Karnataka HC Quashes Deficiency Memos, Orders Refund of Taxes Paid Under Coercion During Search

The petitioner, M/s. Gunnam Infra Projects Private Limited, a registered entity under the GST regime, was subjected to a search and inspection by officers of the DGGI and Anti-Evasion Wing on 08.06.2023. During the course of the search, the petitioner alleged that its representatives were compelled to make an immediate payment of Rs. 2.42 crores through Form DRC-03 under threat of coercive action. Similar summons and demands followed between 2023 and 2025, resulting in further payments without any formal determination or adjudication of tax liability, adding to more than Rs. 3.11 crores.

In May 2025, the petitioner filed refund applications in Form RFD-01 seeking return of the amounts so paid. However, the Deputy Commissioner of Central Tax issued deficiency memos dated 20.05.2025 and 21.05.2025, stating that the applications were incomplete. Aggrieved by the repeated obstruction of its refund claim, the petitioner approached the High Court.

Main Issue: Whether deficiency memos can be used to stall refund claims where GST amounts were collected during investigation without adjudication, and whether payments made through Form DRC-03 under such circumstances can be treated as voluntary under the CGST Act.

HC’s Decision: The High Court ruled in favour of the petitioner and held that tax can be collected only with authority of law, as mandated by Article 265 of the Constitution. The Court found that the payments made through Form DRC-03 during an ongoing investigation, without any quantified demand or adjudication, could not be characterised as voluntary payments under Section 74(5) of the CGST Act.

The Court reiterated that tax officers are prohibited from effecting recoveries during search or inspection proceedings. It further held that deficiency memos cannot be employed as a device to avoid processing refund applications when the underlying collection itself lacks legal sanction. Thus, the deficiency memos dated 20.05.2025 and 21.05.2025 were quashed, and the respondents were directed to process the refund claims and pass appropriate orders in accordance with law.

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