Ltd. v. Senior Intelligence Officer, Director General of Goods & Service Tax, Trichy  127 taxmann.com 31 (Madras)
The petitioner was a dealer in pulses, and flour and also a manufacturer of food products, and grain mill products. The department alleged that the petitioner is using the brand to sell its products and therefore subject to GST. Whereas the petitioner has argued that products sold are unbranded and therefore not subject to GST levy. During the Investigation, the petitioner made a payment of Rs. 2 Crore under Protest and thereafter sought a refund of the same.
Hon’ble Madras High Court in Para 27 of its order observed as under
“27. Merely because an assessee has, under the stress of investigation, signed a statement admitting tax liability and has also made a few payments as per the statement, cannot lead to self-assessment or self-ascertainment. The ascertainment contemplated under section 74(5) is of the nature of self-assessment and amounts to a determination which is unconditional, and not one that is retracted as in the present case. Had such ascertainment/self-assessment had been made, there would be no further proceedings contemplated, as section 74(6) states that with ascertainment of demand in section 74(5), no proceedings for show cause under section 74(1) shall be issued. In this case, enquiry and investigation are on-going, personal hearings have been afforded and both the parties are fully geared towards issuing/receiving a show cause notice and taking matters forward. Thus, the understanding and application of section 74(5) in this case, is, in my view, wholly misconceived.”
The court thus ordered to refund the amount collected of Rupees 2 Crore.
In Samyak Metals Pvt. Ltd. Vs Union of India [2023-TIOL-626-HC-P&H-GST]
The business premises of the petitioner were searched on 25.02.2021. During the search proceedings ledger of a particular vendor was analyzed. During the recording of the personal statement, Director accepted that they have only received bills without receiving any goods from the said vendor. Petitioner was therefore forced to deposit tax in lieu of ITC availed on purchases made from a particular vendor. Further applicable Interest and Penalty were also recovered vide form DRC-03 on 26-02-2021. Investing Authority has neither passed any adjudication order nor issued any show cause notice u/s 74(1) of the Act. Even Form DRC-04 was not issued.
Relying on the Judgment of Bhumi Associates (supra) and considering the fact that the department has neither issued any in GST-DRC-04 nor has issued any notice under Section 74, Punjab and Haryana High Court has ordered a refund of tax, interest, and penalty collected with interest @ 6% p.a.
In Modern Insecticides Ltd Vs Commissioner Central Goods and Service Tax [2023-TIOL-502-HC-P&H-GST]
In the present case, the dispute revolves around the short compass of whether the amount paid by the petitioner on 16.01.2021, could be retained by the department without issuing the show cause notice under Section 74 (1) of the CGST Act that too after the expiry of two years. Relying on Gujrat High court Judgment in Bhumi Associate (supra) and Delhi High Court Judgment in Vallabh Textile (supra), Punjab and Haryana High Court ordered that the deposit of tax during the search cannot be retained by the department till the adjudication of notice, which can take more time in future. Accordingly, the department is directed to return amount of Rs. 2.54 Crore along with simple interest at the rate of 6% per annum from the date of deposit till the payment is made.
Please note in all the above cases refund of the amount collected during search proceedings pursuant to High Court direction does not mean the end of all the proceedings. The department can very well adjudicate such matters basis evidence collected during search proceedings after issuance of a proper Show Cause Notice and granting a reasonable opportunity of being heard to the Petitioner. In all the above cases High Courts were seized of the limited issue of whether the Department can retain the amount collected during the search for an unreasonable long period under the garb of voluntary payments without honouring safeguards laid down by the CGST/Relevant SGST Act, Various High Court and Supreme Court Judgments and CBIC Instructions.
The legislative intent of the Search provision is to collect evidence against the assessee as opposed to collecting tax on the spot during the search. Above judgements highlights one important legal principle that during the course of an investigation, the assessee should not be forced to pay any amount without adjudication of liability. It is also a trite of law that any amount collected during the investigation should be refunded in the absence of any determination of demand against the concerned assessee. Further, if the department were to argue that payment made by the assessee during the search process is voluntary then such payments need to pass through the test of Interim Directions issued by Hon’ble Gujarat High Court in Bhumi Associates, CBIC Instruction No. 01/2022-23 [GST-Investigation] dated 25.02.2022 and procedures laid down in the CGST/Relevant State GST Rules. Retaining Tax Amount recovered from the assessee during search proceedings vide form GST DRC-03 without issuing any GST DRC-04 or SCN u/s 74(1) of the CGST/Relevant SGST Act may not find favours with the Judiciary.
The views expressed herein are strictly personal to the author and should not be construed as advice/ legal opinion. The contents of this article are based on the interpretation of the facts, relevant legislation, rules, notifications, circulars, judgments/rulings, etc. on the date of publishing of this article. One should not act upon the information in this article without obtaining specific professional advice. Author of this blog is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission pertaining to this article. Further, the said article is only for information and guidance purposes and should not be construed as any kind of advertisement or solicitation of work.
This article was also published in June 2023 publication of monthly magazine titled ‘GST Review’ published by Goods and Services Practitioners Association of Maharashtra (GSTPAM).
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