Legal Analysis: Voluntary Nature of Tax Payments and ITC Reversal During Investigations
The following analysis is based on the judgment of the High Court of Karnataka in Writ Appeal No. 2126 of 2025, decided on March 12, 2026 in the matter of The Assistant Commissionerate Vs Kum international
Facts of the Case:
During inspection which was conducted on 3 Mach 2024, the assessee deposited the tax on some ineligible input credit and also deposited interest and penalty on 10 June2024 and also filed a letter for closer and department also issued closer order in August 2024. Later on party filed writ petition in High Court that payment was not volumetry but under coercive circumstances. The single bench allowed the appeal but double bench allowed the appeal to the extend of coercive payment which was done during inspection but interest and penalty as voluntary as no corroborative evidences on record Hence, remanded back excluding the disputed period for further action under relevant provisions of the act. That means adjudicating the issue a fresh.
2.The Key points:
Principle of Voluntariness under Section 74(5)
Section 74(5) of the Central Goods and Services Tax (CGST) Act, 2017, allows an assessee to pay tax, interest, and a penalty before a formal show-cause notice is issued. However, for a closure order under Section 74(6) to be valid, the underlying payment must be voluntary.
- The “Ongoing Inspection” Test: Reversal of Input Tax Credit (ITC) while an inspection is active and authorities are physically present on the premises is a strong indicator of coercion. Such actions lend substance to the claim that the reversal was not made of the assessee’s own free will.
- Breathing Time: Ordinarily, a Proper Officer should grant an assessee “breathing time” to evaluate and reverse ITC. Immediate reversal during the search process suggests a lack of voluntary intent.
B. Evidentiary Requirements for Alleging Coercion
While courts protect assessees from high-handedness, the burden of proof regarding coercion shifts based on conduct:
- Corroborative Evidence: A mere bare allegation of pressure is insufficient. The allegation must be supported by “attending circumstances” and the specific actions of the authorities.
- The Duty to Complain: If coercion occurs, the assessee is expected to lodge a formal complaint with higher authorities within a short span of time.
- Effect of Silence: Maintaining silence for an extended period (e.g., over two months) regarding alleged threats or coercion raises serious doubts about the genuineness of the claim.
Judicial Remedies and the “Restoration” Doctrine
When a court finds that a payment or declaration was involuntary: There are no of Judgments where courts exercised their extra ordinary powers to provide Justice.
- Setting Aside Closure: The court may set aside the closure order passed under Section 74(6) and direct a refund of the amount paid under protest.
- Restoring the Status Quo Ante: The proceedings must be restored to the stage they were at prior to the involuntary declaration. This ensures the Revenue is not permanently prejudiced by the lapse of time.
- Tolling of Limitation: To prevent an “abuse of process,” the period from the date of the involuntary statement/payment until the date of the court’s judgment is excluded when computing the limitation period for the department to issue a formal notice under Section 73 or 74. The same was followed in this case.
Precedential Authority
- Supreme Court Guidance: In K.T.M.S. Mohd. vs. Union of India, the Court held that statements obtained through inducement, threat, or coercion must be rejected brevi manu (summarily).
- Delhi High Court Alignment: In Lovelesh Singhal vs. Commissioner, the court affirmed that ITC reversals made in the presence of inspecting authorities cannot be regarded as voluntary.
Way Forward:
This Judgment is worth reading on coercive action and pressure done by authorities during search applied by CGST/ SGST / DGGI officers. The concluding remakes are as follows :
1. Tender your statement on summon under section 70 with facts known and in case there is no answer put candidly to get back on the same within specified time.
2. In case any pressure applied for recovery then it is in the interest of the circumstances to tell officers that such payments are void and refundable.
3. Even in case to get relieve of the pressure any payment made than file the protest with Higher officers for the coercive action and pressure applied during search, There are no of Judgments by various High Courts and circular of the department that payment cannot be realized by pressure tactics. Even any seizure of cash and assets, there are no of Judgments which favour assessee to approach their Jurisdictional High Court to grant relief.
4. It will be better for department to frame a case and issue proper SCN and adjudicate the same as per provision of section 73 /74 of CGST Act 2017.
Deputy Commissioner St & Ors Vs Wingtech Mobile Communications (India) Pvt. Ltd. & Anr
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