Tax paid during search held invalid and GST department ordered to refund the amount with 6% interest by Punjab & Haryana High Court
Case Citation
M/s Parsvnath Traders v. Principal Commissioner, CGST & Anr.andM/s Mahavira Dyes & Chemicals v. Principal Commissioner, CGST & Anr.
CWP No. 10923 of 2021 and CWP No. 10976 of 2021
Decision dated 27.07.2023
Punjab and Haryana High Court
1. Main Issue Involved
Whether GST amount deposited by the taxpayer during the course of search and investigation without issuance of show cause notice under Section 74(1) can be treated as voluntary payment under Section 74(5) or whether such recovery is illegal and liable to be refunded.
The case examines the misuse of Section 74(5) where departments treat payments during investigation as “voluntary”.
2. Sections and Rules Discussed
Section 16 — Input Tax Credit conditions
Section 74(1) — Determination of tax involving fraud/suppression
Section 74(5) — Voluntary payment before issuance of notice
Section 74(6) — Closure of proceedings upon payment
The Court clarified that Section 74(5) is meant for voluntary self-ascertainment and not for forced tax recovery during investigation.
3. Facts of the Case
The petitioner M/s Parsvnath Traders was engaged in trading of chemicals and had purchased goods from M/s Royal Sales Corporation, Rohtak during FY 2018-19 and 2019-20. The petitioner claimed ITC based on tax invoices and supporting documents including e-way bills, goods receipts and invoices.
On 05.02.2021, the CGST department conducted a search at the business premises of the petitioner alleging that the petitioner had availed ITC on the basis of fake invoices issued by the supplier. During the investigation the officers compelled the petitioner to deposit ₹20 lakhs on the same day and later ₹30,70,216 on 16.02.2021, aggregating to ₹50,70,216 through Form GST DRC-03.
Despite such deposit, the department did not issue any show cause notice nor passed any adjudication orderdetermining tax liability. The petitioner requested refund of the amount, but the request was rejected by order dated 18.05.2021, which led to filing of the writ petition before the High Court.
The crucial fact was that even two years after the deposit, no show cause notice under Section 74 was issued.
4. Petitioner’s Submissions
The petitioner argued that:
The amount of ₹50.70 lakhs was deposited under pressure during investigation.
No show cause notice under Section 74(1) had been issued.
Without determination of liability, the department had no authority to retain the amount.
The payment was not voluntary and therefore could not be treated as self-ascertainment under Section 74(5).
The petitioner relied upon earlier judgments including:
Century Metal Recycling Pvt. Ltd. v. Union of India
Concepts Global Impex v. Union of India
Century Knitters (India) Ltd. v. Union of India
Bhumi Associate v. Union of India
The petitioner’s strategy was to establish that recovery without adjudication violates Article 265 of the Constitution.
5. Department’s Submissions
The department contended that:
The petitioner had availed fake ITC based on invoices of M/s Royal Sales Corporation.
Investigation revealed that the supplier had issued invoices without actual movement of goods.
The payments made through DRC-03 were voluntary payments, constituting admission of tax liability.
Therefore, refund could not be granted.
The department attempted to justify retention of the amount by treating the deposit as self-ascertainment under Section 74(5).
6. Analysis and Findings of the Court
The High Court examined the scheme of Section 74 of the CGST Act.
The Court observed that Section 74 provides a complete mechanism for determination of tax liability, beginning with issuance of a show cause notice and culminating in adjudication. A taxpayer may pay tax voluntarily before issuance of notice under Section 74(5), but such payment must be based on genuine self-ascertainment or ascertainment by the proper officer.
The Court clarified that Section 74(5) cannot be treated as a statutory mechanism permitting advance recovery of tax during investigation. Such an interpretation would defeat the statutory scheme of adjudication.
Further, the Court noted that the petitioner had immediately sought refund of the deposited amount, demonstrating that the payment was not an unconditional self-assessment.
The Court also relied upon earlier precedents where it had been held that tax amounts recovered during search without crystallised liability cannot be retained by the department.
The Court effectively limited the misuse of DRC-03 deposits obtained during investigation.
Important observation of the court
Court has noted as under -
Reference can also be made to Century Metal Recycling Pvt. Ltd.’s case (supra) wherein, a Co-ordinate Bench of this Court had observed that unless there was an assessment and demand, the amount deposited by the petitioners could not be appropriated. It was observed as under:-
“13. As far as the amount deposited by the petitioners is concerned, case of the petitioners is that the same was deposited under coercion. Case of the respondents was that the same was deposited voluntarily. Whatever be the position, unless there is assessment and demand, the amount deposited by the petitioners cannot be appropriated. No justification has been shown for retaining the amount deposited, except saying that it was voluntarily deposited. In view of this admitted position, the petitioners are entitled to be returned the amount paid.”
"It is also relevant to mention also that this Bench has dealt with similar question in CWP-733-2021 titled as William E Connor Associates & Sourcing Pvt. Ltd. vs. Union of India & Others, decided on 04.05.2023, in CWP-23788-2021 titled as Diwakar Enterprises Pvt. Ltd. vs. Commissioner of CGST and Others, 2023(98) GST 322, decided on 14.03.2023 and in CWP-8035-2021 titled as Modern Insecticides Ltd. and Others vs. Commissioner, Central Goods and Service Tax and Others, decided on 19.04.2023 by this Court, and it has been held that the amount deposited during search cannot be retained by the Department if proceedings under Section 74(1) of the Act are not initiated."
7. Judgment of the Court
The High Court allowed the writ petitions and held that:
The recovery of ₹50.70 lakhs from M/s Parsvnath Traders was illegal.
The department was directed to refund the amount within six weeks along with interest at 6% per annum.
Similar relief was granted to M/s Mahavira Dyes & Chemicals for refund of ₹45.65 lakhs with interest.
The Court granted refund with interest, reinforcing the principle that coercive recovery during investigation is impermissible.
8. CA BTA Insights
This judgment adds another strong precedent against coercive tax recovery during GST search and investigation.
Key takeaways for litigation strategy:
DRC-03 deposits during search are not automatically voluntary.
Section 74(5) cannot be used to legitimise advance recovery.
Tax cannot be retained without issuance of SCN and adjudication.
Courts consistently hold that no recovery should take place during search proceedings.
Taxpayers can seek refund with interest if payment was made under pressure.
This judgment, along with Bhumi Associate (Gujarat HC) and Delhi High Court rulings, forms a strong line of authority limiting departmental coercion during GST investigations.
For GST litigation, this decision strengthens the defence that payments during investigation should be treated as provisional deposits, not final tax payments.