No recovery of tax to be made during search, inspection or investigation unless it is voluntary

The Hon'ble Delhi High Court in the case of M/s. Vallabh Textiles v. Senior Intelligence Officer and Ors (W.P.(C) No. 9834/2022 dated December 20, 2022) has held that, payment of tax made during the conduct of search cannot be considered as voluntary payment of tax. Further directed the Revenue Department to refund the amount deposited by the assessee along with the interest.

Facts

M/s. Vallabh Textiles ("the Petitioner") is engaged in the business of trading of readymade garments. A search as per Section 67 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") was conducted at the business premise of the Petitioner on February 16-17, 2022, based on the intelligence that the Petitioner had sold goods, in cash, on behalf of two entities and failed to disclose such cash transactions, and pay the requisite tax on the commission earned by it.

During the search the Petitioner involuntarily deposited Rs. 1,80,10,000/- as tax amount along with interest and penalty through FORM GST DRC-03. 

The Petitioner has filed the present petition praying that the amount deposited during the conduct of search was not voluntary. Further, the deposit made during the search was contradictory to the provision of Rule 142(1A) of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules") as the officials had not issued any notice for ascertaining tax liability.

Issue

Whether the tax deposited by the Petitioner during the search procedure can be considered as voluntary deposit?

Held

The Hon'ble Delhi High Court in W.P.(C) No. 9834/2022 dated December 20, 2022, held as under:

• Observed that, although the payment was made through FORM GST DRC-03, however, there was no document on record issued by officials confirming the acknowledgement of accepting the payment, which does not establish the voluntariness of payment of tax amount by the Petitioner.
• Further, the High Court directed the Central Board of Indirect Taxes and Customs ("CBIC") to align Instruction No. 01/2022-2023 dated May 25, 2022 with the directions issued by the Hon'ble Gujarat High Court in Bhumi Associate [R/Special Civil Application No. 3196 & Ors. of 2021, dated February 18, 2021] wherein, the court instructed that if the taxpayer comes forward to make voluntary payment in GST DRC-03, the taxpayer should be advised to file the same after the search ended and officer have left the premise of the taxpayer.
• Noted that, the deposits made by the Petitioner were between 01:00 AM to 7:00 AM, however the search was concluded at 9:30 AM of the same date. Thus, the deposits were made during the conduct of search. Hence, was in contravention of Section 73(5) or Section 74(5) of the CGST Act.
• Opined that, if a procedure is prescribed under a statute or by law, that is, via dicta contained in a judgment, it has to be followed. Further, failure to follow the prescribed procedure will conclude that the deposit of tax, interest and penalty was not voluntary.
• Held that, amounts which were deposited on behalf of the Petitioner, lacked an element of voluntariness.
• Directed the Revenue Department to return the amount deposited by Petitioner of INR 1,80,10,000/- along with the interest at the rate of 6% from the date of payment, within 10 days.

Our Comments

The Hon'ble Gujarat High Court in Bhumi Associate v. Union of India (supra) issued directions that no recovery should be during search/inspection under any circumstances.The Court passed an interim order directing the CBIC and Chief Commissioner of Central/State Tax to issue guidelines by way of suitable circular/instructions stating that:

• No recovery in any mode by cheque, cash, e-payment or adjustment of ITC should be made at time of search/inspection proceedings under sec 67 of the CGST Act;
• If the assessee comes forward to make voluntary payment by filing Form GST DRC-03, the assessee should be asked/advised to file such Form GST DRC-03 on the next day after the end of search proceedings and after the officers of the visiting team have left the premises of the assessee;
• Facility of filing complaint/grievance after the end of search proceedings should be made available to the assessee if the assessee was forced to make payment in any mode during the pendency of the search proceedings;
• If complaint/grievance is filed by assessee and officer is found to have acted in defiance of the afore-stated directions, then strict disciplinary action should be initiated against the concerned officer - Gujarat HC in 

Further, the Hon'ble Karnataka High Court in M/s Bundl Technologies Private Limited v. Union of India [WP 4467/2021 (T-RES) dated September 14, 2021] has held that assessee's payment made as goodwill gesture during investigation cannot be taken as self-ascertained tax. Further, directed the Revenue Department to refund money deposited during the investigation.

In this regard, the Hon'ble Punjab & Haryana High Court in Himanshu Infraprojects Pvt. Ltd. v. Commissioner, CGST [CWP No. 11407 of 2020 (O&M) dated January 18, 2021] set aside the order attaching the bank account of the assessee on the ground that, amount had been deposited by assessee under coercion, which as per the revenue department was deposited voluntarily, whereas, neither any demand nor SCN was pending at that time. It was held that, a person whose property has been provisionally attached can file objections and if the written order is not communicated to him, he would not be in a position to know the reasons to arrive at the conclusion that it was in the interest of the Revenue to attach the property. Further, directed the Revenue Department to refund the amount after retaining 10% of the duty demanded.

Furthermore, the Hon'ble Madras High Court in Shri NandhiDhall Mills India Pvt. Ltd. v. Senior Intelligence Officer, DGGST & Ors. [W.P. No. 5192 of 2020 and WMP. No. 6135 of 2020 dated April 07, 2021] has held that merely because the assessee had signed a statement admitting tax liability under the stress of investigation and had also made a few payments as per the statement, cannot lead to self-assessment or self-ascertainment. The ascertainment contemplated under Section 74(5) of the CGST Act is of the nature of self-assessment and amounts to a determination by it which is unconditional, and not one that is retracted. Thus, the understanding and application of Section 74(5) of the CGST Act is wholly misconceived. Further directed the Revenue Department, to refund the amount of INR 2 crore collected from the assessee during the investigation.

Relevant Provision

Section 73(5) of the CGST Act

"The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment."

Section 74(5) of the CGST Act

"The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment."

Rule 142(1A) of the CGST Rules

The proper officer may, before service of notice to the person chargeable with tax, interest and penalty, under sub-section (1) of Section 73 or sub-section (1) of Section 74, as the case may be, communicate the details of any tax, interest and penalty as ascertained by the said officer, in Part A of FORM GST DRC-01A."