Reversal of Input Tax Credit (ITC) at midnight during search and seizure cannot be treated as voluntary payment of GST dues, the Gujarat High Court has said. It has also asked the tax department to issue a refund along with interest at 6 per cent. Experts feel such an action by the official was complete violation of CBIC circular and it should be avoided.

“We can notice that the action of the petitioner is termed to be voluntary and not have any element of voluntariness,” a division bench of Justices Sonia Gandhi and Sandeep N Bhatt said while disposing a petition by Shree Ganesh Molasses Trading Limited.

The petitioner alleged that on February 11, 2022, a search and seizure operation was carried out by a team of CGST officials. On February 12, 2022, tax officials reversed the ITC in the electronic credit ledge and corrosively and illegally filed Form DRC03 under Section 74(5), although it was not voluntary. According to the petitioner, there is no tax evasion on the part of the petitioner firm and there arises no question of admitting any wrongdoing.

Tax Department denied that any pressure was put on the petitioner to pay any kind of deposit. The statement of one of the partners on February 11-12, had been recorded and he had signed on each page and it cannot be said that he was threatened or force.

During the hearing, the lawyer for the petitioner reproduced an instruction dated May 22, 2022. It clarified that there may not be any circumstance necessitating ‘recovery’ of tax dues during the course of search or inspection or investigation proceedings. However, there is also no bar on the taxpayers for voluntarily making the payments on the basis of ascertainment of their liability on non-payment/ short payment of taxes before or at any stage of such proceedings. The tax officer should, however, inform the taxpayers regarding the provisions of voluntary tax payments through DRC-03, the instruction said.

Instruction not followed

After going through all the facts presented and arguments made by both parties, the court felt that said instruction has not been followed. Accordingly, it held that the tax department is required to reverse the ITC to the tune of ₹37,68,300 along with interest.

Commenting on the ruling, Prateek Bansal, Tax Partner with White and Brief - Advocates & Solicitors says sections 73 and 74 of the CGST Act provide for the issuance of a show cause notice to an assessee before any adverse action is taken against it under the CGST Act. In the present case, the actions of the GST Department in seeking to recover the tax at a pre-mature stage essentially tend to circumvent the due process of law i.e., the prescribed assessment and recovery mechanism under the GST law, and thus, making the said statutory provisions nugatory.

“It is a classic case for invocation of extraordinary Writ jurisdiction of the High Court as the disputed ITC reversal is in violation of Articles 14, 19(1)(g), 21, 265 and 300A of the Constitution of India, besides contrary to the principles of natural justice,” he said.

Further, the Supreme Court in its various decisions (Ratan Melting & Wire Industries, 2008) has ruled that the circulars/instructions issued by the CBIC are binding on all Departmental authorities, and the same should be followed unreservedly.