Case Summary

Santosh Kumar Gupta Prop. Mahan Polymers v. Commissioner, DGST & Ors., W.P.(C) 17171/2022, Delhi High Court (05.12.2023)
Category: Input Tax Credit – Reversal under Coercion during Search; Validity of Search under Section 67; Refund of Forced Deposit
Relevant Provisions: Sections 67, 73, 74, 83 of CGST/DGST Act; Rule 139 & 142 of CGST/DGST Rules

FACTS (with Para References)

The petitioner, a registered dealer engaged in the business of polymers, was subjected to search/inspection on 18.10.2022 at his business premises at Tri Nagar and Bawana under Section 67(1), DGST Act (Para 1). During this search, officers allegedly compelled him to reverse ITC of ₹22,14,226 by filing FORM DRC-03, asserting that certain suppliers from whom ITC was availed had their registrations cancelled (Paras 1–3, 13).

He contended that his statement was recorded around 11:30 PM, under psychological pressure, fatigue, and complete control of the visiting officers, and that the reversal of ITC was coerced (Paras 2, 14).

He also challenged the validity of the search authorisation (FORM INS-01), arguing that the officer checked multiple boxes mechanically without proper “reasons to believe” mandated under Section 67 (Paras 3–6).

No DRC-04 acknowledgement was issued by the department after the ITC reversal, contrary to Rule 142, creating procedural illegality (Paras 2, 19).

The petition sought (i) declaration of the search as illegal, and (ii) refund/re-credit of the forced ITC reversal.

QUESTIONS FOR DETERMINATION

1. Whether the search/inspection under Section 67(1) was illegal for want of proper “reasons to believe”? (Paras 4–9)

2. Whether the reversal of ITC worth ₹22,14,226 was voluntary or coerced? (Paras 10–14)

3. Whether the petitioner is entitled to re-credit of ITC when the reversal was made during search and without adjudication? (Paras 18–22)

OBSERVATIONS OF THE COURT (with Para References)

On Validity of the Search (Paras 5–9)

The Court held that the search authorisation (FORM INS-01) complied with Rule 139, and ticking multiple grounds did not by itself show non-application of mind. The detailed reasons are not required to be disclosed in the form. The department recorded reasons in internal files, which the petitioner did not seriously dispute.

The Court accepted the department’s assertion that ITC was availed from cancelled suppliers and held that Section 67(1)(a) conditions were satisfied, thus the search was not illegal.

On Whether the ITC Reversal Was Voluntary (Paras 10–15, 18, 20–22)

The Court noted that the petitioner’s statement agreeing to ITC reversal was recorded late at night during an ongoing search (Paras 14, 22).

The Court found:

• No adjudication was conducted to determine wrongful ITC (Paras 20–21).

• No acknowledgment in DRC-04 was issued (Para 19).

• The “self-ascertainment” deposit under Sections 73(5) or 74(5) must be truly voluntary and conclusive.

• The petitioner had stoutly disputed the voluntariness of the deposit from the beginning (Paras 18, 22).

The Court expressly accepted that the taxpayer may have been intimidated, given the late-night proceedings, continuous questioning, and the coercive environment (Para 22).

Thus, the payment could not be treated as voluntary self-assessment under Section 73(5)/74(5), which would otherwise foreclose adjudication.

On Right to Re-credit of ITC (Paras 18–22)

Since the reversal was not voluntary:

• The deposit could not be retained without adjudication.

• Revenue remains free to initiate proceedings under Section 73/74, invoke Section 83, or block ITC under Rule 86A, if conditions are met (Para 22).

Accordingly, the department must re-credit the ITC in the taxpayer’s electronic credit ledger.

JUDGMENT / VERDICT (Flowing Narrative with Para References)

The Delhi High Court held that while the search itself was validly authorised under Section 67(1) (Paras 5–9), the reversal of ITC amounting to ₹22,14,226 was not voluntary. The Court found that the taxpayer was subjected to search and questioning late into the night and could reasonably have experienced intimidation, such that the statement and corresponding DRC-03 payment could not be treated as a voluntary self-ascertainment under Section 73(5) or 74(5) (Paras 14, 18, 22).

Since no DRC-04 acknowledgement was issued, procedural safeguards under Rule 142 were not followed (Para 19). Moreover, the department had not conducted any adjudication or issued any notice demonstrating that ITC was inadmissible (Paras 20–21). The voluntary-payment mechanism under Sections 73(5) / 74(5) cannot extinguish tax disputes unless the taxpayer unequivocally admits liability.

In these circumstances, the Court directed the department to re-credit the ITC of ₹22,14,226 to the petitioner’s Electronic Credit Ledger (Para 22), while preserving the right of the department to take future protective or coercive measures, including blocking ITC under Rule 86A or attaching property under Section 83, subject to statutory preconditions.

Thus, the writ petition was disposed of with directions in favour of the taxpayer (Para 23).

TABLE OF CASES REFERRED

BETWEEN THE FINE LINES – Practical Takeaways for Industry

This ruling reinforces that any payment of tax, reversal of ITC, or filing of DRC-03 during search or inspection is suspect unless unequivocally voluntary. Revenue cannot rely on late-night statements or pressured payments as “self-ascertainment.” If DRC-04 is not issued or no adjudication follows, taxpayers are entitled to re-credit/refund of such deposits. Officers must exercise Section 67 powers strictly and cannot convert search proceedings into forced recovery.

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