GST Payment during investigation is a payment under coercion and liable to be refunded- says Karnataka High Court
Recovery During Investigation & Payment Under Alleged Coercion – Scope of Section 74(5)
Date & Year of Judgment
28 January 2025
This judgment strengthens the judicial scrutiny over so-called “voluntary payments” made during search and investigation under GST.
Case Reference
The Intelligence Officer & Anr. v. M/s Kesar Color Chem IndustriesWrit Appeal No. 1649 of 2024High Court of Karnataka at BengaluruCoram: Justice V. Kameswar Rao & Justice S. Rachaiah
1. Main Issue Involved
Whether amounts deposited during search/investigation proceedings, claimed by the department as voluntary payment under Section 74(5) of the CGST Act, can be retained when the assessee alleges coercion and disputes tax liability.
The case examines the boundary between “self-ascertainment” and “coercive recovery” during investigation.
Article 265 – Constitution of India (No tax shall be levied or collected except by authority of law)
The Court read Section 74(5) strictly within its statutory scheme and constitutional framework.
3. Facts of the Case
Investigation initiated against a third party (M/s Raj Chemicals).
Respondent allegedly received invoices without supply.
Search conducted from 29.07.2021 to late night 30.07.2021.
Statement recorded at 12:30 a.m. on 31.07.2021.
₹1 crore deposited on 31.07.2021.
Summons issued to appear at Bengaluru.
₹1.5 crore deposited on 03.08.2021.
Affidavit dated 10.08.2021 retracting statements.
SCN issued later on 30.11.2022.
Single Judge ordered refund of ₹2.5 crores.
Department filed writ appeal.
Deposits were made before issuance of SCN and during investigation stage.
4. Appellant (Department)’s Submissions
Payment was voluntary under Section 74(5).
DRC-03 filed; challan generated after search closure.
Retraction affidavit was belated.
Writ involved disputed facts not suitable under Article 226.
Payment liable to be adjusted during adjudication.
Revenue relied heavily on “self-ascertainment” characterization.
5. Respondent (Assessee)’s Submissions
Payments extracted under threat of arrest.
Statements recorded under coercion.
No DRC-04 acknowledgment issued.
No determination of tax liability existed.
Recovery during investigation is illegal.
Relied upon Delhi HC judgment in Lovelesh Singhal.
Assessee emphasized absence of voluntariness and non-compliance with statutory procedure.
6. Analysis and Findings of the Court
A. Whether Payment Was Voluntary
The Division Bench agreed with the Single Judge that voluntariness was absent.
The Court held that statements and deposits cannot be separated and that the circumstances indicated coercion.
B. Can Deposit Be Retained Pending Adjudication?
The Court framed the issue directly:
If tax liability itself is disputed and adjudication is pending, can the department retain the amount allegedly paid under Section 74(5)?
The Court answered in the negative.
C. Interpretation of Section 74(5)
The Court observed that self-ascertainment must be voluntary and prior to issuance of notice.
If voluntariness is absent, the statutory scheme collapses.
D. Affidavit Retraction – Not Belated
Retraction within one week was held not fatal.
E. Reliance on Delhi High Court
The Court extensively reproduced and relied upon Lovelesh Singhal v. Commissioner, DGST (2024) to reinforce the principle that coercive deposits must be refunded.
Most Important Observations of the Court
(Para 29)
“The facts demonstrate the inference that the recording of statement was under the threat, that he shall be arrested… So it suggests, the statements were recorded and deposits were made under threat and coercion. The statements and the payments made cannot be separated nor it can be concluded that there is no allegation of threat and coercion for the purpose of payment/deposit of the amounts.”
(Para 30)
“So, the issue is whether any tax is payable at all? So, pending decision on the issue, can the amount remain deposited with the appellants? The answer has to be ‘NO’, more so when it is concluded by the learned Single Judge that the same was not voluntary, with which we agree.”
(Para 31)
“One week is not a large period to be considered as fatal/belated.”
“On a cumulative reading of the facts of this case, we are of the view that the learned Single Judge is right… that the payments were recovery and were contrary to law.”
7. Final Judgment
Writ appeal dismissed.
Refund of ₹2.5 crores upheld.
Department cannot retain amount collected during investigation under coercive circumstances.
Judicial endorsement that coercive “voluntary” payments cannot be legitimized by labelling them as Section 74(5) deposits.
8. Similar / Related Judgments
Delhi HC – Lovelesh Singhal v. Commissioner, DGST (2024)
Delhi HC – Vallabh Textiles
CBIC Instructions dated 25.05.2022 i.e. Instruction no 1/2022-23 (No recovery during investigation)
There is now a consistent judicial trend across High Courts against coercive recovery during investigation.
9. CA BTA Insights
This judgment is extremely important for GST litigation strategy.
Key Principles Emerging:
Section 74(5) requires genuine voluntariness.
Statement and payment cannot be artificially separated.
Deposit during investigation, without adjudication, cannot be retained.
Retraction within reasonable time is valid.
Article 265 operates as constitutional safeguard against unauthorized recovery.