The Supreme Court stayed the operation of the Rajasthan High Court’s August 17, 2026 order concerning a ₹5.28 crore GST deposit made during a DGGI search, and issued notice in the matter, with the case listed for November 5, 2026. 

The Rajasthan High Court has directed the competent authority of the Directorate General of Goods and Services Tax Intelligence (DGGI) to pass a reasoned and speaking order on the withholding of ₹5.28 crore deposited during a GST search, after noting that the amount had remained with the department for more than eight months without any crystallised tax demand or initiation of corresponding proceedings.

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The Court, however, did not adjudicate the taxpayer’s entitlement to refund at this stage and left all rival contentions open. 

The matter arose from a search conducted by DGGI officers on December 18, 2025, at the factory premises of the taxpayer as well as the residential premises of its Director. The search was carried out under Section 67(2) of the Central Goods and Services Tax Act, 2017.

The factory search concluded at around 4:00 PM on December 18, 2025, while the search at the residential premises continued for more than 30 hours and concluded around 6:00 PM on December 19, 2025. Panchnamas were subsequently prepared. 

During the proceedings, the company’s Director and Accountant were summoned and their statements were recorded.

According to the taxpayer, the statements were recorded under mental stress and coercive circumstances, accompanied by an apprehension of arrest. It alleged that the search team insisted upon payment of tax based on rough estimates and indicated that the premises would not be released until the amount was deposited. 

The taxpayer claimed that it informed the officers that there were insufficient funds in its bank account and was advised to arrange money from family members, relatives or friends.

Accordingly, funds were arranged from different sources and ₹5.28 crore was deposited into the taxpayer’s Electronic Cash Ledger.

The taxpayer further alleged that the officers thereafter compelled it to access the GST portal and themselves filed Form GST DRC-03 for the amount, without explaining the nature or contents of the filing. 

The taxpayer subsequently submitted a representation on December 24, 2025, seeking refund of the amount. It maintained that the deposit had been made under pressure and not out of free will.

It also denied allegations of fraud, suppression or misstatement and stated that its transactions were duly recorded in its regular books of account. The taxpayer expressed willingness to provide all information required by the department and have its liability adjudicated in accordance with law. 

Before the High Court, the taxpayer argued that the ₹5.28 crore could not have been recovered during the search because its tax liability had not yet been determined.

It was submitted that Sections 73 and 74 of the CGST Act contemplate a statutory process involving a show cause notice, opportunity of representation and hearing, followed by determination of tax, interest and penalty.

According to the taxpayer, recovery could follow only after such determination. It therefore contended that collection of tax during a search, before determination of liability, was contrary to the statutory scheme and offended Article 265 of the Constitution, which provides that no tax shall be levied or collected except by authority of law.

The taxpayer also invoked Article 300A, contending that withholding the amount amounted to deprivation of property without authority of law. 

It further argued that statements recorded in haste and under the control of departmental officers could not automatically be regarded as voluntary admissions or form the basis for adverse proceedings.

The department disputed the allegations of coercion, harassment and forced recovery.

According to the respondents, the investigation had revealed substantial incriminating material against the taxpayer, including forensic analysis of seized Excel data, WhatsApp communications, coded invoices and statements of the taxpayer’s employees.

The department maintained that the ₹5.28 crore was deposited voluntarily through Form DRC-03 after the taxpayer was confronted with the incriminating material. It also argued that the taxpayer’s December 24 representation was an afterthought because no allegation of coercion had been raised during the search proceedings. 

The department further submitted that the investigation remained underway and that statements of buyers were being recorded and transactions were being independently verified.

Department Relies on Statements and Audio-Video Recordings

The department specifically disputed the taxpayer’s allegation that the statements had been obtained under pressure.

It submitted that the entire proceedings were covered by audio-video recordings, which, according to the department, demonstrated that the statements were recorded voluntarily and professionally.

The respondents also stated that the Director had admitted irregularities during the investigation and assured the department that the tax liability would be discharged after proper calculation. The department argued that the subsequent allegation of coercion, raised days later, lacked contemporaneous supporting evidence. 

The department also placed reliance on statements of buyers allegedly connected with the transactions under investigation.

One such buyer, the proprietor of M/s Dhanlaxmi Steel Suppliers, was stated to have admitted receiving goods through a network involving M/s Mahaveer Trading Company without proper invoices. The department stated that approximately 50 vehicles carrying consignments had been received on the basis of dummy invoices. 

After hearing the parties, the Rajasthan High Court observed that the dispute should initially be examined by the competent authority.

The Court noted that the taxpayer had already submitted a representation dated December 24, 2025, and that the department itself submitted that the representation would be considered and a speaking order would be passed. 

The Court therefore did not decide whether the taxpayer was entitled to a refund of ₹5.28 crore.

It observed that the dispute involved questions of fact, particularly concerning whether the amount had been deposited voluntarily or under pressure. The Court also noted the department’s submission that directing refund at that stage could have wider repercussions because, according to the department, similarly situated assessees had deposited amounts aggregating to nearly ₹160 crore. 

A significant aspect of the judgment was the Court’s observation concerning the continued withholding of the money.

The Court noted that more than eight months had passed since the amount was deposited, yet no proceedings had been initiated against the taxpayer and no tax demand had been crystallised.

The Court stated that the competent authority must address the reasons for which the amount continued to be withheld in these circumstances. 

The High Court accordingly disposed of the writ petition by directing the competent authority, namely the Additional Director General, to pass a speaking order.

The order must specifically deal with the issues raised by the taxpayer in its representation and explain why the ₹5.28 crore had continued to remain withheld for more than eight months, particularly when there was neither corresponding initiation of proceedings nor a crystallised tax demand. 

The Court directed that the order be passed as expeditiously as possible and preferably within four weeks from the date the judgment was uploaded on the Court’s website. The taxpayer was also given liberty to appear before the competent authority and make submissions.

Importantly, the Court clarified that its order should not be treated as an expression of opinion on the merits of the rival contentions, leaving all issues open for consideration. 

On September 21, 2026, a Bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva issued notice, returnable on November 5, 2026.

The Supreme Court directed that the operation of the Rajasthan High Court’s August 17, 2026 judgment and order would remain stayed until the next hearing. Consequently, no orders are to be passed on the taxpayer’s representation until the matter is taken up next by the Supreme Court.

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