Introduction:

In Gunnam Infra Projects Private Limited v. Deputy Commissioner of Central Tax (Revenue), WP(C) No. 611 of 2025, the Karnataka High Court, through Justice M. Nagaprasanna, delivered a crucial ruling holding that payments made by an assessee in Form GST DRC-03 at the time of search or during investigation cannot be treated as “voluntary payments” under Section 74(5) of the CGST Act when no liability has been quantified by authorities through adjudication. The dispute arose after the assessee, a private infrastructure company, was subjected to simultaneous inspection by the DGGI and the Anti-Evasion wing under Section 67(1) of the CGST Act, leading to immediate payments of over ₹2.42 crores in DRC-03 challans, followed by four additional DRC-03 payments totaling ₹3.11 crores during the issuance of multiple summons. When the assessee later sought a refund, the applications were rejected through deficiency memos alleging lack of supporting documents. The High Court observed that these memos were unsustainable and that the refund applications were complete in terms of Section 54 read with Rule 89. Relying on precedents including Radhika Agarwal, Vallabh Textiles, Bundl Technologies, and AB Enterprises, the Court quashed the deficiency memos, affirming that coerced payments during search cannot be labeled “voluntary” and must be refunded if no quantified demand exists.

Arguments:

The assessee, represented by Advocate Lochana S. Babu, argued that the payments made in Form DRC-03 were not voluntary and were extracted under pressure during search and investigation, without any determination of liability under Section 74. It was submitted that Section 74(5) allows voluntary payment only of “self-ascertained tax dues,” but in this case no such ascertainment was ever made by the assessee, nor communicated by the department. Instead, the payments were made out of compulsion to avoid harassment during search operations. The assessee further submitted that Rule 89 and Section 54 entitle it to refund of any tax or amount paid without adjudication, and that the deficiency memos citing lack of documents were baseless because the refund applications contained all required documentation, as recognized by the Delhi High Court in AB Enterprises. The assessee argued that the department failed to issue any adjudication order, show cause notice, or quantification memo—making the payments unlawfully collected and refundable.

On the other hand, Revenue, represented by CGSPC M.N. Kumar along with Advocates M. Unnikrishnan and Madhu N. Rao, contended that the payments were voluntary deposits made through DRC-03 under Section 74(5), and therefore could not be refunded until the completion of investigation. The Revenue argued that since the assessee filed DRC-03 forms with payment acknowledgments, it signified self-ascertainment and willingness to pay. They further submitted that the refund applications were incomplete and unsupported by sufficient documentation, justifying the deficiency memos. Revenue also stated that the investigation was ongoing and refund would prejudice the departmental proceedings. They asserted that the petitioner’s repeated payments in DRC-03 showed conscious compliance rather than coercion.

Judgement:

The Karnataka High Court rejected the Revenue’s stance and held that payments made during search or pursuant to investigation cannot automatically be treated as voluntary payments under Section 74(5). Justice Nagaprasanna emphasized that voluntariness requires the taxpayer to self-ascertain liability and consciously decide to pay, which was not the case here. The Bench noted that there was no assessment, no quantification, and no formal communication determining any amount payable by the assessee. This absence deprived the DRC-03 payments of their “voluntary” character. Relying on the Supreme Court’s reasoning in Radhika Agarwal and several High Court judgments including Vallabh Textiles, Kesar Colour Chem Industries, Bundl Technologies, J. Ramesh Chand, and Bhumi Associates, the Court reiterated that amounts deposited during search are often coerced or made under pressure, and therefore cannot be treated as voluntary unless the department affirmatively establishes otherwise.

The Court also examined the validity of the deficiency memos rejecting the refund applications. Referring to the Delhi High Court’s decision in AB Enterprises, Justice Nagaprasanna found that the assessee had submitted all necessary documents for refund under Section 54 read with Rule 89. The deficiency memos were held to be arbitrary, unsustainable, and issued without proper examination of the applications. The Court observed that deficiency memos cannot be used as a tool to delay or deny legitimate refunds when statutory requirements are fulfilled. It further noted that Rule 142 requires the issuance of a statutory communication (DRC-01) before tax can be demanded, and since no such notice was issued, the department had no authority to retain payments extracted during search. The Court thus quashed the deficiency memos and held that the assessee was entitled to a refund of all amounts paid via DRC-03, affirming that coerced or unadjudicated payments cannot be withheld by the Revenue merely because an investigation is ongoing.

Accordingly, the writ petition was allowed, and the department was directed to process the refund claims in accordance with law.