GST Refund Cannot Be Denied for Coerced Payments Made During Search: Karnataka High Court Orders Processing Under Section 54 CGST Act

In a significant ruling that reinforces taxpayer rights, the High Court of Karnataka has struck down deficiency memos issued by tax authorities, declaring that payments extracted under the threat of arrest or coercion during search operations cannot be treated as "voluntary" under Section 74 (5) of the CGST Act. Justice M. Nagaprasanna, presiding over the petition filed by M/s. Gunnam Infra Projects Private Limited, upheld the constitutional mandate of Article 265, asserting that tax cannot be collected without the explicit authority of law.

The Backdrop of the Dispute

The petitioner, a private limited company registered under the CGST Act, found itself under intense scrutiny when the Director General of GST Intelligence and the Anti-Evasion Unit conducted a multi-day inspection of its premises in June 2023. During these proceedings, the company was compelled to deposit over Rs. 3.11 crore in tax via Form DRC-03. While the authorities claimed these payments were voluntary self-ascertainments under Section 74 (5), the company maintained they were made under extreme duress to avoid the threat of arrest and adverse consequences.

When the company eventually applied for a refund of these payments under Section 54 of the CGST Act, the Deputy Commissioner of Central Tax issued "deficiency memos" in Form RFD-03 for multiple applications, claiming that the supporting documents were missing. The petitioner, having provided all necessary documentation, challenged these rejections before the High Court, asserting that the authorities were performing a colorable exercise of power to withhold funds.

Arguments from the Bar

The petitioner’s counsel argued that the proper officer was duty-bound to process the refund application if it comported with statutory requirements under Rule 89 , rather than acting as an adjudicator on the merits of the refund claim at the initial stage. They placed heavy reliance on the Division Bench judgment in Intelligence Officer, DGGI v. Kesar Color Chem Industries , which affirmed that tax recovery during investigation without adjudication violates constitutional protections.

Conversely, counsel for the respondent authorities contended that the payments were voluntarily reflected in the system as DRC-03 and the company had failed to provide sufficient evidence of coercion. They maintained that the deficiency memos were purely procedural and did not permanently bar the petitioner from seeking a refund upon supplying the "required" documentation.

A Clear Stance Against Coerced Recovery

The Karnataka High Court rejected the Revenue’s posture, noting a lack of legal basis for the "voluntary" classification. Justice Nagaprasanna observed that when a taxpayer is subjected to search and seizure, the conditions for voluntary payment—which require the assessee to calculate and admit liability without pressure—are inherently absent.

The Court drew significant parallels with the Supreme Court’s decision in Radhika Agarwal v. Union of India , which cautioned against the use of "threat to arrest" in the guise of self-payment. The ruling emphasized that the practice of extracting money during late-night searches, without a formal adjudication or notice, violates the fundamental principles of the rule of law.

Key Observations

The judgment features several critical observations regarding the limits of administrative power:

• On the nature of voluntary payments: "Sub-section (5) to Section 74 of the CGST Act gives an option to the assessee and does not confer any right on the Tax Authorities to compel or extract tax by threatening arrest. This would be unacceptable and violative of the rule of law."
• On procedural fairness: "It is not necessary to examine in detail any controversy whether such payments were made voluntarily. Clearly, where a taxpayer... states that the payments had not been made involuntarily and the circumstances prima facie indicate so, the taxpayer must be granted the benefit of withdrawing such payments."
• On collecting without authority: "Article 265 of the Constitution mandates that collection of tax has to be by the authority of law. If tax is collected without any authority of law, the same would amount to depriving a person of his property... and would infringe his right under Article 300A."

The Final Order

The High Court allowed the writ petition, quashing the deficiency memos issued on May 20–21, 2025. The Court directed the respondents to process the refund applications as per law. This verdict serves as a vital safeguard for businesses, ensuring that the investigative powers granted under the CGST Act are not weaponized to facilitate premature revenue collection, and reaffirms that the judiciary will intervene when the procedural safeguards of the law are sacrificed for administrative convenience.