Karnataka High Court Holds GST Payments Made During Investigation Were Not Voluntary, Orders Refund

The Karnataka High Court has directed the GST authorities to refund ₹53.97 lakh collected from a taxpayer during an investigation, holding that the payments could not be treated as voluntary payments under the GST law.

Justice C.M. Poonacha observed that there was no material to show that the taxpayer had voluntarily ascertained his tax liability before making the payments.

The Court also noted that no prior demand or assessment had been made before the payments and that the authorities had not issued the required DRC-04 acknowledgments.

The Court was hearing a petition filed by M/s Hukkeri Taluka Samagra Grameen Abhivravdi Sangh, a registered taxpayer engaged in providing manpower supply services to government departments and public authorities.

The dispute arose after the GST authorities inspected the petitioner's premises on January 20, 2024, based on an intelligence report alleging discrepancies between its GSTR-3B and GSTR-7 records.

On March 27, 2024, the petitioner made payments of ₹20,97,352 and ₹15 lakh through Form GST DRC-03, totalling ₹35,97,352. It later made another payment of ₹18 lakh on May 14, 2024. The petitioner contended that the payments were made under coercion and were not voluntary.

The petitioner subsequently sought refund of ₹38,97,352 and ₹15 lakh. The refund applications were rejected by the authorities in November 2024, and the rejection was later upheld in appeal on August 28, 2025.

Before the High Court, the petitioner argued that the payments were wrongly treated as voluntary payments under Section 73/74 of the CGST Act despite there being no prior determination or ascertainment of the tax liability.

The Revenue opposed the plea, contending that the payments were made voluntarily after the inspection. It also argued that subsequent adjudication proceedings under Section 74 had been initiated and, therefore, the refund could not be granted.

The High Court, however, found several circumstances indicating that the payments could not be treated as voluntary.

The Court noted that where a taxpayer makes a voluntary payment through Form GST DRC-03 under Section 73(5) or Section 74, Rule 142(2) of the CGST Rules requires the authorities to issue an acknowledgement in Form GST DRC-04. In the present case, no such acknowledgement had been issued.

It further observed that there was no material showing that the tax liability had been ascertained either by the petitioner or by the proper officer before the payments were made.

The Bench also relied on the instructions issued by the GST authorities on May 25, 2022, which state that there can be no recovery of tax during search, inspection or investigation proceedings without following the prescribed legal process.

The Court particularly noted that the DRC-03 forms showed no payment towards interest or penalty, even though the payments were stated to have been made under Section 74(5), which contemplates payment of tax along with interest and penalty.

"..the alleged voluntary payment made by the petitioner is admittedly under sub-section (5) of Section 74 of the CGST Act. The same mandates that the said voluntary payment of tax is to be made along with interest and penalty. However, in the DRC-03, it is clear that no payment is made by the petitioner towards interest or penalty and the relevant points are shown as nil..", the Court said.

The Court further observed that there had been no demand from the authorities before the payments were made and that the notice dated May 13, 2024, requiring the petitioner to appear personally was itself not issued under any specific provision of law.

Rejecting the Revenue's contention that subsequent proceedings under Section 79 demonstrated the voluntary nature of the payments, the Court held that mere initiation of recovery proceedings could not establish that the earlier payments were voluntary.

"Mere proceedings initiated under Section 79 of the Act will not in any manner indicate that the payments made by the petitioner are voluntary", the Court said.

The High Court accordingly allowed the writ petition and quashed the appellate orders, rejecting the petitioner's refund claims.

It directed the authorities to refund ₹53,97,352 along with interest at 6% per annum from the date of payment until the date of refund.

For the Petitioner: Advocates Ganesh Vishwanath Shandage and Pratima Shipurkar S.

For the Respondents: Additional Advocate General Gangadhar J.M. and Additional Government Advocate Nandini Somapur.