GST Deposits During Search & Investigation: Bombay High Court Emphasizes Inquiry Into Coercion Complaints

1. Background and Context

The Bombay High Court in Modern Traders Vs Deputy Commissioner/Joint Commissioner has revisited an important question in GST administration: when an assessee deposits tax during a search, inspection or investigation, can such remittance be presumed to be a voluntary payment?

The High Court examined:

  • Whether amounts deposited before adjudication of liability could be straightaway regarded as voluntary payments, and
  • Whether GST authorities are duty-bound to investigate allegations of coercion, in light of Instruction No. 01/2022-23 dated May 25, 2022 issued by the GST Investigation Wing.

The matter arose from a writ petition where the assessee challenged the treatment of deposits made during investigation as voluntary, and alleged that the payments were extracted under pressure from departmental officers.

2. Factual Matrix

2.1 Parties and Proceedings

  • Modern Traders (“the Petitioner”) is a business concern represented by its partner, Mr. Ebrahim Fazal Din.
  • Deputy Commissioner/Joint Commissioner, Nagpur – II and other GST authorities (“the Respondents”) initiated proceedings and conducted departmental action, including investigation, against the Petitioner.
  • During these proceedings, the Petitioner deposited certain amounts towards alleged tax dues.

The Respondents treated these payments as voluntary contributions and proceeded on the basis that there was no further liability to adjudicate, nor any question of imposing a 100% penalty.

2.2 Petitioner’s Stand

The Petitioner asserted, in substance, that:

  • The deposits were made before any adjudication order determining tax liability.
  • Payments were made during the course of investigation and under pressure from officers, and therefore could not be classified as voluntary.
  • Reliance was placed on:
    • Judicial precedents holding that amounts deposited during search or immediately thereafter cannot automatically be viewed as voluntary, and
    • Departmental instructions and circulars, particularly the GST Investigation Wing Instruction No. 01/2022-23 dated May 25, 2022.

Aggrieved by the department’s treatment of these deposits as voluntary and its failure to probe the allegation of coercion, the Petitioner invoked the writ jurisdiction of the Bombay High Court.

2.3 Revenue’s Position

The Respondents maintained that:

  • The Petitioner had of its own accord deposited the entire amount.
  • No order imposing 100% penalty had been passed; consequently, the department saw no occasion to undertake adjudication of tax liability or levy of penalty.
  • Complaints regarding coercion surfaced later, and earlier correspondence from the Petitioner did not contain such allegations.

In other words, the department attempted to justify treating the amount as a voluntary deposit and downplayed the significance of the later coercion complaint.

The dispute raised the following central questions:

  1. Can a deposit made during search, inspection or investigation, and before adjudication, be invariably considered a voluntary payment of tax?
  2. Do GST authorities have an affirmative obligation to investigate complaints of coercion, in terms of the Central Government Instruction No. 01/2022-23 dated May 25, 2022, particularly Clause 5?

4. Instruction No. 01/2022-23 and Clause 5

The Court examined the GST – Investigation Instruction No. 01/2022-23 dated May 25, 2022, which clarifies the framework surrounding deposits made during search or investigation. The Instruction is aimed at:

  • Clarifying the legal position regarding so-called voluntary payments, and
  • Ensuring that officers do not resort to coercive measures for extracting deposits during investigation.

A pivotal part of this Instruction is Clause 5, which the Court reproduced and relied upon:

“5. Pr. Chief Commissioners/Chief Commissioners, CGST Zones and Pr. Director General, DGGI are advised that in case, any complaint is received from a taxpayer regarding use of force or coercion by any of their officers for getting the amount deposited during search or inspection or investigation, the same may be enquired at the earliest and in case of any wrongdoing on the part of any tax officer, strict disciplinary action as per law may be taken against the defaulting officers.”

From this, the Court distilled a clear obligation upon the revenue authorities: