Tax Deposited During GST Raids: What Three Delhi High Court Judgments Say

Search and inspection operations under Section 67 of the Central Goods and Services Tax Act, 2017 (CGST Act) often stretch late into the night. In several cases, taxpayers have ended up depositing large amounts through Form GST DRC-03, either in cash or by debiting their Electronic Credit Ledger (ECL), while the search team was still on their premises. The department usually treats these deposits as voluntary payments under Section 73(5) or Section 74(5) of the CGST Act. Taxpayers, on the other hand, say they were coerced.

The Hon'ble High Court of Delhi has dealt with this question in three judgments: M/s Vallabh Textiles vs. Senior Intelligence Officer and Ors. [W.P.(C) 9834/2022, dated December 20, 2022], Lovelesh Singhal Prop. Shivani Overseas vs. Commissioner, Delhi Goods and Services Tax & Ors. [W.P.(C) 16353/2022, dated December 5, 2023], and Neeraj Paper Marketing Ltd. vs. Special Commissioner, Department of Trade and Taxes, GNCTD & Ors. [W.P.(C) 158/2023, dated December 5, 2023]. In all three cases, the Court held that the amounts deposited during search operations were not voluntary and directed the department to return them.

The Legal Framework on Voluntary Payment

Section 73(5) of the CGST Act allows a person chargeable with tax to pay the tax along with interest under Section 50, on the basis of his own ascertainment or the tax as ascertained by the proper officer, before service of a show cause notice, and to inform the proper officer in writing of such payment. Under Section 73(6), the proper officer, on receipt of such information, shall not serve any notice in respect of the tax so paid or any penalty payable. Under Section 73(7), if the amount paid falls short of the amount actually payable, the proper officer shall issue notice for the shortfall.

Section 74(5) contains a similar scheme for cases involving fraud, wilful misstatement or suppression of facts, except that the taxpayer must also pay a penalty equivalent to fifteen per cent of the tax to absolve itself of further penalty liability.

These provisions must be read with Rule 142 of the Central Goods and Services Tax Rules, 2017 (CGST Rules). Under Rule 142(1A), where the proper officer seeks to communicate the details of tax, interest or penalty before serving a notice, he must do so in Part A of Form GST DRC-01A. Under Rule 142(2), where the taxpayer makes a payment on self-ascertainment, he must inform the proper officer through Form GST DRC-03, and the proper officer is then required to issue an acknowledgement accepting the payment in Form GST DRC-04.

The Bhumi Associate Directions and the CBIC Instruction

In Bhumi Associate v. Union of India, decided on February 16, 2021, the Hon'ble Gujarat High Court directed the CBIC and the Chief Commissioner of Central/State Tax of Gujarat to issue guidelines providing that no recovery by cheque, cash, e-payment or adjustment of input tax credit should be made at the time of search or inspection under Section 67 under any circumstances. Even if the assessee comes forward to make voluntary payment through Form DRC-03, he should be advised to file it on the next day after the end of search proceedings and after the officers have left his premises. The Court also directed that a facility for filing a complaint be made available to an assessee forced to pay during the search, and that strict disciplinary action be taken against officers found to have acted in defiance of these directions.

Thereafter, the GST-Investigation Wing of the CBIC issued Instruction No. 01/2022-23 [GST-Investigation] dated May 25, 2022. The Instruction clarified that recovery of taxes not paid or short paid can be made under Section 79 of the CGST Act only after issuance of notice and confirmation of demand by an adjudication order, and therefore there may not arise any situation where "recovery" has to be made during search, inspection or investigation. It also stated that the law does not bar a taxpayer from voluntarily paying any tax liability, and directed that complaints of force or coercion be enquired into at the earliest.

Case 1: M/s Vallabh Textiles vs. Senior Intelligence Officer and Ors.

The Petitioner was engaged in trading of ready-made garments and selling such goods on behalf of third parties on commission. The department alleged that it had sold goods worth Rs. 149.90 crores in cash on behalf of two entities and earned commission of about Rs. 7.50 crores without paying tax. A search was conducted at its premises, which commenced at about 3:30 PM on February 16, 2022 and ended at 9:30 AM on February 17, 2022. During the search, a sum of Rs. 1,80,10,000/- was deposited through Form GST DRC-03 in four tranches between 1:28 AM and 7:03 AM on February 17, 2022.

The department contended that the deposit was voluntary and that the allegation of coercion was an afterthought, raised only on May 25, 2022 after summons had been served.

The Court observed that although the payments were made in Form GST DRC-03, no document was placed on record showing that the proper officer had issued an acknowledgement in Form GST DRC-04. The stand that the payment was voluntary was therefore not established, as the regime under Sections 73/74 and the CGST Rules had not been adhered to. The Court further held that the fact that deposits were made in the early hours while the search had not concluded showed that the payments were not voluntary.

The Court held that direction number two in Bhumi Associate, requiring the assessee to be advised to file DRC-03 on the day after the search, was binding on the department and had not been followed. It noted that the CBIC Instruction dated May 25, 2022 fell short, as it sidestepped this direction and did not elaborate on the various modes of collection. The Court rejected the argument that the objection was raised late, holding that if a procedure is prescribed by statute or by a judgment, it has to be followed "to the tee". The Court opined that the purpose of having amounts deposited the day after the search is to give the person space to seek legal advice and to deposit only upon a proper self-ascertainment, and no such elbowroom was given in this case.

The Court directed the department to return Rs. 1,80,10,000/- with simple interest at 6% per annum from February 17, 2022, within ten days, and directed the CBIC to align Instruction No. 01/2022-23 with the directions in Bhumi Associate.

Case 2: Lovelesh Singhal Prop. Shivani Overseas vs. Commissioner, Delhi Goods and Services Tax & Ors.

The Petitioner traded in PVC Resin. A search was conducted at his business premises on October 7, 2022, continuing till the early hours of October 8, 2022, on the basis of an authorisation in Form GST INS-01. The Petitioner was informed that the registration of his supplier, M/s Samridhi Exports, had been cancelled retrospectively, and at 2:06 AM on October 8, 2022, ITC of Rs. 18,72,000/- was debited from his ECL through Form DRC-03 while the search was still continuing. In his statement, the Petitioner denied any mismatch in his returns.

The Petitioner also challenged the search authorisation as vague. The Court noted that the authorisation merely reproduced all the reasons available under Section 67(1)(a), but held that the retrospective cancellation of the suppliers' registrations had a rational nexus with a reason to believe that ITC may not be available. Since sufficiency of reasons is not subject to judicial review, the Court declined to hold the search illegal.

On the deposit, the Court accepted that it was made under duress and in compelling circumstances, as the Petitioner had been subjected to the search far beyond normal business hours and the deposit was made while the search was ongoing. The Court held that Sections 73(5) and 74(5) are provisions for the benefit of a taxpayer and are not provisions under which the department can compel a taxpayer to deposit tax. Where tax is collected under coercion, it is required to be returned. Where a taxpayer states that the payment was involuntary and the circumstances prima facie indicate so, he must be allowed to withdraw it, though he would then forfeit immunity from penalty and the authorities may proceed against him to the full extent permissible under law.

The Court observed that payment on self-ascertainment necessarily requires acceptance of the underlying liability by the taxpayer and acknowledgement by the department. Here, the Petitioner had disputed any liability, no DRC-04 had been issued, and the paragraph of his statement relied upon by the department merely recorded what the visiting team had told him about the supplier's cancellation. It could not be read as an admission that he was liable to reverse the ITC. The Court found that the department's reliance on Suresh Kumar P.P. v. Deputy Director, DGGI, RCI Industries and Technologies Ltd. v. Commissioner DGST Delhi, and S.S. Industries v. Union of India was misplaced, as those cases turned on different facts. The Court also held that it is impermissible for officers to pressurise taxpayers to pay tax without following the requisite procedure, even if it appears that the tax is due.

The Court directed the department to forthwith re-credit Rs. 18,72,000/- to the Petitioner's ECL, while clarifying that the department remained free to take steps in accordance with law, including passing an order under Rule 86A of the CGST Rules if its conditions were satisfied.

Case 3: Neeraj Paper Marketing Ltd. vs. Special Commissioner, Department of Trade and Taxes, GNCTD & Ors.

The Petitioner traded in waste paper and craft paper. A search was conducted at its premises on July 29, 2022 under Section 67(2), and a mismatch of Rs. 60 lakhs in GSTR-2A and GSTR-3B for FY 2018-19 and Rs. 20 lakhs for FY 2019-20 was found. Its Director's statement acknowledged the mismatch and undertook to pay tax, interest and penalty if any liability arose. A total of Rs. 28,20,000/- was deposited through DRC-03, being Rs. 20,70,000/- in cash and Rs. 4,50,000/- through ITC at 11:49 PM on July 29, 2022, and Rs. 3,00,000/- in cash at 12:38 AM on July 30, 2022.

The department contended that the payment was voluntary, since the Director had admitted the mismatch and had not retracted his statement. The department later issued show cause notices under Section 74 for both years, which mentioned the deposit but gave no credit for it in the proposed demand.

The Court held that the procedure for voluntary deposits had not been followed, as no acknowledgement in Form GST DRC-04 was issued under Rule 142(2). It observed that the show cause notices were in terms of Section 74(7) but were not limited to the shortfall after accounting for the deposit, meaning the department had neither acknowledged the deposit nor given its benefit. Relying on Vallabh Textiles, the Court held that non-compliance with the stipulated procedure also leads to the conclusion that the payments were not voluntary.

The Court found that while the Director admitted a mismatch in returns, he did not acknowledge that ITC was incorrectly availed, and only undertook to pay if any liability arose. No liability had been ascertained and no notice under Rule 142(1A) had been issued. Since the payments were made late at night during the search, the Court accepted that they were made under compelling circumstances, holding that the issue was covered by Vallabh Textiles and Lovelesh Singhal. The department was directed to refund Rs. 23,70,000/- in cash with interest at 6% per annum from December 13, 2022, the date of the Petitioner's refund request, and to refund Rs. 4,50,000/- by reversing the debit in the ECL.

Key Principles Emerging From the Three Judgments

Absence of DRC-04 is decisive. In all three cases, the department had not issued an acknowledgement in Form GST DRC-04 under Rule 142(2). The Court consistently held that failure to follow the prescribed procedure itself leads to the conclusion that the deposit was not voluntary.

Timing of the payment matters. Payments made late at night or in the early hours, while the search was still continuing, were treated as made under compelling circumstances.

Voluntary payment provisions cannot be used to compel payment. Sections 73(5) and 74(5) exist for the benefit of the taxpayer. As held in Lovelesh Singhal, they are not provisions under which the department can compel a taxpayer to deposit tax, and officers cannot pressurise taxpayers to pay without following the requisite procedure.

An admitted mismatch is not an admitted liability. In Neeraj Paper Marketing and Lovelesh Singhal, statements recording a mismatch or the cancellation of a supplier's registration were held not to be acknowledgements of liability to pay tax or reverse ITC.

Non-retraction or delayed objection does not save the deposit. The argument that the statement was not retracted, or that coercion was alleged only later, was rejected where the statutory and judicially prescribed procedure had not been followed.

Payments should be made the day after the search. The Delhi High Court, in Vallabh Textiles, concurred with the Bhumi Associate direction that a taxpayer wishing to pay should be advised to do so the next day, after the officers have left, so that he has space to seek legal advice.

Refund does not end the proceedings. As clarified in Lovelesh Singhal, a taxpayer who withdraws such a payment forfeits immunity from penalty, and the department remains free to proceed against him in accordance with law, including under Rule 86A of the CGST Rules.

Conclusion

Taken together, these judgments make clear that the voluntary payment mechanism under Sections 73(5) and 74(5) of the CGST Act depends on genuine self-ascertainment by the taxpayer and strict adherence to Rule 142 by the department. Where money is collected during a search, outside normal hours, without a DRC-04 acknowledgement, and without any determined liability, the Delhi High Court has consistently treated it as involuntary and directed its return, with interest where paid in cash and by re-credit where ITC was debited. At the same time, the Court has preserved the department's right to proceed against the taxpayer in accordance with law.

CASES DISCUSSED

1. M/s Vallabh Textiles vs. Senior Intelligence Officer and Ors. [W.P.(C) 9834/2022; 2022 SCC OnLine Del 4508; Neutral Citation 2022/DHC/005682] - Delhi High Court, December 20, 2022 - Bench: Hon'ble Mr. Justice Rajiv Shakdher and Hon'ble Ms. Justice Tara Vitasta Ganju

2. Lovelesh Singhal Prop. Shivani Overseas vs. Commissioner, Delhi Goods and Services Tax & Ors. [W.P.(C) 16353/2022; Neutral Citation 2023:DHC:8631-DB] - Delhi High Court, December 5, 2023 - Bench: Hon'ble Mr. Justice Vibhu Bakhru and Hon'ble Mr. Justice Amit Mahajan

3. Neeraj Paper Marketing Ltd. vs. Special Commissioner, Department of Trade and Taxes, GNCTD & Ors. [W.P.(C) 158/2023; Neutral Citation 2023:DHC:8662-DB] - Delhi High Court, December 5, 2023 - Bench: Hon'ble Mr. Justice Vibhu Bakhru and Hon'ble Mr. Justice Amit Mahajan

OTHER CASES REFERRED IN THE JUDGMENTS

Bhumi Associate v. Union of India - Gujarat High Court, decided February 16, 2021 - Directions against recovery during search proceedings (referred in Vallabh Textiles and Lovelesh Singhal)

Suresh Kumar P.P. and Ors. v. The Deputy Director, DGGI and Ors. [MANU/KE/2191/2020] - Kerala High Court - Distinguished in Lovelesh Singhal, as the cheque issued in that case was found to be voluntary

M/s RCI Industries and Technologies Ltd. v. Commissioner DGST Delhi & Ors. [2021 SCC OnLine Del 3450] - Distinguished in Lovelesh Singhal

S.S. Industries v. Union of India [Manu/GJ/1609/2020] - Gujarat High Court - Distinguished in Lovelesh Singhal, as the allegations in that case were not refuted

RELEVANT PROVISIONS

Section 67 of the CGST Act - Inspection, search and seizure

Sections 73(5), 73(6) and 73(7) of the CGST Act - Voluntary payment before notice in non-fraud cases

Sections 74(5), 74(6) and 74(7) of the CGST Act - Voluntary payment with 15% penalty before notice in fraud/suppression cases

Rule 142(1A) of the CGST Rules - Communication of ascertained liability in Part A of Form GST DRC-01A

Rule 142(2) of the CGST Rules - Payment through Form GST DRC-03 and acknowledgement in Form GST DRC-04

Rule 86A of the CGST Rules - Referred in Lovelesh Singhal as an option available to the department

CBIC Instruction No. 01/2022-23 [GST-Investigation] dated May 25, 2022 - Deposit of tax during the course of search, inspection or investigation