The Patna High Court has held that the Revenue cannot withhold a GST refund merely because an appeal concerning the assessee is pending before the GST Appellate Tribunal.
The bench of Justice Anil Kumar Sinha and Justice Vikash Kumar that where the department seeks to withhold the refund during the pendency of an appeal, the statutory mechanism under Section 54(11) of the CGST/BGST Act, 2017 must be specifically invoked and followed.
The bench directed the Commissioner of State Tax to take a specific decision under Section 54(11), after issuing a proper show cause notice and providing the taxpayer an opportunity of hearing.
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The petitioner/assessee is a works contractor registered with the Munger Circle of the Commercial Tax Department. The dispute arose over its claim for refund of ₹1.75 crore lying in its Electronic Cash Ledger.
The petitioner had initially applied for the refund on December 15, 2023. However, the refund application was rejected on May 31, 2024, with the authorities alleging that the petitioner had availed ineligible Input Tax Credit of ₹24.13 crore for FY 2022-23.
According to the order, the alleged ineligible ITC was arrived at by analysing inward e-way bills generated by suppliers as well as the petitioner’s GSTR-3B and GSTR-2A records.
The taxpayer challenged the rejection before the Appellate Authority. The Appellate Authority subsequently set aside the refund rejection order on December 31, 2024.
The department thereafter filed a revision application on January 28, 2025, before the Commissioner of State Taxes under Section 108 of the CGST/BGST Act, 2017, challenging the appellate order.
While the dispute remained pending, the petitioner filed a fresh refund application on February 5, 2025.
On March 1, 2025, the adjudicating authority issued a Deficiency Memo in Form GST RFD-03. The notice stated, based on data available on the GSTBO portal, that the refund was not admissible under Section 54 of the CGST/BGST Act read with Rule 90 of the CGST/BGST Rules, citing undischarged assessed tax liability for previous years.
The petitioner approached the Patna High Court challenging the deficiency memo and seeking directions for release of the ₹1.75 crore refund.
During the pendency of the writ proceedings, the Revenue also filed an appeal before the GST Appellate Tribunal, Patna, under Section 112 of the CGST/BGST Act on June 30, 2026.
Before the High Court, the petitioner argued that the Revenue could not simply withhold the refund because an appeal had been filed before the Tribunal.
Relying upon Section 54(11) of the CGST Act, the petitioner contended that the Commissioner must first form an opinion that payment of the refund would adversely affect the Revenue in the pending appeal.
The provision also requires the taxable person to be given an opportunity of being heard before the refund is withheld.
The petitioner submitted that no such order had been passed by the Commissioner in the present case. Therefore, according to the petitioner, the mere pendency of the Revenue’s appeal could not legally justify withholding the refund.
The State took the position that the communication issued to the taxpayer was a show cause notice under Rule 90(3) of the CGST Rules, 2017.
It argued that the petitioner should have awaited the final decision of the Joint Commissioner instead of approaching the High Court, making the writ petition premature.
The High Court examined the statutory framework governing deficiency notices and the circumstances in which a refund can be withheld during the pendency of an appeal.
The Bench noted that Rule 90(3) provides a mechanism for dealing with deficiencies in refund applications.
Under the provision, where deficiencies are noticed, the proper officer is required to communicate those deficiencies to the applicant through Form GST RFD-03 on the common portal, requiring the applicant to file a fresh refund application after rectifying the deficiencies.
However, the Court separately examined the Revenue’s contention regarding withholding the refund because of the pending appellate proceedings.
The crucial question was whether the Revenue had undertaken the statutory exercise contemplated under Section 54(11)before withholding the taxpayer’s ₹1.75 crore refund.
The Patna High Court found that the records did not indicate that the Commissioner had undertaken any proceeding or exercise under Section 54(11) that could justify withholding the refund.
The Court specifically recorded that there was no proceeding or exercise by the Commissioner under Section 54(11) warranting the Revenue to withhold ₹1.75 crore of the petitioner.
This became the central legal issue in the case.
The Court therefore did not permit the Revenue to treat the mere pendency of its appeal before the GST Appellate Tribunal as sufficient, by itself, to justify withholding the refund.
Instead of ordering an unconditional release of the refund, the High Court directed the Commissioner to undertake the statutory process under Section 54(11).
The Commissioner was directed to pass a specific order regarding payment or withholding of the refund during the pendency of the Tribunal appeal.
Importantly, the Court directed that this exercise must be carried out only after issuing a show cause notice and providing the petitioner with a proper opportunity of hearing.
The High Court also prescribed a detailed timeline for completion of the process.
The Commissioner has been directed to issue the show cause notice to the petitioner within one week from the date of the judgment. The notice must be served through the common portal, SMS and email.
The petitioner has been granted a further one week to submit its reply after receiving the notice.
Thereafter, the Commissioner must fix a date for personal hearing after giving prior information to the petitioner. Following the hearing and consideration of the taxpayer’s reply, the Commissioner must pass a reasoned order within one month from the date on which the hearing concludes.
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