GST Payment During Search or Investigation Must Be Voluntary –
Delhi High Court Grants Refund to Vallabh Textiles
M/s
Vallabh Textiles v. Senior Intelligence Officer and Others (W.P. (C) No. 9834 of 2022 | Decided on: 20 December 2022 |
High Court of Delhi)
Summary of
the Case
The Delhi High Court,
in a landmark judgment, ordered the refund of ₹1.80 crore, along with 6%
simple interest, to M/s Vallabh Textiles after holding that the
deposit made during a GST search operation lacked voluntariness. The
Court found that the payment was secured during the early hours of an ongoing
search, in violation of statutory procedures and Central Board of Indirect
Taxes and Customs (CBIC) instructions. It further directed CBIC to revise its
guidelines in line with directions of the Gujarat High Court’s ruling in
Bhumi Associates.
This case is pivotal in
establishing that deposits obtained during searches must strictly comply
with legal procedures, or else they shall be presumed to be coerced.
Background
and Facts
1. Search
Conducted:: GST officers conducted a search at the
petitioner’s unregistered premises from 3:30 PM on 16 February 2022 to 9:30
AM on 17 February 2022.
2. Allegations
by the Department:: The department claimed:
o Petitioner
sold goods in cash worth ₹149.90 crore for Empire Apparels Pvt. Ltd.
(EAPL) and Navrang Enterprises (NE);
o Petitioner
earned a 5% commission (~₹7.49 crore), allegedly not disclosed;
o Tax,
interest, and penalty were calculated at ₹1.80 crore, deposited during
the search.
3. Deposits
Made During Search (DRC-03):
o ₹35
lakh at 1:28 AM
o ₹1
crore at 2:15 AM
o ₹20.25
lakh at 5:04 AM
o ₹24.85
lakh at 7:03 AM
— All on 17 February 2022, while the search was still ongoing.
4. Petitioner’s
Claim: The amount was extracted under duress, in
violation of Rule 142 and CBIC Instructions. No DRC-04 (acknowledgment) was
issued. CCTV was disabled, and petitioner’s employee Sumit Jain was
allegedly coerced.
5. Legal
Relief Sought: Refund of ₹1.80 crore with statutory
interest under Section 56 of the CGST Act, asserting the deposit was not
voluntary.
Legal
Issues
1. Whether
the deposit made during a search operation can be considered voluntary
in absence of procedural safeguards?
2. Whether
absence of Form DRC-04 acknowledgment and other legal formalities
renders the deposit invalid or coerced?
3. What
safeguards are expected of GST officers during search operations regarding collection
of tax?
Petitioner’s
Submissions
- The deposit was coerced, not
voluntary.
- Officer failed to issue DRC-04
acknowledgment.
- No prior determination or
self-ascertainment under Section 74(5) or Rule 142(1A).
- Violated CBIC Instruction No.
01/2022-23 dated 25 May 2022, issued post Gujarat HC’s ruling in Bhumi
Associates.
- CCTV turned off; staff detained
overnight; signatures obtained under pressure.
- Search concluded at 9:30 AM, but
money deposited between 1:28 AM and 7:03 AM — during search, not after.
Respondent’s
Arguments
- Payment was made through DRC-03
voluntarily.
- Petitioner never raised objection
until after second summons dated 13 April 2022.
- Deposits from EAPL and NE
corroborated the petitioner’s role in undisclosed cash sales.
Legal
Framework Referenced
➤ Section 74(5) CGST Act:
Permits voluntary payment
of tax, interest, and 15% penalty before notice is issued.
➤ Rule 142(2) CGST Rules:
Requires officer to acknowledge
voluntary payment via Form DRC-04.
➤ Instruction No. 01/2022-23 (CBIC):
Prohibits recovery during
search; states:
- No forced payments;
- DRC-03 should be filed after
search concludes;
- Taxpayer should be advised about
rights and options.
Court’s
Analysis and Findings
1. Deposits During Search
≠ Voluntary
The Court noted:
“If payments were
voluntary, they should have been made after the search, not during midnight
hours.”
The search ended at 9:30
AM, but deposits began at 1:28 AM and continued until 7:03 AM.
2. Non-Compliance With
Rule 142
“No DRC-04 was issued by
the officer acknowledging the amount deposited.”
This violated the
statutory mandate and supports the petitioner’s version.
3. Violation of CBIC
Instruction and Gujarat HC Guidelines
The Court referred to Bhumi
Associates v. Union of India, which directed:
- No payment during search;
- DRC-03 to be filed next day;
- Disciplinary action if coercion is
proven.
Delhi HC held:
“Instruction No.
01/2022-23 must be aligned with Gujarat High Court’s Bhumi Associates
directions.”
4. Procedure Trumps Delay
in Retraction
Delay in raising
objections (letter dated 25 May 2022) was not fatal.
“When the procedure is
violated, the deposit loses its voluntary character.”
5. Legal Advice
Opportunity Denied
Court emphasized:
“The reason officers are
told to collect deposits only the day after the search is to give space for
legal counsel.”
That "elbow
room" was absent in this case.
Final
Orders of the Court:
1. Writ
Petition Allowed: Court allowed the petition and declared
the deposit not voluntary.
2. Refund
of ₹1.80 Crore Ordered: Respondents were directed to refund
₹1,80,10,000 to the petitioner.
3. Interest
at 6% p.a. Granted: From 17 February 2022 until
actual date of refund.
4. Refund
Within 10 Days: Payment to be made within 10 days of
receipt of judgment.
5. CBIC
Directed to Update Instructions: CBIC must align
Instruction No. 01/2022-2023 with Gujarat HC’s ruling.
Conclusion:
This judgment solidifies
legal principles that:
- Search-time deposits must be
voluntary, and demonstrably so;
- DRC-04 issuance is essential
to establish legality of deposits;
- Courts are willing to treat non-compliant
collections as coercion, even when payment is made via DRC-03;
- Procedural safeguards are not
optional, and failure to follow them triggers
refund liability.
This decision will
influence how GST officers conduct investigations and how businesses respond to
coercive tax recovery attempts.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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