The question of whether a payment made during the course of a GST search can be characterised as voluntary is one that has generated considerable litigation since the introduction of the GST regime. The Delhi High Court's decision in M/S Vallabh Textiles v. Senior Intelligence Officer and Ors. is among the more significant pronouncements on this issue, and it arrives at a clear answer: where the procedural safeguards prescribed by statute and binding judicial directions have not been observed, the voluntary character of any deposit made during search proceedings cannot be sustained.
Background
M/S Vallabh Textiles, a firm engaged in trading Ready-Made Garments and in selling goods on behalf of third parties on a commission basis, was subjected to a search at its premises between 3:30 PM on 16 February 2022 and 9:30 AM on 17 February 2022. The search was carried out on the basis of intelligence gathered by the GST authorities, who alleged that between July 2017 and February 2022, the firm had sold goods in cash worth Rs. 149.90 crores on behalf of two entities, Empire Apparels Pvt. Ltd. and M/s Navrang Enterprises, earning a commission of Rs. 7.50 crores on those transactions, and that neither the transactions nor the commission income had been disclosed or subjected to tax.
During the search, officers seized a laptop containing a soft-copy ledger of cash sales, along with physical registers, bill books, and other documents. The firm's manager, who was also the authorised representative, was present and signed the panchnama along with two witnesses produced by the department. Simultaneous searches at the premises of the two associated entities resulted in statements from their representatives allegedly confirming the arrangement, following which both entities deposited amounts towards tax, interest and penalty on 17 February 2022 through Form GST DRC-03.
In the case of the petitioner-concern, a sum of Rs. 1,80,10,000 was deposited in four tranches on 17 February 2022, while the search was still underway: Rs. 35,00,000 at 1:28 AM, Rs. 1,00,00,000 at 2:15 AM, Rs. 20,25,000 at 5:04 AM, and Rs. 24,85,000 at 7:03 AM. The search concluded only at 9:30 AM that morning. By letter dated 25 May 2022, the firm communicated to the authorities that the statements and documents signed by the authorised representative had been obtained under coercion. The writ petition, as ultimately confined by counsel before the Court, sought the return of Rs. 1,80,10,000 along with statutory interest.
The Legal Framework
The statutory scheme governing voluntary payment of tax under the CGST Act, 2017 is relevant to appreciating the Court's reasoning. Sections 73 and 74 of the Act establish a two-track demand-and-recovery mechanism. Section 73 applies to cases not involving fraud, wilful misstatement, or suppression of facts, while Section 74 covers the more serious category where one or more of these ingredients are present. In both tracks, a taxpayer is permitted to make payment of tax and interest based on self-ascertainment, before a show cause notice is served by the proper officer.
Under Section 74(5), the provision applicable here, given the allegations of suppression, a taxpayer who self-ascertains their liability and pays the tax and interest before notice is served is required to pay a penalty of only 15%. Once such a payment is made, Section 74(6) bars the proper officer from issuing a notice for the amount so paid. If, however, payment is made after notice is issued under Section 74(1), the penalty rises to 25% and must be paid within 30 days, following which all proceedings are deemed concluded.
Rule 142 of the CGST Rules, 2017 operationalises this framework. Where a taxpayer makes a payment under self-ascertainment, the payment is communicated to the proper officer through Form GST DRC-03. Sub-rule (2) of Rule 142 then casts an obligation on the proper officer to issue a formal acknowledgement of the payment in Form GST DRC-04. This acknowledgement is not a procedural nicety; it is the document that formally records the voluntary character of the payment on the revenue's side and completes the statutory process.
The Revenue's Position and the Court's Analysis
The revenue contended that the deposits were voluntary, pointing to the fact that DRC-03 had been filed in the prescribed form on the GST portal. It was also urged that the deposits by the associated entities on the same date corroborated the voluntary nature of the payments across all parties, and that the allegation of coercion was an afterthought raised only after summons dated 13 April 2022 had been served.
The Court was not persuaded.
Ratio Decidendi
The Court's conclusion that the deposits lacked voluntariness rested on three mutually reinforcing grounds.
The first and most direct was the absence of Form GST DRC-04. The revenue placed no acknowledgement of payment on record at any stage of the proceedings. The Court held that strict compliance with the procedural framework under Rule 142 is a prerequisite for characterising a payment as voluntary. DRC-03, the form filed by the taxpayer, records how the payment was made; it does not establish that the payment was made freely. DRC-04, the officer's acknowledgement, is what closes the statutory loop. Its absence left the revenue's position legally unsubstantiated, irrespective of how the deposit was processed.
The second ground was the timing of the deposits. All four tranches were paid in the early hours of 17 February 2022, during a search that had been running since the previous afternoon and had not yet concluded. The Court held that payments made while search proceedings remain ongoing cannot, in the ordinary course, be regarded as voluntary. A person whose premises are under active search does not have the freedom of mind or the access to legal advice necessary to make a genuinely considered decision about their tax liability. The Court found that the circumstances were inherently coercive, without requiring direct evidence of threats or physical compulsion.
The third ground was the binding force of the directions issued by the Gujarat High Court in Bhumi Associate v. Union of India [MANU/GJ/0174/2021, 16 February 2021]. In that matter, the Gujarat High Court had directed, among other things, that even where a taxpayer comes forward of their own accord to file a DRC-03 during search proceedings, the officers must advise them to file it the following day, after the search has ended and the officers have vacated the premises. The purpose is to ensure that the taxpayer has a genuine opportunity to seek legal counsel and arrive at a considered self-ascertainment, free from the pressures attendant on an ongoing search. The Delhi High Court held that this direction was binding on the revenue authorities and had not been followed. That failure, in the Court's view, gave the collection of the amount the colour of coercion not backed by the authority of law.
The revenue's argument that the objection had been raised belatedly was rejected on a clear principle. Where a procedure is prescribed by statute or by a binding judicial direction, it must be followed precisely. Non-compliance carries legal consequences, and those consequences do not dissipate by reason of the affected party's delay in objecting.
Court’s Verdict
The Court directed that Rs. 1,80,10,000 be returned to the petitioner-concern within ten days of receipt of the judgment, together with simple interest at 6% per annum from 17 February 2022 until the date of actual payment. CBIC was separately directed to revise Instruction No. 01/2022-2023 dated 25 May 2022 to bring it into full conformity with the directions issued in Bhumi Associate, particularly the direction requiring officers to advise taxpayers to file DRC-03 only after the conclusion of search proceedings. The Court noted that while the instruction was a step in the right direction, it had fallen short by not incorporating this specific safeguard.
Significance
This decision firmly establishes that the filing of DRC-03 does not, standing alone, render a deposit voluntary. The surrounding circumstances, the timing, the availability of legal counsel, and critically, compliance with the full procedural framework, including the issuance of DRC-04, will all bear on how courts assess the character of such payments.
CBIC's own Instruction No. 01/2022-2023, issued in the backdrop of growing litigation on this issue, had itself acknowledged that no recovery of tax can be made during the course of search or investigation, and that any payment through DRC-03 must remain genuinely voluntary. The Court's direction to align that instruction with the Bhumi Associate directions reinforces that the safeguards available to taxpayers during search proceedings are not aspirational; they carry legal force.
For businesses that face GST search or inspection proceedings, the practical implication is clear. No payment should be made through DRC-03 while a search remains underway. Taxpayers should insist on the opportunity to seek legal advice before making any deposit, and any pressure to pay before the search concludes should be documented carefully. The Bhumi Associate directions and this ruling together provide a firm legal basis to resist such pressure and to seek recovery of amounts deposited in contravention of these safeguards.