Deposits Collected During GST Searches Not Voluntary: Karnataka HC Rules Refund Cannot Be Denied Through Deficiency Memos [Read Order]

The bench of the High Court of Karnataka has held that deposits made during investigation and search proceedings under the Central Goods and Services Tax Act, 2017 cannot be considered voluntary when no liability is determined and the statutory requirements of Section 74(5) are unmet.

The Court further ruled that refund applications complete under Rule 89 of the Central Goods and Services Tax Rules, 2017 cannot be rejected or stalled through deficiency memos, and such claims must be processed strictly in accordance with law.

The Petitioner, Gunnam Infra Projects Private Limited was subjected to a search and inspection by officers of the Directorate General of GST Intelligence and the Anti-Evasion Unit acting under Section 67(1) of the Central Goods and Services Tax Act, 2017. During the operation, officers insisted on immediate payment, leading the appellant to deposit ₹2,42,00,000 through Form DRC-03.

Subsequent summons and investigation proceedings continued, during which the appellant deposited further amounts totalling ₹3,11,59,298 through additional Form DRC-03 filings. Seeking recovery of these amounts, the appellant filed refund claims under Section 54 in Form RFD-01. The Deputy Commissioner, however, issued deficiency memos, claiming that supporting documents were not enclosed.

Represented by Advocate Lochana S. Babu, the appellant argued that the payments made during the search cannot be termed voluntary under Section 74(5) of the Central Goods and Services Tax Act, 2017 as no adjudicated liability existed at the time of payment. Subsequently, the payment didn’t comprise both penalty or interest as mandatory under Section 74(5).

He submitted that Payments were made under coercive circumstances to the police officers during search and summons proceedings which is strictly prohibited by the virtue of CBIC Instruction No. 01/2022-23. Further, all documents required under Rule 89(2) were filed with the refund applications and therefore the proper officer was bound to issue an acknowledgment in Form RFD-02.

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Represented by Sri M. N. Kumar, Sri Madhu N. Rao and Sri M. Unnikrishnan, the Department argued that refund applications do not automatically entitle an assessee to reimbursement and the deficiency memos were issued due to incomplete documentation. Accordingly, the memos did not reject the refund on merits but merely directed the appellant to re-submit applications with proper records.

The single judge bench of Justice M. Nagaprasanna observed that no liability had been quantified and no interest or penalty accompanied the payments, ruling that deposits collected during search proceedings cannot be termed voluntary under Section 74(5). The Court noted that the deposits were obtained during an ongoing search and investigation, contrary to CBIC instructions. Therefore, such payments must be refunded when challenged.

On the issue of deficiency memos, the High Court held that the refund applications were complete as per Rule 89(2) and therefore could not be rejected as deficient. Consequently, the bench quashed the deficiency memos.

Accordingly, allowed the writ petition.