The Karnataka High Court, in M/s Kesar Colour Chem Industries v. The Intelligence Officer & Ors., examined the legality of recovery of tax amounts during the course of investigation under the Central Goods and Services Tax Act, 2017, prior to the issuance of a show cause notice. The petitioner challenged the recovery of a sum of ₹2.50 crore collected by the departmental authorities during investigation proceedings, contending that the amount was paid under coercion and not pursuant to voluntary self-ascertainment as contemplated under Section 74(5) of the CGST Act.

The petitioner submitted that the recovery was effected before any determination of liability through adjudication and before issuance of a show cause notice. It was contended that Section 74(5) permits payment of tax only where the assessee, on its own volition, self-ascertains the tax liability and voluntarily discharges the same. In the present case, the payment was allegedly extracted during investigation through summons and pressure, thereby lacking the essential element of voluntariness.

The respondents argued that the amounts were paid voluntarily by the petitioner and were duly reflected through forms such as DRC-03, asserting that the payment amounted to self-ascertainment under Section 74(5). They contended that the petitioner had cooperated during investigation and had willingly discharged the liability.

The High Court rejected the stand of the department and held that self-ascertainment under Section 74(5) necessarily presupposes a voluntary and independent determination of tax liability by the assessee. The Court observed that the subsequent issuance of a detailed show cause notice itself demonstrated that the tax liability had not been self-ascertained and that adjudication was still pending. This contradicted the department’s claim that the payment was voluntary.

The Court further held that any recovery of tax prior to adjudication, without authority of law and without following the statutory procedure, violates Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by authority of law. Recoveries made during investigation, in the absence of voluntary self-ascertainment and prior to issuance of a show cause notice, were therefore declared illegal.

Accordingly, the Karnataka High Court directed the respondents to refund the amount of ₹2.50 crore recovered from the petitioner, along with applicable interest. The Court clarified that its findings were confined to the legality of the recovery and would not prejudice the adjudication proceedings initiated pursuant to the show cause notice, which were left open to be decided in accordance with law.


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