Karnataka High Court on Coercive GST Recovery During Search: Limits of Section 74(5) and Right to Refund of Involuntary DRC‑03 Payments

1. Introduction

The judgment in Sri J Ramesh Chand v. Union of India & Ors., W.P. No. 9890 of 2023 (T‑RES), decided on 13 October 2025 by the Karnataka High Court (Hon’ble Mr. Justice S.R. Krishna Kumar), is a significant addition to the growing body of jurisprudence on coercive tax recovery during GST search and investigation.

The petitioner, a 67‑year‑old proprietor of “Million Lights”, engaged in trading electronic equipment and footwear, challenged the procurement of Rs. 10 crores by GST officials on 24.03.2023, during simultaneous search operations at his residence and business premises. The Revenue claimed that this amount was paid voluntarily under Section 74(5) of the CGST Act, 2017 by way of self‑ascertainment, through multiple Form DRC‑03 entries. The petitioner alleged that the payment was obtained under coercion and threat of arrest and therefore was illegal and without authority of law.

The core issues before the Court were:

Whether the Rs. 10 crores paid on 24.03.2023 could legally be treated as a voluntary self‑ascertainment under Section 74(5) of the CGST Act; and
If not, whether the petitioner was entitled to a refund of the amount with interest, despite subsequent issuance of show‑cause notice (SCN) and continuation of adjudication proceedings.

The judgment consolidates and applies Supreme Court and multi‑High‑Court jurisprudence on the impermissibility of “on‑spot” recovery during search, the meaning of “voluntary” payment under Section 74(5), and the need to respect constitutional mandates under Articles 265 and 300‑A.

2. Summary of the Judgment

2.1 Reliefs Sought

The petitioner sought:

A writ of certiorari quashing the alleged “voluntary” payment of Rs. 10 crores made on 24.03.2023 via various DRC‑03 entries (all under CGST), and
A writ of mandamus directing the respondents to refund Rs. 10 crores along with interest, claimed to have been extracted under coercion during search/inspection, and
Any other appropriate relief.

2.2 Key Factual Matrix

The petitioner is a registered GST taxpayer, regularly filing returns since 01.07.2017.
23.03.2023: Third respondent (Inspector) raided the residence and seized a laptop (returned later on 28.03.2023).
24.03.2023: Respondents 3 and 4 conducted search, inspection and seizure at the business premises and, during this operation, procured payment of Rs. 10 crores from the petitioner through a series of DRC‑03 entries (all dated 24.03.2023).
At this stage, no notice under Section 73 or Section 74 of the CGST Act had been issued, nor was any demand quantified.
Despite the DRC‑03 payments, the Department never issued an acknowledgment in Form DRC‑04, which Rule 142(2) mandates when tax is voluntarily paid.
The petitioner approached the High Court on 03.05.2023, alleging coercion and threat of arrest. Only later, during the pendency of the writ, did the Department issue intimation in DRC‑01A followed by a formal SCN in DRC‑01.

2.3 Court’s Holding

The Court held that:

The Rs. 10 crores obtained from the petitioner on 24.03.2023 was not a voluntary payment under Section 74(5) but was extracted in the course of search/inspection, hence involuntary and illegal.
The collection was without jurisdiction or authority of law, being contrary to Article 265 (no tax without authority of law) and to the statutory scheme of the CGST Act and Rules.
The Department’s failure to issue Form DRC‑04, seizure of records preventing any meaningful self‑ascertainment, absence of contemporaneous quantification of tax/interest/penalty, and subsequent issuance of SCN all showed that this was not self‑ascertainment as contemplated under Section 74(5).
Following established precedent (including the Karnataka DB decision in Union of India v. Bundl Technologies Pvt. Ltd. and other High Court decisions), money collected in such circumstances must be refunded with interest, irrespective of ongoing adjudication.

2.4 Final Directions

The writ petition was allowed.
The petitioner was held entitled to a refund of Rs. 10 crores together with simple interest at 6% per annum from 24.03.2023 till the date of payment.
The respondents were directed to refund this amount with interest within two months of receipt of the order.
All rival contentions in pending SCN/adjudication proceedings were expressly kept open; the Court did not decide the merits of the underlying tax dispute.

3. Statutory and Administrative Framework

3.1 Section 74(5) of the CGST Act, 2017

Section 74 applies to cases involving fraud, wilful misstatement or suppression of facts. Sub‑section (5) provides an option (not an obligation) to the taxpayer:

The person chargeable with tax may, before service of notice under sub‑section (1), pay the amount of tax along with interest under Section 50 and a penalty equal to 15% of such tax on the basis of his own ascertainment or as ascertained by the proper officer, and inform the proper officer in writing of such payment.

Key aspects:

The initiative is with the taxpayer (“may… on the basis of his own ascertainment”).
Payment must include tax + interest + 15% penalty.
It is a pre‑SCN settlement mechanism, not a collection tool during search.

3.2 Rule 142(2) of the CGST Rules, 2017

Rule 142(2) operationalises Section 74(5) (and the parallel Section 73(5)):

If, before notice, a taxpayer pays tax/interest/penalty under Section 73(5) or 74(5), he must inform the officer through Form GST DRC‑03.
The proper officer must then issue an acknowledgment in Form GST DRC‑04 electronically, confirming acceptance.

The DRC‑03 / DRC‑04 pairing is pivotal: DRC‑03 alone does not conclusively prove a valid, voluntary self‑ascertainment; DRC‑04 is the officer’s formal acknowledgment that the scheme under Section 73(5)/74(5) is being invoked.

3.3 CBIC Instruction No. 01/2022‑23 (GST – Investigation), dated 25.05.2022

This Instruction, issued pursuant to the Gujarat High Court’s directions in Bhumi Associates, squarely addresses “Deposit of tax during the course of search, inspection or investigation”. Its key clarifications, quoted and relied upon by the Court, are:

No “recovery” of tax dues should be made during search/inspection/investigation. Recovery under Section 79 is permissible only after due process – issuance of notice, adjudication, and demand order.
There is no bar on taxpayers making voluntary payments via DRC‑03, but such payments:
- Are initiated only by the taxpayer through his GST portal login.
- Are meant to discharge admitted/self‑ascertained liability under Section 73(5)/74(5).
Officers must inform taxpayers about the voluntary payment provisions but cannot coerce or force payments.
Complaints of coercion must be promptly inquired and strict disciplinary action taken in case of wrongdoing.

3.4 Supreme Court’s Decision in Radhika Agarwal v. Union of India (2025) 6 SCC 545

The High Court extensively quoted Radhika Agarwal, where the Supreme Court:

Approved and reinforced the CBIC Instruction of 25.05.2022.
Held that Section 74(5) concerns voluntary payments and does not authorise collection under force, coercion or threat of arrest.
Warned that threatening taxpayers with arrest to extract “self‑payments” violates fundamental rights and the rule of law.
Explicitly stated that taxpayers subjected to such coercion are entitled to approach courts and seek refund of amounts deposited.

Thus, the Supreme Court elevated what was already a strong High‑Court trend into a binding, national standard.

3.5 Constitutional Backdrop: Articles 265 and 300‑A

Article 265: “No tax shall be levied or collected except by authority of law.”
Article 300‑A: No person shall be deprived of his property save by authority of law.

The Karnataka High Court, following earlier decisions (e.g., KVR Construction, EBIZ.com, Bundl Technologies, Suretex Prophylactics), treats money coercively collected without adjudication or statutory basis as being held in violation of these constitutional guarantees, mandating refund.

4. Precedents Cited and Their Influence

The judgment draws on a wide range of Supreme Court and High Court decisions, reflecting a nationwide judicial consensus against coercive GST recovery during search. Key precedents include:

4.1 Dabur India Ltd. v. State of U.P. (1990) 4 SCC 113

The Supreme Court condemned governmental tactics that “coerce” citizens into paying duties which they contest:

Government may enforce payment only through legal steps, not “extra‑legal steps or manoeuvre”.
This sets the normative constitutional tone: tax collection through threats or pressure is impermissible.

The Karnataka High Court uses Dabur India to frame coercive recovery as institutionally unacceptable.

4.2 Radhika Agarwal v. Union of India (2025) 6 SCC 545

As noted above, Radhika Agarwal is central. The Supreme Court:

Took note of widespread complaints that GST officers compel or coerce taxpayers to deposit alleged dues under threat of arrest.
Analysed national data showing correlation between payments during investigation and reduced arrests, supporting the allegation that arrest power is used as a bargaining chip.
Confirmed that Section 74(5) is an optional, voluntary route for the assessee, and gives no right to the Department to extract payments.
Explicitly held that taxpayers subjected to coercion can seek refund of tax deposited, and that officers engaging in such practices must face consequences.

The Karnataka High Court treats this as the authoritative backdrop that must guide GST investigations, including in the present case.

4.3 Bhumi Associates v. Union of India (Gujarat HC, 2021)

This landmark Gujarat High Court decision issued four concrete directives to CBIC and State GST:

No recovery by cheque, cash, e‑payment or ITC adjustment during search under Section 67, in any circumstances.
Even if the assessee wishes to pay voluntarily via DRC‑03, he should be advised to do so the next day, after the search is over and officers have left.
Provide a complaint/grievance mechanism for assessees who allege forced payment during search.
Strict disciplinary action for officers violating these directions.

These directions led directly to Instruction No. 01/2022‑23. The Karnataka High Court uses this framework, often via decisions of other High Courts (Delhi, Punjab & Haryana), to evaluate the conduct in the present case.

4.4 Bundl Technologies Cases (Karnataka HC, Single Judge and Division Bench)

The case of Bundl Technologies Pvt. Ltd. (Swiggy) is particularly important because it originated in Karnataka:

The single judge held that large sums paid during investigation (late night and early morning) could not be treated as self‑ascertainment under Section 74(5), especially when:
- Investigation continued despite payment.
- The taxpayer expressly reserved the right to seek refund and denied liability.
- No DRC‑04 was issued.
The Division Bench (in appeal by the Union) upheld this view, clarifying that:
- Section 74(5) gives an option to pay, it is not a source of power to compel pre‑adjudication payment.
- Payments made under stress of investigation at “odd hours” are involuntary.
- Absence of contemporaneous admission of liability and non‑issuance of DRC‑04 undermine the claim of self‑ascertainment.
- Refund is due irrespective of subsequent SCN and pending adjudication.

The present judgment expressly relies on Bundl Technologies and adopts its reasoning, making it the controlling precedent within Karnataka on this point.

4.5 Suretex Prophylactics, Kesar Colour Chem (Karnataka HC)

In Suretex Prophylactics (India) Pvt. Ltd. v. Union of India and Kesar Colour Chem Industries v. SIO (affirmed in W.A. 1649/2024), this Court:

Held that amounts collected during investigation without adjudication are in the nature of pre‑deposit or coerced recovery, not tax duly payable.
Directed refund with interest, rejecting the Department’s argument that refund should await outcome of adjudication.
Emphasised that self‑ascertainment under Section 74(5) requires genuine voluntariness, which is absent when statements and payments occur under the shadow of search, late hours, or threat of arrest.

These decisions paved the way for the current case, which extends and applies the same logic to a still larger sum (Rs. 10 crores).

4.6 High Courts of Delhi, Punjab & Haryana and Gujarat

The judgment relies heavily on a series of decisions from other High Courts, demonstrating a clear, pan‑Indian trend:

Delhi High Court:
- Vallabh Textiles v. SIO: Deposits in the early hours during ongoing search, with no DRC‑04 and no SCN, were held to be non‑voluntary; refund ordered with 6% interest.
- Lovelesh Singhal v. Commissioner, Delhi GST: ITC reversal at 2:06 a.m. during inspection was held coerced; ITC restored.
- Mahavir Singh v. AC, CGST: Payment during search held involuntary and ordered to be refunded with interest.
- Makemytrip (India) Pvt. Ltd. v. UOI: In pre‑GST context, amounts paid during service‑tax investigation to secure bail were held coerced and refundable.
Punjab & Haryana High Court:
- Parsvnath Traders v. Principal Commissioner, CGST: Payment during search not treated as self‑ascertainment; refund of Rs. 50.70 lakhs with interest.
- Samyak Metals Pvt. Ltd. v. UOI, Modern Insecticides: Similar directions against retention of amounts collected during search without timely SCN/adjudication.
- Century Metal Recycling, Concepts Global Impex: In customs context, reiterated that without assessment and demand, amounts deposited cannot be appropriated.
Gujarat High Court:
- Bhumi Associates v. UOI: Provided the foundational guidelines against recovery during search.

The Karnataka High Court aligns itself with these authorities, emphasising that coercive collection during search is uniformly frowned upon across jurisdictions.

5. Court’s Legal Reasoning

5.1 Central Question: Voluntary Self‑Ascertainment or Coercive Recovery?

The fulcrum of the Court’s analysis is whether the payment of Rs. 10 crores on 24.03.2023 can be classified as:

a voluntary self‑ascertainment under Section 74(5), or
an involuntary, coerced recovery during search, prohibited by law and instructions.

The Court answers firmly in favour of the latter, based on a structured, multi‑factor examination (essentially a “voluntariness test”).

5.2 Key Factors Considered (Para 25, Sub‑clauses (i)–(xi))

(i) No Prior Notice, Demand or Pending Proceedings

Before the 24.03.2023 search:

No notice under Section 73 or 74 had been issued.
No adjudication, quantification or determination of tax, interest or penalty was underway.

This meant there was no crystallised demand and no obvious reason for the petitioner to make a large voluntary payment during search, unless under pressure.

(ii) Failure to Issue DRC‑04 Acknowledgment

Despite the DRC‑03 entries:

The Department never issued Form DRC‑04 to acknowledge and accept the payments as voluntary under Section 74(5).

Given Rule 142(2), this omission is treated as strong evidence that the payment was not processed or regarded as a genuine Section 74(5) self‑ascertainment.

(iii) No Contemporaneous Demand or Basis for Payment

At the time of payment, there was:

No formal demand under any provision of the CGST Act.
No contemporaneous order or quantified computation shared with the petitioner.

This undercuts the Department’s claim that the payment was a considered, voluntary act aligned with statutory mechanisms.

(iv) Absence of Detailed Quantification or Supporting Documents

Apart from bare DRC‑03 entries stating “CGST” and amounts, there were:

No working sheets, calculations, or explanation of how Rs. 10 crores was arrived at.
No contemporaneous letter from the petitioner admitting liability or explaining self‑ascertainment.

This absence of quantitative rationale is inconsistent with the structured nature of self‑assessment/self‑ascertainment under Section 74(5).

(v) Inherent Incongruity of Self‑Incriminating Voluntary Payment in a Fraud/Suppression Case

Section 74 applies to cases involving fraud or suppression. A taxpayer who is being searched on suspicion of such serious wrongdoing is unlikely to voluntarily make a large payment acknowledging the very misconduct alleged, especially:

before knowing whether Section 73 (non‑fraud) or Section 74 (fraud) proceedings will be initiated, and
without any clear quantification or opportunity for legal advice.

This behavioural and contextual improbability weighs against the Department’s narrative.

(vi) No Prior or Simultaneous Adjudication by the Department

The Department only issued an intimation in DRC‑01A on 17.02.2025 (long after the writ was filed) and an SCN in DRC‑01 thereafter. This confirms:

That no ascertainment had actually taken place on 24.03.2023; and
That the Rs. 10 crores could not have been a payment of “tax as ascertained by the proper officer” under Section 74(5).

(vii) Seizure of Records Made Self‑Ascertainment Practically Impossible

The respondents had seized:

On 23.03.2023: a laptop from the petitioner’s residence.
On 24.03.2023: multiple devices and records from the business premises, including account books, servers, desktops, mobiles, hard disks and laptops.

Given that all relevant records were in the Department’s custody at the time of payment, it was practically impossible for the petitioner to:

Scrutinise accounts;
Compute alleged liability, interest, and penalty; and
Form a reasoned, voluntary self‑ascertainment.

(viii) Incompatibility of Continuing Investigation with Section 74(5) Closure

Under the structure of Section 74:

If genuine self‑ascertainment and payment occur under Section 74(5), and are accepted, the matter should normally move towards closure or limited continuation only for any shortfall (Section 74(7)).
Here, the Department continued full investigation and later issued a comprehensive SCN, which is inconsistent with the claim that the Rs. 10 crores was an accepted self‑ascertainment payment.

(ix) Statutory Requirements of Section 74(5) Not Met (Tax + Interest + 15% Penalty)

Section 74(5) requires payment of:

Tax +
Interest under Section 50 +
15% penalty on such tax.

However, the DRC‑03 entries show:

Amounts paid only towards CGST “Tax” columns.
Interest and penalty columns are “Nil”.

Therefore, even on their face, the payments cannot qualify as Section 74(5) payments. This is a decisive statutory inconsistency.

(x) Human/Practical Improbability of Complex Self‑Computation During Search

Self‑ascertainment under Section 74(5) is not a mere button click; it requires:

Reviewing several tax periods and transactions,
Calculating interest at a discretionary rate (up to 18% / 24%), and
Computing 15% penalty on tax.

The Court held it is “highly improbable and physically/humanly impossible” for a taxpayer to do such detailed work:

In the midst of a high‑pressure search,
With officers present,
And with key records seized.

(xi) Violation of CBIC Instruction 01/2022‑23 and Judicial Directions

The collection of Rs. 10 crores:

Contravened CBIC’s own Instruction No. 01/2022‑23, which says there should be no “recovery” during search.
Ignored the judicial directions in Bhumi Associates, Vallabh Textiles, Lovelesh Singhal, etc., that even “voluntary” DRC‑03 should ordinarily be filed after the search ends and officers have left.

The Court treats this as further proof that the payment was not in conformity with law or instructions.

5.3 Conclusion on Voluntariness and Legality

On the cumulative assessment of all these factors, the Court concludes:

The Rs. 10 crores was obtained/collected during search and inspection, not as a free, informed, self‑initiated act of the petitioner.
The payment did not satisfy the statutory preconditions of Section 74(5) (in particular, lack of interest and penalty component, absence of ascertainment and acknowledgement).
The collection thus amounted to a coercive recovery without authority of law, in violation of both the CGST framework and Articles 265 and 300‑A of the Constitution.

Accordingly, the amount must be refunded with interest, following the line of authority in Bundl Technologies, Suretex, Vallabh Textiles, Parsvnath Traders, Samyak Metals and others.

5.4 Relationship with Pending Adjudication

A recurring Departmental argument in such cases is that refund should await completion of SCN/adjudication, or that the amount should be treated as “pre‑deposit”. The Court rejects this:

The right to refund arises from the illegality of the mode of collection at the time it was made; it is not dependent on the eventual tax liability.
Future adjudication under Section 73/74 is independent and can proceed on merits.
To allow the Department to retain money collected without authority of law would perpetuate a continuing violation of Articles 265 and 300‑A.

Thus, even though an SCN under Section 73/74 was issued later, it does not “cure” the illegality of the earlier coercive collection.

6. Impact and Broader Legal Significance

6.1 Consolidation of Anti‑Coercion Jurisprudence in Karnataka

The judgment firmly embeds, within Karnataka, the principles earlier laid down in:

Bundl Technologies (SJ and DB),
Suretex Prophylactics,
Kesar Colour Chem (and DB affirmation), and
Various other High Court rulings.

GST officials in Karnataka now operate under a clear binding precedent that:

They cannot treat large payments during search as conclusive self‑ascertainment merely because DRC‑03 was filed.
Any such collection is highly vulnerable to refund orders with interest if challenged.

6.2 Strengthening the Practical Force of CBIC Instructions

Although CBIC Instructions are executive instruments, the Court’s reliance on Instruction 01/2022‑23 and Supreme Court’s approval in Radhika Agarwal elevates them:

From being mere internal guidelines to becoming benchmarks of legality against which officer conduct will be judged.
Non‑compliance can now directly trigger judicial findings of illegality and consequent orders of refund and potential disciplinary proceedings.

6.3 Clarifying the Scope of Section 74(5)

The judgment furthers doctrinal clarity that:

Section 74(5) is a taxpayer’s option – not a departmental tool for pressure‑based recovery.
For a payment to qualify under Section 74(5), it must:
- Be preceded by genuine self‑ascertainment,
- Include tax + interest + 15% penalty, and
- Be acknowledged with DRC‑04.
Payments that do not satisfy these features cannot be retro‑labelled as Section 74(5) payments to justify retention.

6.4 Deterring Misuse of Search and Arrest Powers

The judgment, read with Radhika Agarwal, signals that:

Search and arrest powers are not collection tools; they are investigatory and penal powers subject to strict safeguards.
Using the threat of arrest to procure DRC‑03 payments is likely to:
- Render the payment refundable, and
- Expose the officers involved to potential disciplinary and even legal consequences.

6.5 Protection of Taxpayer Rights and Compliance Culture

By mandating refund with interest, the Court:

Protects taxpayers from “pay‑now, contest‑later” coercive practices in the absence of legal foundation.
Promotes a compliance culture based on due process and adjudication, rather than fear and intimidation.

Ironically, this is likely to improve long‑term voluntary compliance, as taxpayers gain confidence that the system will not tolerate arbitrary extractions.

7. Complex Concepts Simplified

7.1 What Is “Self‑Ascertainment” under Section 73(5)/74(5)?

“Self‑ascertainment” means:

The taxpayer independently reviews his books and transactions.
He identifies an error (e.g., underpaid tax or wrongly claimed ITC).
He calculates the exact amount of tax due, plus applicable interest (and penalty in Section 74 cases).
He then decides, of his own free will, to pay it before receiving any notice, to avoid or reduce penalties and litigation.

It is akin to a voluntary confession and settlement initiated by the taxpayer – not something done under a GST officer’s diktat.

7.2 Difference between “Recovery” and “Voluntary Payment”

Recovery:
- Is when the Department takes money to satisfy a tax liability.
- Legally, it can happen only after:
  - A notice,
  - Adjudication,
  - Demand order, and
  - Non‑payment within the stipulated time.
- Section 79 of CGST governs recovery (e.g., by attachment, sale, garnishee orders), and it cannot be invoked during mere investigation.
Voluntary payment:
- Is when a taxpayer, without being forced, pays tax he believes is due.
- He uses DRC‑03 on the GST portal to deposit the amount.
- This is meant to resolve his own admitted liability, not to satisfy a demand forced by the officer.

In practice, the line is crossed when officers pressure, threaten, or corner the taxpayer into making such “voluntary” payments.

7.3 DRC‑03 and DRC‑04 in Simple Terms

DRC‑03: An online form used by the taxpayer to inform the Department that he has paid an amount voluntarily or against an SCN.
DRC‑04: An online acknowledgment issued by the Department confirming that it accepts the DRC‑03 payment under the voluntary payment scheme.

In genuine voluntary scenarios, you expect to see DRC‑03 (from taxpayer) + DRC‑04 (from officer). When only DRC‑03 exists, especially during search, without DRC‑04, courts are increasingly sceptical.

7.4 Articles 265 and 300‑A – Why They Matter in Tax Cases

Article 265 ensures that the State cannot levy or collect any tax unless a valid law authorises both the levy and the method of collection.
Article 300‑A protects property rights: money forcibly taken without lawful authority remains the citizen’s property, and the State must return it.

When GST officials collect money during search without an adjudicated demand or statutory basis, courts deem such collection to be in breach of these Articles and order refunds with interest.

8. Conclusion: Key Takeaways

No coercive GST recovery during search: The judgment reinforces that officers cannot demand or secure payments during search/inspection/investigation as a form of “recovery”.
Self‑ascertainment is strictly voluntary and structured: For a payment to qualify under Section 74(5), it must be genuinely voluntary, reasoned, and encompass tax, interest and 15% penalty, followed by DRC‑04 acknowledgment.
Payments during search are presumptively suspect: Especially where:
- They are made during the currency of search,
- Records are seized,
- No DRC‑04 is issued,
- There is no prior notice/quantification, and
- Investigation and SCN continue afterwards.
Right to refund is independent of eventual tax liability: Even if the taxpayer may later be found liable in adjudication, money collected without authority of law must be refunded with interest for the intervening period.
Alignment with Supreme Court and national jurisprudence: The judgment faithfully applies Radhika Agarwal and mirrors Delhi, Punjab & Haryana, and Gujarat High Courts, contributing to a coherent national standard on coercive recovery.
Operational message to GST officers: Any deviation from CBIC’s 25.05.2022 Instruction and judicial guidelines on deposit during search can:
- Invalidate the collection,
- Require refund with interest, and
- Potentially trigger disciplinary consequences.

In essence, Sri J Ramesh Chand v. Union of India underscores that GST enforcement must operate within strict legal and constitutional boundaries. The power to search, seize and even arrest cannot be converted into a mechanism for de facto tax collection. Any amount extracted in breach of these limits is not tax at all, but an unlawful deprivation of property – and must be returned.