Payments During Inspection Are Coercive; Refund Cannot Be Denied for Missing Supporting Documents.
Issue
Whether a GST refund application for an amount paid during an inspection can be rejected via a deficiency memo for lacking “supporting documents,” and whether such a payment, made during continuous inspections and summons, can be legally treated as a “voluntary deposit” by the department.
Facts
The petitioner (Gunnam Infra Projects) made payments totaling ₹3.11 crore during a period of continuous GST inspections and summons by the department.
The department treated these payments as voluntary deposits under Section 74(5) of the CGST Act.
The assessee subsequently filed refund applications in Form RFD-01 to claim this amount back.
The department rejected these refund applications by issuing deficiency memos, alleging that certain additional “supporting documents” were not attached, even though the applications were filed in the correct format with essential documents.
The assessee filed a writ petition, arguing the payment was coercive, not voluntary, and the rejection of the refund was illegal.
Decision
The Karnataka High Court allowed the writ petition and ruled in favour of the assessee.
The Court held that payments made during a period of continuous inspections and summons cannot be treated as voluntary deposits.
Relying on several High Court precedents and the Supreme Court’s ruling in Radhika Agarwal, the Court affirmed that any payment extracted through threat, pressure, or coercion is refundable.
It was held that the GST Act provides no legal bar to claiming a refund of amounts wrongly classified as “voluntary” but paid under duress.
The Court found the deficiency memos used to reject the refunds to be legally untenable, as they could not be used to deny a claim simply because some additional supporting documents were missing.
The department was directed to process the refund in accordanceAdjusting a prior-period GST refund against a current demand is not permissible without a specific order, and the High Court has directed the tax authorities to reconsider the matter.
Issue
Whether GST authorities can unilaterally adjust a time-barred (legacy) refund claim from a prior financial year against a separate, confirmed demand for a subsequent financial year, without a proper adjudication or order authorizing such an adjustment.
Facts
The petitioner had a pending refund claim for the financial year 2017-18, which the GST authorities had not processed.
Separately, the petitioner had an outstanding and confirmed GST demand for the financial year 2018-19.
The tax authorities proceeded to unilaterally adjust the pending (and potentially time-barred) refund from 2017-18 against the confirmed demand for 2018-19.
The petitioner challenged this unilateral adjustment, arguing that the two periods were distinct and that the department could not, on its own accord, “revive” and “adjust” a refund claim against an unrelated demand without following due process.
Decision
The High Court set aside the impugned order of adjustment.
It held that the department cannot unilaterally make such an adjustment.
The court found that the issues of the 2017-18 refund and the 2018-19 demand are separate matters that must be adjudicated independently.
The matter was remanded back to the tax authorities with a direction to provide the petitioner a fresh opportunity to be heard on the merits of both the refund and the demand.
Key Takeaways
No Unilateral Adjustments: The GST department does not have the authority to self-adjust a pending or time-barred refund from one period against a confirmed demand from a different period.
Each Tax Period is Distinct: Assessment and refund proceedings for different tax periods are separate and distinct. They cannot be mixed or adjusted against each other without a specific legal provision or a formal adjudication order.
Due Process Required: The department’s action of adjusting the refund without an order or a hearing was a violation of the principles of natural justice.
- Limitation Matters: The department cannot revive a time-barred refund claim at its own convenience simply to set off a demand for another year.
with law.
Key Takeaways
Payment During Inspection is Not Voluntary: Payments made under the pressure of an ongoing inspection or investigation, or during summons, are not considered “voluntary” under Section 74(5).
Coerced Payments are Refundable: The Court reaffirmed the principle that payments extracted through threat, pressure, or coercion during a search or inspection are refundable to the taxpayer.
Deficiency Memos Have a Limited Scope: An authority cannot reject a refund application by issuing a deficiency memo for non-submission of additional “supporting documents” if the application is otherwise filed in the correct format with all essential documents.
Burden of Proof: The department’s action of treating an amount paid during an investigation as “voluntary” is not sustainable unless they can prove it was paid without any duress.