GST Deposits During Search Operations Cannot Be Treated as Voluntary: Delhi High Court Directs Refund in Sushil Kumar Case

Overview of the Dispute

A significant ruling has emerged from the Delhi High Court concerning the legality of tax deposits extracted during GST search operations conducted in the early morning hours. The case of Sushil Kumar Vs Delhi State GST Govt. NCT of Delhi & Ors. raises critical questions about procedural compliance, the voluntariness of payments made under pressure, and the statutory obligations cast upon revenue authorities during search and inspection proceedings under the GST framework.

The petitioner, a manufacturer and trader dealing in ferrous and non-ferrous metals, was subjected to a search operation that began at 5:30 PM on 16.11.2023 and extended until approximately 5:00 AM on 17.11.2023. Before the search concluded, the petitioner was made to deposit a total of ₹40,06,342/- — comprising ₹15,06,342/- attributed to alleged stock variation and ₹25,00,000/- linked to purported wrongful availment of input tax credit — through FORM GST DRC-03. These deposits were recorded at 3:10 AM and 3:18 AM, well before the search team departed the premises.

Background Facts and Allegations

The search was authorized through FORM GST INS-01 dated 16.11.2023. The grounds cited in the authorization included:

  • Alleged suppression of transactions involving the supply of goods and/or services
  • Alleged suppression of stock-related transactions
  • Alleged contravention of statutory provisions under the GST law with the intent to evade tax

Petitioner's Grievances

The petitioner raised multiple concerns regarding the conduct of the search and the manner in which the deposits were extracted:

  • Oral and vague allegations of GST evasion were made without any formal demand being raised
  • The statement of the authorized representative was recorded under conditions of duress and coercion
  • The amounts were deposited through FORM GST DRC-03 at unearthly hours — 3:10 AM and 3:18 AM — while the search was still in progress and revenue officials were present at the premises
  • No acknowledgement in FORM GST DRC-04 was issued by the respondents, as mandatorily required under Rule 142(2) of the CGST Rules
  • No formal statutory demand had been raised prior to the deposits being made

Revenue's Stand

The respondents countered that the deposits were entirely voluntary in nature and that recovery proceedings under Section 73 of the Central Goods and Services Tax Act, 2017 had since been initiated through the issuance of a Show Cause Notice.

Statutory and Regulatory Framework Examined

Voluntary Payment Mechanism Under the CGST Act, 2017

The Court carefully examined the statutory provisions governing voluntary payment and demand recovery under the Central Goods and Services Tax Act, 2017:

Section 73 of the CGST Act applies to cases not involving fraud, wilful misstatement, or suppression of facts. It permits an assessee to discharge tax liability, along with applicable interest, before a formal notice is served, thereby avoiding higher penalties.

Section 74 of the CGST Act mirrors the above mechanism but applies to cases involving fraud, wilful misstatement, or suppression of facts. Here too, an assessee can make self-ascertained payments before or after receiving a show cause notice, subject to graduated penalty rates.

Both provisions contemplate a deliberate, informed, and self-initiated payment process — not one compelled under duress during an ongoing search.

Rule 142 of the CGST Rules — Procedural Safeguards

Rule 142 of the CGST Rules, 2017, falling under Chapter XVIII titled Demands and Recovery, prescribes a specific procedural sequence: