Karnataka High Court Orders Refund of ₹10 Crore, Rules DRC-03 Payments During GST Search Not Voluntary
Court Says Nil Interest and Penalty Entries Prove Payment Was Forced, Not Self-Assessed
Judgment Reinforces Safeguards Against Arbitrary GST Collections During Search Operations
By Our Legal Correspondent
New Delhi: November 28, 2025:
In a landmark ruling, the Karnataka High Court has directed the refund of ₹10 crore collected from a taxpayer during a Goods and Services Tax (GST) search, holding that the payment was not voluntary. The Court emphasized that payments made under Form DRC-03 without interest or penalty entries cannot be treated as self-assessed and therefore must be returned with interest.
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Background of the Case
The case involved Sri J. Ramesh Chand, who was subjected to a GST search and inspection on March 24, 2023. During the operation, authorities collected ₹10 crore through debit entries in Form DRC-03. The taxpayer later challenged the collection, arguing that the payment was made under duress and without proper adjudication.
The GST department claimed that the payment was voluntary and made under self-assessment provisions. However, the High Court disagreed, noting that the DRC-03 entries showed nil interest and nil penalty, which indicated that the payment was not voluntary but forced.
Court’s Observations
Justice S.R. Krishna Kumar, delivering the judgment, made several key observations:
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- Nil interest and penalty entries in DRC-03 establish that the payment was not voluntary.
- The collection was made during search and seizure operations, which raises questions of coercion.
- Payments under duress cannot be treated as self-assessed under Section 74(5) of the CGST Act, 2017.
- The department acted without jurisdiction and contrary to law in collecting the amount.
The Court directed the GST authorities to refund the ₹10 crore along with 6% interest per annum, payable within two months.
Legal Framework
- Section 74(5) of CGST Act: Allows taxpayers to make voluntary payments of tax, interest, and penalty before issuance of a show cause notice.
- Form DRC-03: Used for making voluntary payments. However, entries must include interest and penalty if payment is truly voluntary.
- Court’s Interpretation: Nil entries for interest and penalty prove that the payment was not voluntary but extracted during search.
Importance of the Ruling
This judgment is significant for several reasons:
- Protects Taxpayers: Ensures that businesses are not forced to make payments during search operations without adjudication.
- Clarifies Law: Establishes that nil interest and penalty entries in DRC-03 are evidence of non-voluntary payment.
- Strengthens Safeguards: Reinforces the principle that tax authorities cannot bypass due process.
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Similar Cases Across India
Courts across India have dealt with disputes over GST payments during search operations:
- Delhi High Court (2024): Held that payments made under coercion during search cannot be treated as voluntary.
- Gujarat High Court (2025): Directed refund of amounts collected without proper adjudication, emphasizing taxpayer rights.
- Madras High Court (2023): Observed that voluntary payment requires free will and proper documentation, not forced collection.
These cases collectively highlight a judicial trend toward protecting taxpayers from arbitrary actions during GST enforcement.
Expert Views
Tax experts welcomed the ruling, noting that it provides clarity on the interpretation of DRC-03 payments. According to them:
- The judgment will prevent misuse of search operations to extract money.
- It reinforces the importance of due process and adjudication in tax collection.
- It sends a strong message to authorities that coercive practices will not be tolerated.
Impact on Businesses
For businesses, the ruling has practical implications:
- Documentation: Companies should carefully review DRC-03 entries and challenge payments made under duress.
- Legal Protection: Courts are willing to intervene and order refunds when payments are not voluntary.
- Confidence: The judgment reassures businesses that their rights will be protected against arbitrary enforcement.
Broader Implications
The ruling strengthens trust in India’s tax system by ensuring fairness and accountability. It also highlights the need for:
- Training of GST officers to avoid coercive practices.
- Clear guidelines on voluntary payments during search operations.
- Greater transparency in enforcement actions.
Conclusion
The Karnataka High Court’s ruling is a milestone in GST jurisprudence. By ordering refund of ₹10 crore with interest, the Court has reinforced the principle that tax collection must follow due process and cannot be based on coercion.
For taxpayers, the judgment is a reminder to assert their rights and challenge arbitrary actions. For authorities, it is a warning that coercive practices will not withstand judicial scrutiny.
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