GST / Indirect Tax : Depositing Amount under Protest and Its Legal Effect

 GST / Indirect Tax : Depositing Amount under Protest and Its Legal Effect

Introduction

In a recent decision the issue was related to depositing the amount under protest by a person who has been issued notice by the Tax Department. In this case, personal presence of the Tax Department officials Surender Thakur and Ms. Poonam Thakur was directed. Ms. Poonam Thakur even failed to give satisfactory explanation. 

In Shyama Power India Ltd v. Union of India [2025] GCtR 1271 (HP), after the Company had deposited the amount under protest, the i.e. Commissioner, State Taxes and Excise passed an order under Section 74 of the CGST Act, 2017 on 02.12.2023, whereby an interest of Rs. 1,32,34,923/- and penalty of Rs. 1,11,45,134/- was levied on petitioner without determining the tax demand on account disallowance of alleged wrong availed ITC and by treating the amount deposited ‘under protest’ to be an admitted liability.

The petitioner categorically pleaded that the amount in question was deposited under protest without admitting the liability. The petitioner further stated in the application that the appeal could not be filed in the case of nil basic demand.

While deciding the petition it was rightly commented that the concerned official of Tax Department refused to rectify order dated 02.12.2023 on the ground that there was no mis-match between show cause notice dated 30.09.2023 and DRC-07 dated 02.12.2023. Concerned official of Tax Department did not address the basic point raised by the petitioner in rectification application questioning the creation of tax liability so as to enable the petitioner agitate before the Appellate Authority.

It was observed at page 7 that "once the petitioner had deposited the amount ‘under protest’, the same could not have been considered to be an admission of liability because the necessary corollary of deposit under protest is that the amount towards the alleged liability has been deposited without admitting the liability and inherent therein is his right to challenge the order." "‘Under protest’ has been defined in Black’s Law Dictionary Tenth Edition, Page 1419 as “3. A formal statement, usu. in writing disputing a debt’s legality or validity but agreeing to make payment while reserving the right to recover the amount at a later time. *The disputed debt is described as ‘under protest’. 4. Tax. A taxpayer’s statement to the collecting officer that payment is being made unwillingly because the taxpayer believes the tax to be invalid." 

It was also explained that the adjudicating authority completely erred and failed to take note that Input Tax Credit to the tune of Rs. 1,11,45,134/- could not have been reversed, merely on the basis of the suspicion without carrying out any independent investigation coupled with other evidence. Tax Department's Official was required to conduct an impartial inquiry regarding the aforesaid amount and could not have based its decision solely on summary of show cause notice in Form DRC-01.

Conclusions 

While the findings in Shyama Power (Supra) to the extent of setting aside the Order of Tax Department was fine, it would have been proper if costs should have been imposed which should have been recovered from the salary of the concerned Tax Department official responsible for taking a wrong decision. Apart from imposing costs, initiating disciplinary action against the concerned Department official was also required to ensure that Tax Department officials stop taking such decisions which are legally unsustainable. The reason being : due to wrong decision by Tax Department official, a person has to suffer and has to spend money on litigations. In such situation, a Judgment of Hon'ble Supreme Court in 2013 and Assistant Director, ED v. Kamal Ahsan [2022] GCtR 1550 (SC) should have been invoked.