Deposit of tax during search or investigation cannot be treated as ‘voluntary payment’

The Hon’ble Bombay High Court in the case of Modern Traders Versus Deputy Commissioner/Joint Commissioner, Nagpur – II & Ors. - 2026 (4) TMI 1138 - BOMBAY HIGH COURT held that where a taxpayer alleges that tax was deposited during search or investigation due to coercion, the department is obligated to examine the complaint in terms of Clause 5 of the Central Government instructions dated May 25, 2022, and such payment made during investigation cannot automatically be treated as voluntary.

Facts:

Modern Traders (“the Petitioner”) is a business entity represented through its partner Mr. Ebrahim Fazal Din and had deposited certain tax amounts during departmental proceedings conducted by GST authorities.

Deputy Commissioner/Joint Commissioner, Nagpur – II and other GST authorities (“the Respondents”) initiated proceedings against the Petitioner and treated the tax amount deposited during the investigation as a voluntary payment.

The Petitioner contended that the amount was deposited prior to adjudication of liability and therefore could not be treated as a voluntary payment. The Petitioner also alleged that the deposit was made during investigation under pressure from the authorities.

The Respondent contended that the revenue had never imposed 100% penalty, and the Petitioner itself deposited the entire amount voluntarily; hence there was no question of adjudicating liability or imposing penalty thereafter.

The Petitioner submitted that the payment was made during search or immediately after investigation, and therefore could not be treated as voluntary, relying on judicial precedent and departmental circulars.

Aggrieved by the treatment of the payment as voluntary and the failure of the department to examine allegations of coercion, the Petitioner approached the Bombay High Court by filing the present Writ Petition.

Issue:

Whether deposit of tax made by a taxpayer during search or investigation proceedings can be treated as voluntary payment, and whether the department is obligated to inquire into allegations of coercion in terms of the Central Government Instructions dated May 25, 2022?

Held:

The Hon’ble Bombay High Court in Modern Traders Versus Deputy Commissioner/Joint Commissioner, Nagpur – II & Ors. - 2026 (4) TMI 1138 - BOMBAY HIGH COURT held as under:

• Observed that, the issue before the Court was that the Petitioner had allegedly been made to deposit money prior to adjudication of its liability to pay tax, and that the revenue had treated such payment as voluntary.
• Observed that, the Respondents relied upon the GST Investigation Wing Instruction No. 01/2022-23 dated May 25, 2022, which clarify the legal position regarding voluntary payment of tax and require authorities to ensure correct application of law and protection of taxpayers’ interests.
• Noted that, Clause 5 of the said instructions specifically requires authorities to inquire into complaints from taxpayers alleging use of force or coercion by officers during search, inspection, or investigation to obtain deposits of tax amounts.
• Noted that, despite being aware of the above precedent, the Respondents did not deal with this aspect in their replies filed before the Court.
• Observed that, the Respondents sought to explain that the complaint alleging coercion was made later and that the Petitioner had earlier made communication without raising grievance. However, this would not relieve the authorities from their obligation to examine the complaint under Clause 5 of the circular.
• Held that, the revenue ought to have addressed this aspect in its earlier replies and must explain the delay and failure to consider the complaint in accordance with the circular and directed that, further time was granted to the Respondents to file additional reply addressing these issues, and the matter was listed for further hearing on March 6, 2026.

Our Comments:

The present order primarily addresses the legal position regarding “voluntary payment” of tax during investigation under GST law, and the administrative obligation of tax authorities to examine allegations of coercion.

In the case Sushil Kumar Versus Delhi State GST Govt. NCT of Delhi and Ors. - 2024 (3) TMI 270 - DELHI HIGH COURT the Delhi High Court interpreted the GT Investigation Wing Instruction No. 01/2022-23 dated May 25, 2022 and held that if a taxpayer deposits money during search or immediately thereafter, the same cannot automatically be regarded as voluntary. The Court reasoned that departmental officers must ensure compliance with the safeguards in the circular intended to prevent coercive recovery during investigation. The reasoning adopted in the present case aligns with the approach taken, both of which emphasize the need for procedural fairness and adherence to departmental instructions governing recovery during investigation.

Relevant Provisions:

Instruction No. 01/2022-23 [GST – Investigation] dated May 25, 2022

Subject: Deposit of tax during the course of search, inspection or investigation – reg.

“5. Pr. Chief Commissioners/Chief Commissioners, CGST Zones and Pr. Director General, DGGI are advised that in case, any complaint is received from a taxpayer regarding use of force or coercion by any of their officers for getting the amount deposited during search or inspection or investigation, the same may be enquired at the earliest and in case of any wrongdoing on the part of any tax officer, strict disciplinary action as per law may be taken against the defaulting officers.”

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