The Bombay High Court has quashed provisional attachments of the bank accounts of an RBI-authorised payment aggregator, holding that suspicion of involvement in an online gaming syndicate, without cogent material connecting the company to GST evasion, cannot justify freezing its accounts under Section 83 of the Central Goods and Services Tax Act, 2017.
The Bench of Justice M. S. Karnik and Justice Sandesh D. Patil found that the attachment orders rested on vague allegations and failed to establish the statutory grounds necessary for exercising the power. The merchant settlement funds held in the company’s escrow accounts were impressed with a trust and did not belong to the payment aggregator. Those funds, therefore, could not be attached as its property under Section 83.
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The dispute arose from an investigation conducted by the Directorate General of GST Intelligence, Hyderabad Zonal Unit, into an alleged organised online money gaming syndicate.
According to the department, the syndicate used fintech companies and shell merchant establishments to route and layer funds generated through online gaming activities without paying the applicable GST. The department alleged that 1Pay had emerged as one of the entities involved in routing those funds.
The company, incorporated in January 2019, received RBI authorisation to operate as an online payment aggregator in May 2024. In June 2026, it received authorization to operate as both an online and offline payment aggregator.
Its current and escrow accounts maintained with HDFC Bank, ICICI Bank, Kotak Mahindra Bank and IDFC Bank were provisionally attached during August 2026. The company approached the High Court on September 3, 2026, challenging the attachments.
During the proceedings, the company also challenged subsequent orders that permitted limited transactions while continuing the remaining restrictions.
Senior Advocate Darius Shroff, appearing for the company, argued that the jurisdictional conditions for provisional attachment under Section 83 had not been fulfilled.
The company submitted that it operated a legitimate payment platform serving numerous merchants, including government bodies and public institutions. It referred to entities such as the Government of Bihar, Mumbai University, the Institute of Chartered Accountants of India, IRCTC and MHADA to demonstrate the established nature of its operations.
It contended that the prolonged freeze had severely disrupted its business and affected funds payable to third-party merchants.
The company also challenged the orders disposing of its objections as vague and cryptic. Although the authorities had permitted certain payments relating to government entities, restrictions continued over the remaining accounts and funds.
The department defended the attachments by alleging that the company had failed to cooperate with the investigation and had not supplied documents promised during the recording of statements of its directors and key managerial personnel.
It submitted that the company’s principal and additional places of business were found locked on August 10, 2026. According to the department, relevant records were unavailable at the premises and the server was empty.
The company had explained that employees were working from home because its office was being shifted. The department disputed that explanation and alleged that material relevant to the investigation might have been moved to an undisclosed location.
DGGI further claimed that approximately 88 merchants using the platform were non-existent or non-functional at their declared business premises and were allegedly involved in online money gaming.
It argued that the company’s potential liability was under investigation and that attachment could also extend to a person falling within Section 122(1A) of the CGST Act. The department maintained that the restrictions were necessary to protect revenue against possible diversion of funds.
The central issue was whether the authorities had established a lawful basis to provisionally attach the payment aggregator’s accounts under Section 83.
The Bench examined whether the material demonstrated the company’s connection to GST liability, whether attachment was necessary to protect government revenue, and whether merchant funds held in escrow could be treated as property belonging to the company.
Relying on the Supreme Court’s decision in Radha Krishan Industries v. State of Himachal Pradesh, the Court reiterated that provisional attachment is a drastic power whose statutory conditions must be strictly satisfied.
The formation of the requisite opinion must rest on tangible material showing why attachment is necessary to protect revenue. A suspicion of wrongdoing or a prima facie allegation on the merits does not, by itself, establish that necessity.
The Bench also emphasised that proportionality forms part of the lawful exercise of the attachment power.
Examining the attachment orders, subsequent partial defreezing orders and the department’s affidavit, the Court found that the allegations lacked essential particulars.
The orders did not identify the specific transactions, the entities involved, the manner in which GST had allegedly been evaded, or the payment aggregator’s role in that evasion.
The Bench observed that the material largely concerned suspected money laundering by unnamed third parties, without identifying any GST liability of the company itself.
It also found no material establishing the statutory basis for attaching the company’s property as that of a taxable person or a person covered by Section 122(1A).
The Court noted that the names, identities and basic transaction details of the 88 allegedly suspicious merchants had not been disclosed in the orders or even in the department’s affidavit.
Further, the GSTR-1 information relied upon by the department reflected commission invoices issued by the company. The authorities had not explained the precise illegality involving those merchants or connected it to the company’s alleged participation in GST evasion.
Considering the company’s role as a payment aggregator for several government entities, the Bench also accepted that it could not be treated as a fly-by-night operator.
A significant aspect of the judgment concerned the ownership of funds lying in the escrow accounts.
The Court noted that HDFC Bank had informed the authorities that the account maintained with it was a regulated escrow account under the RBI’s payment aggregator guidelines. The balances represented merchant settlement amounts payable to various beneficiaries, including public sector and government-linked merchants.
The Bench held that these funds were held in trust and were not the company’s property. Consequently, they could not be attached under Section 83 as property belonging to the payment aggregator.
The Court also referred to the Delhi High Court’s decision in Zhudao Infotech Private Limited v. Principal Additional Director General. That decision addressed attachment of a payment aggregator’s accounts in connection with alleged illegal gaming activities and recognised that its accounts could not be attached to recover potential third-party liabilities where the aggregator itself was not being held liable on the transactions.
The Bench observed that much of the department’s defence centred on the company’s alleged non-cooperation. It recorded that the company had indicated its willingness to cooperate concerning the 88 entities mentioned in the affidavit.
However, the Court found that the attachment orders could not be sustained through explanations subsequently offered in affidavits. The record did not supply the cogent and credible material required to justify the exercise of Section 83.
The department’s assertion that reasons had been recorded in its official file, and later stated in its affidavit and partial defreezing orders, did not persuade the Bench that the statutory test had been met.
The High Court concluded that the provisional attachments reflected a clear failure to apply the requirements of Section 83.
It held that the opinion supporting attachment was based entirely on suspicion and that cogent and credible material was absent. The safeguards laid down in Radha Krishan Industries had therefore not been satisfied.
The petition was allowed in terms of prayer clauses seeking to quash the provisional attachments and the subsequent partial defreezing orders to the extent that they continued the attachments. No order as to costs was made.
The operative relief concerned the account attachments; the judgment did not determine the final merits of the alleged GST evasion.
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