The High Court of Judicature at Madras has ordered the state tax authorities to refund significant tax amounts recovered from Aruna Mills, a textile manufacturing firm, following a controversial surprise inspection. The court ruled that the procedure adopted by the State Tax Officer during the inspection was legally flawed, primarily due to the department’s failure to issue the mandatory Form GST DRC-04, which serves as an official acknowledgment for tax payments made through the Goods and Services Tax (GST) portal. By setting aside four separate assessment orders dated March 27, 2024 , the court has emphasized that coercive collection practices during investigations violate both statutory procedures and fundamental rights to fair administrative process .

The dispute originated from surprise inspections conducted by the Tirupur Intelligence Division on October 19 and 20, 2023 . During these proceedings, the petitioner alleged that its accounting staff was pressured into logging into the GST portal to make substantial tax payments, including amounts toward Integrated Goods and Services Tax (IGST), Central Goods and Services Tax (CGST), and State Goods and Services Tax (SGST). The petitioner argued that these payments were not voluntary, as claimed by the authorities, but were the result of undue coercion exerted while the firm’s partners were absent due to a family wedding occurring in Karur, approximately 50 kilometers from the business premises.

Procedural Lapses and Statutory Failures

The legal challenge centered on the interpretation of Rule 142(2) of the Central Goods and Services Tax Rules, 2017 . The petitioner contended that if a taxpayer makes a payment upon the intimation of tax liability , the proper officer is statutorily obligated to issue an acknowledgment in Form GST DRC-04. The absence of this document in the current case, the petitioner argued, proved that the department had bypassed the necessary legal steps for validating the payment as a "voluntary" admission of liability.

The court took a stern view of the department’s failure to adhere to these provisions. In his ruling, Justice N. Senthilkumar noted that the department’s inability to produce the statutory acknowledgment, coupled with its failure to address the petitioner’s formal objections, undermined the entire assessment process. The court observed: “The representation made by the petitioner on 06.11.2023 was not considered, which only shows the respondent failed to consider the stand raised by the petitioner and the non-issuance of Form GST DRC – 04 is fatal to the respondent.”

This finding aligns with broader judicial trends concerning the conduct of inspections under Section 67 of the GST Act . The court reiterated that while tax authorities possess the power to conduct inspections, these powers are not absolute and cannot be exercised in a manner that forces taxpayers into making payments without due adjudication . The department had argued that the payments were voluntary and made through secure digital authentication, specifically pointing to the necessity of a One-Time Password (OTP) being provided by the firm. However, the court found this defense insufficient given the context of the coercive atmosphere described by the petitioner.

The Human Element in Statutory Inspections

A significant portion of the judicial discourse in this matter involved the timing of the inspection. The court highlighted the insensitivity of conducting surprise inspections on dates coinciding with major life events like weddings. The judgment articulated that personal milestones involve substantial planning and traditional obligations that cannot be mechanically disregarded by administrative bodies.

By rejecting the department's argument that the petitioner's 17-day delay in filing formal objections was fatal to their case, the court recognized the practical realities of managing business affairs during significant family events. The bench noted that such customary procedures and formalities are not merely "empty formalities" but are essential components of human life that warrant administrative patience. The ruling sends a clear message that the efficiency of tax administration cannot come at the cost of disregarding the personal circumstances of the taxpayers being investigated.

Impact on Taxpayer Rights and Future Compliance

The ruling is expected to have a far-reaching impact on how intelligence units across the state handle investigations. By holding that the non-issuance of Form GST DRC-04 renders the subsequent assessment proceedings unsustainable, the court has effectively placed a higher burden of procedural compliance on tax officials. This ensures that taxpayers are not deprived of their right to dispute tax demands before they are forcibly extracted from their electronic credit ledgers .

Furthermore, the decision reinforces the principle that judicial scrutiny will be applied rigorously when allegations of coercion surface in tax recovery cases. The court clarified that the burden of proving that a payment was truly "voluntary" lies with the authority, especially when the surrounding circumstances suggest an environment of intimidation.

The High Court has now directed the respondents to process the refund of the illegally collected amounts within eight weeks from the date of receipt of the order. Additionally, acknowledging the petitioner’s right to a proper assessment, the court granted leave to Aruna Mills to file a manual appeal against the underlying tax issues within twelve weeks, should they choose to challenge the demand on its merits. This provision ensures that the petitioner is restored to its original legal position, allowing the matter to be adjudicated through the proper, non-coercive channels prescribed by the GST framework. With the current orders set aside, the tax department is effectively barred from treating the contested amounts as confirmed revenue, pending any further legal actions that comply with established statutory protocols.