When Dept Admits No Service Tax Liability, It cannot Deny Refund of Deposit made during Investigation on Limitation: Chhattisgarh HC [Read Order]

In a recent ruling, the Chhattisgarh High Court observed that when the Department itself accepts that no service tax liability exists, it cannot reject a refund of the amount deposited during investigation by invoking limitations and procedural lapses.

Deepak Pandey, the appellant, had deposited Rs. 14,89,086 during an investigation concerning alleged service tax dues relating to the construction of a multi-level parking facility for the Raipur Municipal Corporation.

During the inquiry, the municipal authority clarified that the project was meant for public use and not for any commercial or business purpose. The Department later issued a closure letter stating that no discrepancy or service tax liability was found.

After receiving the closure letter, the appellant filed a refund application. The adjudicating authority rejected it on the ground of limitation under Section 102(3) of the Finance Act, 2016 and also on alleged deficiencies in documents. The Commissioner (Appeals) and the CESTATupheld the rejection.

Before the High Court, the appellant's counsel argued that the amount was deposited only during investigation and not as assessed tax, and once the Department acknowledged non-liability, it had no authority to retain the money. They argued that the refund was filed soon after the investigation was closed and that limitation should not be applied in a rigid manner.

The department’s counsel argued that Section 102(3) prescribed a strict six-month time limit from the date on which the Finance Act, 2016 received Presidential assent, and that the refund was filed after that date. He pointed out that the adjudicating authority had also found documentary lapses.

The Division Bench of Justice Rajani Dubey and Justice Amitendra Kishore Prasad explained that the appellant’s payment during investigation could not be treated as service tax because no assessment or determination of liability had taken place.

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The court pointed out that Article 265 of theConstitution bars retention of amounts without authority of law and that once the Department itself accepted non-liability through its closure letter, it could not rely on technicalities to deny refund. The court observed that procedural lapses cannot override the right to recover money paid under a mistaken belief, especially when the Department has already confirmed that no tax was due.

The court held that the refund claim could not be defeated on limitation and that the orders of the Commissioner (Appeals) and the CESTAT were legally unsustainable. The court set aside the impugned orders and directed the authorities to sanction the refund within the prescribed time. The appeal was allowed.

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