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What’s New

Tax Insights

29 April 2023

Refund of amounts recovered during search proceedings, along with interest mandated – Punjab and Haryana High Court

In brief

The Punjab and Haryana High Court has directed¹ refund of tax deposited under protest during search proceedings along with interest at 6%. It has been held that the amount collected without the authority of law amounts to depriving a person of his or her property and thereby infringes upon the taxpayer’s right under Article 300A of the Constitution of India. The High Court further noted that the proper officer did not give any receipt after accepting the impugned amount paid during search proceedings.

In detail

Facts

• Search proceedings were initiated in the office of the petitioner company by Tax Officer 1 (TO 1). The director was questioned and detained forcibly for two days in the office of the tax authorities as alleged by the petitioner.

• Owing to the pressure, the petitioner deposited INR19.9m by lodging a protest.

• A separate investigation was initiated against the petitioner by Tax Officer 2 (TO 2) in respect of the input tax credit (ITC) availed, and the Electronic Credit Ledger was blocked. Thereafter, another search was initiated wherein the petitioner was forced to deposit another INR2.5m. Pursuant to such payment, a Show Cause Notice (SCN) was issued, and consequently, the demand was confirmed.

• Aggrieved by the forced payment made as a consequence of the first search proceedings, the petitioner f iled this writ petition seeking refund of the impugned amount recovered forcibly.

Revenue’s contentions

• It was contended on behalf of TO 1 that the petitioner had voluntarily deposited the impugned amount, which is evident from Form GST DRC-03 filed by the petitioner, wherein the ‘cause of payment’ has been stated as ‘Voluntary’.

• There was suf ficient prima facie evidence to indicate a huge amount of illegal availment of ITC, based on

1 CWP-23788-2021 (Punjab & Haryana)

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the invoices received from units other than those mentioned in the order passed in the matter investigated by TO 2.

• Return of impugned amount was not warranted based on multiple rulings², wherein investigation by two authorities pertaining to different matters in respect of ITC availed on invoices issued by d ifferent suppliers, was held to be correct.

High Court’s decision

The High Court held that the amount paid under protest was liable to be refunded, as the petitioner was deprived of his right. Accordingly, the High Court directed the Revenue to grant refund along with interest at 6%. The specific observations and rationale provided by the High Court are summarised below.

No recovery of tax during search and inspection proceedings

• The Punjab and Haryana High Court relied on the decision of the Delhi High Court³, dealing with the issue of whether payment of amount during search proceedings was voluntary or not, wherein it referred to the directions issued by the Gujarat High Court⁴ focusing on the importance of the instruction⁵ issued by the Central Board of Indirect Taxes and Customs (CBIC), which have laid down the following:

- No recovery should be made at the time of search or inspection proceedings under any circumstances;

- Even if the taxpayer comes forward to make voluntary payment, he should be advised to file Form GST DRC-03 on the day after the search has ended and the officers have left the taxpayer’s premises;

- A f acility should be made available to the taxpayer for filing a grievance in cases where the taxpayer was f orced to make payments during the search; and

- Strict disciplinary action should be initiated against the concerned officer.

Infringement of right under Article 300A of the Constitution of India

• In the context of payment of amount during investigation proceedings, the Punjab and Haryana High Court ref erred to the Karnataka High Court decision⁶ wherein it was held that tax has to be collected by an authority of law as mandated by Article 265 of the Constitution of India. It was further held that the only provision which permits deposit of amount during pendency of investigation is section 74(5) of the Central Goods and Services Tax Act, 2017 (CGST Act) which was not attracted when the amount was p aid under coercion.

• Although the Department contended that the petitioner had deposited the impugned amount voluntarily by f ollowing proper procedure, it was held that if tax is collected without any authority, it would tantamount to depriving the person of his property without any authority of law, thereby infringing upon his right under Article 300A of the Constitution of India.

No receipt by the proper officer

• Ref erring to the provisions in section 74(5) of the CGST Act read with rule 142(2) of the Cent ral Goods and Services Tax Rules, 2017, it was noted that the proper officer did not give any receipt after accepting the impugned amount recovered by the petitioner.

The takeaways

This is an important decision categorically upholding the right to refund of the amount collected during search proceedings. This decision, similar to other High Court decisions, paves the way for seeking refund where amounts are deposited during search proceedings without any further ascertainment or conclusion.

Taxpayers should adhere to the CBIC instructions on recovery of amounts during investigation and exercise right of refund appropriately. Where SCNs are issued, based on the quantum of demand and the mandatory pre-deposit needs, the refund option needs to be explored.

2 M/s. S.S. Industries v. Union of India [2020 (12) TMI 1120]; M/s. Bhawani Textiles v. Additional Director General [2020 (3) TMI 478]; Kaushal Kumar Mishra v. Addl. Director General, Ludhiana Zonal Unit and another [2021 (2) TMI 699]

3 Vallabh Textiles v. Senior Intelligence Officer and others [2022 SCC Online Del 4508]

4 Bhumi Associate v. Union of India [SCA No. 3196 of 2021]

5 Instruction No. 01/2022-2023 dated 25 May 2022

6 Union of India and others v. Bundl Technologies Private Limited and others [ILR 2022 Karnataka 3077]

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