M/S Kesar Colour Chem Industries vs The Intelligence Officer on 26 September, 2024

Summary of Judgment

1. Outcome
The writ petition was partially allowed. The Court declared the recovery of ₹2.50 crores from the petitioner during the investigation stage to be illegal. The respondent authorities (DGGI) were directed to refund the entire amount with applicable interest within four weeks. The Court's findings were limited to the legality of the recovery, keeping all other contentions regarding the merits of the tax dispute open for the pending adjudication process.

2. Core Issue
The central legal question was whether the payment of ₹2.50 crores, made by the petitioner through Form GST DRC-03 during an ongoing investigation and before the issuance of a Show Cause Notice (SCN), could be considered a "voluntary" payment based on "self-ascertainment" under Section 74(5) of the CGST Act, 2017, or if it was an illegal and coercive recovery made by the tax authorities without the authority of law.

3. Key Facts
* The Directorate General of GST Intelligence (DGGI), Bengaluru, initiated an investigation against the petitioner based on intelligence gathered from another entity (M/s. Raj Chemicals), suggesting the petitioner had availed Input Tax Credit (ITC) on invoices without the actual receipt of goods.
* DGGI officers conducted a search at the petitioner's Mumbai office from July 29, 2021, to July 31, 2021. The petitioner alleged being subjected to coercion, threats of arrest, and detention for nearly two days.
* During this period, the petitioner made a payment of ₹1.00 crore on July 31, 2021.
* The petitioner was then summoned to the DGGI office in Bengaluru. On August 3, 2021, a further payment of ₹1.50 crores was made. Both payments totalled ₹2.50 crores and were deposited via Form GST DRC-03.
* The petitioner retracted the statements recorded by the officers through a sworn affidavit on August 10, 2021, claiming they were obtained under duress.
* Subsequently, the DGGI issued a Show Cause Notice (SCN) under Section 74(1) of the CGST Act on November 30, 2022, for the entire disputed tax amount, without giving credit to the ₹2.50 crores already paid.

4. Arguments

• Petitioner's Arguments:

  • The payments were not voluntary but were extracted under extreme duress, mental trauma, and constant threats of arrest during the investigation.
  • Tax authorities have no power to demand or recover any tax amount during the investigation stage (under Section 67 and 70), as the liability is yet to be determined through adjudication. Such recovery violates Article 265 of the Constitution.
  • The payments cannot be classified as "self-ascertainment" under Section 74(5) because the essential element of voluntariness was absent.
  • The fact that the department later issued a full SCN under Section 74(1), rather than a notice for a shortfall under Section 74(7), proves that even the department did not consider the payment as a valid self-ascertainment.

• Respondent's (DGGI) Arguments:

  • The investigation was lawful and based on credible information of tax evasion.
  • The statements recorded and the payments made by the petitioner were entirely voluntary.
  • The payments were correctly made through Form GST DRC-03, which is used for voluntary payments under Section 74(5) as a part of self-ascertainment.
  • The petitioner's retraction of the statements was a belated afterthought to evade tax liability.

5. Court’s Reasoning
* Voluntariness is Key: The Court held that for a payment to qualify under Section 74(5), it must be based on genuine "self-ascertainment," which presupposes a voluntary act by the taxpayer. Given the petitioner's retraction affidavit and the circumstances of the investigation, the Court found the element of voluntariness to be absent.
* Doctrine of Estoppel by Conduct of Department: The Court's reasoning pivoted on the department's subsequent actions. It observed that if the department had truly considered the ₹2.50 crores as a valid payment under Section 74(5), it should have either:
1. Concluded the proceedings under Section 74(6) if the amount was sufficient; or
2. Issued an SCN only for the shortfall under Section 74(7) if the amount was insufficient.
* By issuing a fresh SCN under Section 74(1) for the entire alleged tax liability, the department itself negated its own argument that the payment was a self-ascertainment. This action estopped the department from contending that the payment fell under Section 74(5).
* Violation of Due Process: The self-ascertainment mechanism under Section 74(5) is a pre-notice stage. Once the department proceeds to issue a notice under Section 74(1), it initiates a formal adjudication process, and the opportunity for the Section 74(5) stage is foreclosed.
* Unconstitutional Recovery: Since the payment was not a valid self-ascertainment, it amounted to a recovery of tax without a determined demand. This is contrary to the due process of law and is a direct violation of Article 265 of the Constitution of India, which mandates that no tax can be collected except by the authority of law.

6. Statutory References
* Constitution of India: Article 226, Article 227, Article 265.
* Central Goods and Services Tax (CGST) Act, 2017:
* Section 67 (Power of inspection, search and seizure)
* Section 70 (Power to summon)
* Section 74 and its sub-sections (1), (5), (6), (7), and (8) (Determination of tax in fraud cases)
* Central Goods and Services Tax (CGST) Rules, 2017: Rule 142(2).
* Departmental Instructions: Instruction No. 01/2020-21 [GST-investigation] dated 02.02.2021.

7. Precedents Cited
None were cited in the provided text of the judgment. The Court's decision was based on the interpretation of the statutory provisions of the CGST Act and the Constitution of India.