Refund sustained as GST recovery during investigation was held coercive and not self-ascertained under Section 74(5)

Case Title:
The Intelligence Officer, DGGI v. M/s Kesar Color Chem Industries

Court: High Court of Karnataka, Bengaluru
Case Number: WA No. 1649 of 2024
Date of Judgment: 28 January 2025
Relevant Sections: Sections 67, 70, 74(5), 74(6), 74(7), 74(8) of the CGST Act, 2017; Rule 142 of CGST Rules, 2017
Category: Refund — recovery during investigation, voluntariness of payment under Section 74(5)

Facts (Para 2–12)

The Directorate General of GST Intelligence (DGGI) conducted an investigation under Section 67 of the CGST Act against M/s Raj Chemicals for alleged fake invoicing. The respondent, M/s Kesar Color Chem Industries, was named as one of the recipients of invoices without actual supply. During the search from 29 to 30 July 2021 at the respondent’s Mumbai premises, officials allegedly detained the proprietor overnight, seized phones and computers, and compelled payments of ₹1 crore on 31 July 2021 and ₹1.5 crore on 3 August 2021 under DRC-03. The respondent filed a retraction affidavit dated 10 August 2021 asserting coercion and sought refund of ₹2.5 crore.

The Single Judge in WP No. 17853/2021 found that the payments were not voluntary, but extracted under duress, and directed refund with interest. DGGI appealed, contending the payments were voluntary self-ascertainment under Section 74(5).

Questions for Determination

Whether payments of ₹2.5 crore made during investigation proceedings under Sections 67 and 70 were voluntary self-ascertainment under Section 74(5), or illegal coercive recoveries requiring refund.

Observations (Para 20–28, 29–35)

The Division Bench examined the scheme of Section 74 and emphasized that self-ascertainment must be voluntary. For voluntariness, the taxpayer must accept liability and inform the officer under Rule 142(2). In this case, the taxpayer retracted statements within a week, negating voluntariness.
The Court referred to Lovelesh Singhal v. Commissioner, Delhi GST (2024) 121 GSTR 422 (Delhi) and Vallabh Textiles v. SIO (2023) 120 GSTR 213 (Delhi),* holding that any tax collected during search or summons proceedings without adjudication is illegal under Article 265 of the Constitution.

It was observed that:

• Statements were recorded past midnight under threat of arrest.

• Payments followed immediately after coercive detention.

• No DRC-04 acknowledgment was issued, violating Rule 142.

• The show-cause notice issued later (30.11.2022) treated the matter as fresh adjudication, proving that earlier payments were not self-ascertained.

Hence, both payments constituted unlawful recovery during investigation.

Judgment (Para 35–End)

The Division Bench upheld the Single Judge’s findings that the ₹2.5 crore was collected under coercion and not as self-ascertained tax. Such recovery prior to adjudication is contrary to Section 74 and Article 265. The appeal was dismissed, and refund with applicable interest was affirmed.

Summary of Cases Referred

Between Fine Lines (Practical Takeaway)

The Karnataka High Court reaffirmed that any “voluntary payment” under Section 74(5) must be genuinely self-initiated, not made under the shadow of search, detention, or summons pressure. Payments obtained in midnight investigations or prior to show-cause notice issuance are inherently coercive and refundable. Businesses should insist on due process—self-ascertainment under DRC-03 and acknowledgment under DRC-04—before any deposit, else claim refund under Article 265.

Disclaimer – “The above summary is for academic purpose only; not formal legal opinion. Seek professional opinion before application. Author or publisher or website shall not be responsible for any usage in any form.”