Petition allowed: Rs.10 crore refund directed as payment during search and seizure was involuntary, with 6% p.a. interest

HC allowed the petition and directed refund of Rs.10 crores, holding the payment made during search and seizure and subsequent inspection was involuntary, coerced and not a voluntary self-ascertainment under the GST law. The collection was held illegal, arbitrary and without jurisdiction; respondents must refund Rs.10 crores with interest at 6% p.a. from 24.03.2023 until payment. Refund to be made within two months from receipt of the order.

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ISSUES PRESENTED AND CONSIDERED

1. Whether payments of tax/ITC made by a taxpayer during the course of search, inspection or seizure proceedings are voluntary self-ascertainment under Sections 73(5)/74(5) of the CGST Act or are involuntary/obtained under coercion, threat or duress.

2. Whether tax authorities may lawfully recover or appropriate amounts from a taxpayer during search/inspection/investigation before issuance of any adjudicatory notice/order and without following the procedural safeguards (including Rule 142 acknowledgment in FORM GST DRC-04 and CBIC/High Court directions).

3. Whether, if payments are found involuntary, the taxpayer is entitled to refund with interest and whether departmental adjudication pending thereafter bars such refund.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Voluntariness vs. coercion of payments made during search/inspection (Sections 73(5)/74(5))

Legal framework: Sections 73(5) and 74(5) permit a person chargeable with tax, before service of notice under the respective subsections, to pay tax with interest (and in Section 74(5) penalty of 15%) on the basis of his own ascertainment or as ascertained by the proper officer, and to inform the proper officer in writing; Rule 142(2) prescribes FORM GST DRC-03 for such intimation and mandates an acknowledgment in FORM GST DRC-04.

Precedent treatment: The Court surveyed and followed authoritative decisions and directions (Apex Court and several High Courts) holding that routine recovery during searches is impermissible; earlier High Court directions (e.g., Bhumi Associates) and CBIC Instruction No.01/2022-23 clarify that recovery during search is unlawful and voluntary payment must meet procedural and substantive requisites. Co-ordinate decisions (including Division Bench rulings of this Court and other High Courts) were followed to delineate voluntariness.

Interpretation and reasoning: The Court emphasises that the statutory right to self-ascertainment is an option exercisable by the taxpayer and does not license authorities to compel payment by threat or pressure. Voluntariness requires that (a) taxpayer had opportunity and material to self-ascertain liability, (b) payment be accompanied by proper FORM DRC-03 intimation and acknowledged by FORM DRC-04, (c) payment is not contemporaneous with coercive investigative acts (e.g., seizures, overnight prolonged presence of officers, threats of arrest), and (d) payment includes interest/penalty components where required. Payments made while the search/inspection is ongoing, at odd hours, without access to seized records or without acknowledgment, or where the taxpayer reserves rights or states payment is without admission, lack the element of voluntariness and are susceptible to being found involuntary.

Ratio vs. Obiter: Ratio - payments made in the factual matrix of active search/inspection without procedural compliance and under circumstances showing pressure are not self-ascertainment under Sections 73(5)/74(5). Obiter - observations on wider administrative practices and recommended alignment of CBIC instructions with judicial directions (though consistent with binding precedents) serve as guidance.

Conclusions: The Court concludes that the statutory scheme contemplates genuine voluntary self-ascertainment, not payments coerced during searches; where the indicia of voluntariness are absent, payments must be treated as involuntary and refundable.

Issue 2 - Lawfulness of recovery/appropriation by authorities during investigation and requirement of procedural safeguards (Rule 142, CBIC instructions, judicial directions)

Legal framework: Section 79 (recovery) and Rule 142 deal with notice, recovery and requisite procedure; Rule 142(2) requires FORM DRC-03 and FORM DRC-04 acknowledgement; CBIC Instruction No.01/2022-23 and earlier High Court directions forbid recovery during search and prescribe safeguards (advice to file DRC-03 after officers leave, grievance facility, disciplinary action for coercion).

Precedent treatment: The Court relied on multiple High Court decisions and Apex Court pronouncements (including recent guidance on arrest and investigative conduct) stressing that recovery without adjudication/notice is unlawful and that coercive collection in guise of voluntary payment has been repeatedly deprecated.

Interpretation and reasoning: Recovery of tax amounts is permitted only after lawful adjudication or when genuinely self-ascertained under statutory procedure. The Department cannot convert on-spot extra-legal collections into lawful receipts by later asserting voluntariness. Absence of FORM DRC-04 acknowledgment, lack of contemporaneous quantification/notice, seizure of records preventing proper self-ascertainment, timing of payments during ongoing searches and lack of independent documentation supporting voluntary ascertainment are material factors negating departmental claims of lawful recovery.

Ratio vs. Obiter: Ratio - departmental appropriation of funds during ongoing search/inspection, absent statutory adjudication or procedural compliance, is without authority and contravenes Article 265 and the statutory scheme; obiter - policy suggestions for clearer CBIC direction implementation.

Conclusions: Authorities must not recover or appropriate amounts during searches; they must adhere to Rule 142 procedure and CBIC/high court directions; failure to do so renders collections unlawful.

Issue 3 - Entitlement to refund with interest and effect of pending adjudication

Legal framework: Principles of restitution where payment obtained without lawful authority; statutory refund mechanisms and constitutional constraints (Article 265 - taxes only under law). CBIC instructions and case law entertain refund remedies where payments were involuntary.

Precedent treatment: Courts (including High Courts cited) have granted refunds with interest where payments during search/inspection lacked voluntariness or procedural compliance; several decisions held that pending adjudication does not justify retention of amounts obtained without jurisdiction.

Interpretation and reasoning: Where payments are found involuntary, the Department has no lawful basis to retain amounts pending adjudication. The remedy of refund (with interest at an appropriate rate) is available notwithstanding continuation of investigation/adjudication; the taxpayer's rights to seek refund are not foreclosed because authorities subsequently issue show-cause notices or proceed with adjudication - those proceedings remain open but do not validate the prior coercive collection. The Court considers appropriate interest (6% p.a. in line with precedents) from date of deposit until payment.

Ratio vs. Obiter: Ratio - involuntary collections during search/inspection must be refunded with interest and pending adjudication does not justify retention; obiter - leaving all rival contentions under adjudication open for determination in appropriate forums.

Conclusions: The taxpayer is entitled to refund of amounts collected involuntarily together with interest; departmental contentions that refund must await adjudication are rejected. The right to seek refund coexists with the Department's power to continue investigation/adjudication on merits.

Additional Reasoning and Directions (cross-references)

1. The Court cross-refers to and relies upon CBIC Instruction No.01/2022-23 and judicial directions (e.g., Bhumi Associates) that recovery during search should not be effected and, if voluntary payments occur, DRC-03 should be filed after officers have left and DRC-04 acknowledgment furnished.

2. The Court records the relevance of recent Apex Court guidance limiting arrest and coercive steps during tax investigations; threat of arrest cannot be used to extract payments and such conduct violates fundamental rights and rule of law.

3. The Court leaves open the question of guilt/liability on merits and preserves the parties' rights in adjudicatory proceedings; directions given are limited to restitution of unlawfully collected amounts and adherence to procedural safeguards by authorities.

Final Conclusion

The Court holds that payments collected during the active course of search/inspection without prior adjudication, lacking FORM GST DRC-04 acknowledgment, made under circumstances demonstrating coercion or where necessary material for self-ascertainment was seized, are not voluntary self-ascertainment under Sections 73(5)/74(5). Such collections are unlawful; the taxpayer is entitled to refund with interest, while all departmental adjudicatory contentions remain open for determination in due course.

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