Karnataka High Court: Coerced Payments During GST Probe Not Constitute Valid Self-Ascertainment Under Section 74(5) of the CGST Act

Introduction

The Karnataka High Court recently addressed a crucial issue in Intelligence Officer, Directorate General of GST Intelligence v. Kesar Color Chem Industries[i]. Can revenue authorities recover tax from an assessee during an investigation before issuing a show cause notice (‘SCN’)? The Court ruled that such recovery is excessive and beyond the scope of authority. It also examined the nature of self-ascertained voluntary payments under s. 74(5) of the Central Goods and Services Act, 2017 (‘CGST Act’). The Court firmly held that in the absence of voluntariness, coercive recoveries cannot be considered self-ascertainment.

Brief Facts

• Officers of the Directorate General of GST Intelligence (‘DGGI’) were investigating M/s Raj Chemicals. During the investigation, they recorded a statement from one of the company’s partners, Mr. Vijay Kumar Gupta, who stated that M/s Raj Chemicals had issued invoices to M/s Kesar Color Chem Industries (‘Respondent’) without the actual supply of goods. Based on this statement, the Appellants contended that e-way bill analysis and RFID/Fastag data suggested no actual movement of goods. Consequently, a search and seizure operation was conducted at the Respondent’s office, and an SCN was subsequently issued.

• During the search and seizure operation at the Respondent’s office, it was alleged that while the Respondent provided documents related to M/s Raj Chemicals, the officers remained at the premises for two days, preventing the Respondent from leaving. The Respondent alleged coercion, including physical intimidation, forced removal from his chair, and continuous threats of arrest. It was further claimed that the authorities compelled him to sign a recorded statement without proper review. The statements and panchnama were allegedly signed late at night in the absence of independent witnesses.

• The Respondent contended that two payments totalling Rs. 2.5 crores were forcibly recovered before the issuance of an SCN and were wrongly classified as voluntary self-ascertainment under s. 74(5) of the CGST Act. It was stated that the recorded statements were later retracted, vide an affidavit alleging coercion, and that the Appellants had no power to recover tax during an investigation at the pre-SCN stage under ss. 67 and 70 of the CGST Act. The Respondent also pointed out that the SCN issued subsequently did not exclude the Rs. 2.5 crores already paid, supporting the claim that the payments were not voluntary.

• On the other hand, the Appellants argued that investigations had revealed tax evasion by the Respondent based on Mr. Gupta’s statement. They further asserted that the payments made vide Form GST DRC-03, totalling Rs. 2.5 crores were voluntary and part of self-ascertainment. It was contended that the Respondent had arranged funds outside the DGGI office, negating claims of coercion, and that the delayed retraction affidavit cast doubt on its credibility.

• The Respondent approached the Karnataka High Court, challenging the legality of the payments and the circumstances under which they were made. A Single Judge Bench ruled in favour of the Respondent, holding that the Rs. The 2.5 crore deposit was not voluntary and must be refunded along with applicable interest. Following this decision, the revenue authorities filed an intra-court appeal challenging the Single Judge’s decision and seeking to maintain the recovery from the Respondent.

Issues

The judgment addressed the following issues:

• Whether an involuntary determination of tax liability by an assessee amounts to self-ascertainment under s. 74(5) of the CGST Act?

• Whether the issuance of an SCN negates the self-ascertainment of tax liability by an assessee?

Held

• The Karnataka High Court ruled in favor of the Respondent, affirming the decision of the Single Judge Bench and directing the refund of Rs. 2.5 crores to the Respondent. The Court observed ss. 73 and 74 of the CGST Act provide an opportunity for taxpayers to voluntarily deposit tax before the issuance of an SCN to mitigate penalties. However, if such deposits are made under coercion, they must be refunded.

• The Court found evidence of coercion and threats in the manner in which the statements were recorded and payments were extracted. It was noted that the Appellants’ officers were present at the Respondent’s office for over 48 hours from 29.07.2021 to 31.07.2021, and the statement was recorded at 12.30 AM on 31.07.2021, raising concerns about duress. Furthermore, the second payment of Rs. 1.5 crores was made after the Respondent was summoned to Bangalore, further suggesting coercion.

• The Court held that to determine voluntariness, a detailed inquiry is unnecessary. If the assessee claims coercion and the facts prima facie support this claim, the benefit of withdrawal of payment must be granted. However, the Court clarified that withdrawing such payment forfeits immunity from penalties, and revenue authorities may proceed against the assessee under due process.

• The Court also emphasized that self-ascertained tax liability implies acceptance of the basis of liability and that if an assessee disputes liability, such payments cannot be considered voluntary within the framework of ss. 73 and 74 of the CGST Act. The Court noted that the retraction affidavit was timely and could not be dismissed as belated. It concluded that, pending adjudication of tax liability, no pre-SCN recovery could be retained.

• The Court reiterated the observations in Lovelesh Singhal[ii] and Vallabh Textiles[iii], wherein it was held that tax recovery cannot be made unless the determined amount becomes payable under an adjudication order or in accordance with the provisions of the CGST Act and its rules. It was also observed that any recovery made during an investigation, without adjudication, violates a. 265 of the Constitution of India.

Our Analysis

This judgment has significant implications for GST investigations and recoveries, highlighting the misuse of a benevolent provision to harass taxpayers. By ruling that tax recovery during an investigation, without adjudication, is illegal, the Court has set a crucial precedent to uphold taxpayer rights and constitutional principles.

The decision emphasizes the importance of voluntary compliance in self-ascertainment under s. 74(5) of the CGST Act, rejecting coerced payments as valid. This ruling is likely to compel tax authorities to adhere more strictly to due process, ensuring fairer and more transparent investigations.

However, the judgment may lead to longer investigation periods as authorities ensure proper adjudication before recovery. It may also result in increased litigation, as taxpayers challenge past coercive recoveries. Nonetheless, the forfeiture of immunity from penalties upon withdrawal of self-ascertained payments acts as a deterrent against frivolous claims.

End Notes

[i] [2025] 171 taxmann.com 739 (Karnataka).

[ii] Lovelesh Singhal v. Commissioner, Delhi GST & Ors., (2024) 121 GSTR 422 (Delhi).

[iii] Vallabh Textiles v. Senior Intelligence Officer, (2023) 120 GSTR 213 (Delhi).

Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.