Pre-Deposit Refund Delayed? Courts Say That's Unconstitutional
"Justice delayed is justice denied," they say. But what if it's delayed not by courts—but by portals, procedural rigidity, and a misinterpretation of the word "may"?
This is the story of a taxpayer who fulfilled every requirement under the law, won their appeal fair and square, and yet had to knock on the doors of the High Court just to get back what was rightfully theirs—a statutory pre-deposit made to maintain an appeal under Section 107 of the GST Act.
This tale of delay, digital roadblocks, and legal interpretation comes from the Jharkhand High Court's recent ruling in BLA Infrastructure Private Limited v. State of Jharkhand, [2025(01)LCX0394].
The Facts: An Appeal Allowed, but Refund Denied
Company: BLA Infrastructure, GST-registered in coal handling and transportation.
Issue: Served a Show Cause Notice under Section 74 of the JGST Act for alleged mismatches in GSTR-1 and GSTR-3B returns (September 2019).
Order: Ex parte order passed in August 2021 demanding Rs. 16,90,442 (tax + interest + penalty).
Action: Filed statutory appeal under Section 107 and deposited 10% of disputed tax (mandatory under Section 107(6)(b)).
A pre-deposit is a mandatory payment of 10% of the disputed tax amount, required for filing an appeal under Section 107(6) of the CGST Act. It is not a tax liability but a condition precedent to access appellate remedies.
Outcome: Appeal allowed by Appellate Authority in February 2022.
Refund Claim: Applied for refund of pre-deposit—but only in September 2024.
Department's Response: Issued Deficiency Memo (FORM GST RFD-03), stating refund claim was time-barred under Section 54(1) of CGST Act.
Department's Reference: Circular No. 125/44/2019-GST allows refund only within 2 years from the "relevant date."
GST Portal: Automated system blocked refund due to deficiency memo.
Next Step: BLA filed writ petition in High Court [W.P.(T) No. 6527 of 2024] seeking relief.
The Core Legal Issue: Is the 2-Year Time Limit in Section 54(1) Mandatory?
The heart of the matter lay in Section 54(1) of the CGST Act, which states:
"(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:"
The word "may" became the focal point of the case. While the Department adopted a literal and rigid interpretation—treating the two-year time limit as mandatory and asserting that neither the jurisdictional officer nor the portal had the authority to accept refund claims filed beyond this period—the petitioner relied on judicial precedent to argue otherwise.
Specifically, the petitioner cited the decision of the Madras High Court in Lenovo India Pvt. Ltd. v. Joint Commissioner of GST [2023(11)LCX0162], where it was held that the use of "may" in Section 54(1) indicates that the provision is directory, not mandatory:
"15.7 Thus, a reading of the section 54 (1) of the CGST Act would make it clear that the assessee can make the application within two years. The terms used in said section "may make application before two years from the relevant date in such form and manner as may be prescribed", which means that the assessee may make application within two years and it is not mandatory that the application has to be made within two years and in appropriate cases, refund application can be made even beyond two years. The time-limit fixed under section 54 (1) is directory in nature and it is not mandatory. Therefore, even if the application is filed beyond the period of two years, the legitimate claim of refund by the assessee cannot be denied in appropriate cases."
Thus, the precedent supported the petitioner's contention that the refund claim could not be mechanically rejected solely on the ground of time limitation if otherwise legitimate.
The High Court's Observations: A Matter of Justice and Constitutional Authority
Constitutional Principle at the Core – Article 265:
The Jharkhand High Court grounded its decision in Article 265 of the Constitution, which mandates:
"No tax shall be levied or collected except by authority of law."
The Court held that retention of a statutory pre-deposit, after the assessee succeeds in appeal, lacks legal sanction and directly violates this constitutional safeguard.
Such retention, without lawful backing, was termed "plainly impermissible".
Section 54(1) – ‘May' Is Directory, Not Mandatory
The Court carefully analyzed the wording of Section 54(1) of the CGST Act, which uses the term "may make an application before the expiry of two years…".
It held that the word "may" in this context is directory, not mandatory, especially when it comes to the refund of a statutory pre-deposit — which is a substantive right that arises automatically when a taxpayer wins an appeal.
The Court cautioned that treating the two-year timeline as strictly mandatory would unjustly deny refunds even when there is no delay or fault on the taxpayer's part. Such an outcome would defeat the intent of the law.
To support this view, reliance was placed on well-settled principles of statutory interpretation laid down by the Hon'ble Supreme Court in Muskan Enterprises & Anr. v. State of Punjab & Anr. and Rakesh Ranjan Shrivastava v. State of Jharkhand & Anr. The Court has consistently held that the use of the word "may" in a statute does not automatically imply discretion, just as the use of "shall" does not always make a provision mandatory. In a recent judgment, the Court emphasized that the
real test lies in examining the context, purpose, and consequences of the provision within the overall scheme of the legislation. The interpretation must be guided by the intent of the legislature, not merely the literal meaning of the words. A clause that appears directory in form may, in substance, be mandatory—and vice versa—depending on whether a strict reading would lead to injustice or undermine the object of the law. Therefore, while words like "may" and "shall" are important textual elements, they are not determinative on their own. What ultimately matters is a purposive and contextual reading that ensures the statute operates justly and in line with its intended purpose.
Applying these principles, the High Court held that a procedural directory provision like Section 54(1) cannot override a substantive right to refund.
Refund of Pre-deposit Is a Vested Right
Once an assessee succeeds in appeal, the refund of the pre-deposit becomes an automatic consequence.
The department has no discretion to reject such a refund application on the ground of limitation under Section 54(1).
The Court warned that doing so would amount to unlawful appropriation of public money and violate both constitutional and statutory rights.
Unjust Enrichment Not Applicable
The High Court emphasized that pre-deposit is made from the assessee's own funds and not passed on to customers — so refunding it doesn't lead to unjust gain.
It clearly said that the refund cannot be refused on the ground of unjust enrichment.
Limitation Act Angle – Article 137
Apart from GST law, the Limitation Act allows a person to file a case to recover money within 3 years. If we say the 2-year limit in Section 54 is strict and must always be followed, then it would stop a person from even filing a normal case in court after 3 years to get their money back. That can't be what the law meant to do.
The court says that kind of harsh result was not intended by the law. Such a rigid interpretation would lead to manifest injustice and defeat the entire objective behind granting refund of pre-deposits.
Final Conclusion – Retention Is Unconstitutional
The Jharkhand High Court held that retaining the statutory pre-deposit after the appeal is allowed — solely because the refund was filed beyond two years — is:
Contrary to Article 265,
Against the intent of the CGST Act, and
Unjust and unreasonable in law.
Hence, the refund must be granted, and directory procedural requirements cannot override vested substantive rights.
The Final Verdict: Refund Ordered, Delay Condemned
In the end, the Court ruled in favor of the petitioner, holding that the time limit in Section 54(1) is not mandatory in the context of pre-deposit refunds following a successful appeal. Thus, the High Court:
Quashed the Deficiency Memo dated 06.11.2024 rejecting the refund claim as time-barred.
Directed the department to process the refund within six weeks.
Ordered payment of interest under Section 54 along with the refund.
This judgment reinforces a fundamental message: procedural timelines cannot override constitutional guarantees and statutory entitlements. When the law grants a right—like refund of pre-deposit after a successful appeal—that right must be honoured fully and fairly.
Key Takeaways: What This Judgment Means for Taxpayers
1. Pre-deposit refunds are not hit by the limitation under Section 54(1) if the appeal is allowed— especially when the delay is procedural and not intentional.
2. The use of "may" in Section 54(1) indicates directory intent, and Courts can intervene to prevent procedural technicalities from defeating justice.
3. Circulars cannot override statutory rights, particularly those rooted in appellate orders or constitutional protections like Article 265.
4. GST officers must avoid hyper-technical interpretations that result in unjust enrichment of the State at the cost of taxpayers.
CBIC Already Clarified This—So Why the Confusion?
Interestingly, even before the Jharkhand High Court's ruling, the CBIC had already attempted to clarify the legal position. Through a Corrigendum dated 25th October 2024 to Circular No. 237/31/2024-GST, the CBIC explicitly stated:
"However, it is clarified that said restriction on refund under section 150 of the Finance (No. 2) Act, 2024 will not apply to the refund of an amount paid as pre-deposit by the taxpayer as per sub-section (6) of section 107 or sub-section (8) of section 112 of the CGST Act, at the time of filing of an appeal, where such appeals are decided in favor of the said taxpayer."
This should have put to rest any confusion arising from Section 150 of the Finance (No. 2) Act, 2024, which generally bars refunds of tax or ITC that would not have been paid or reversed had Section 118 (retrospectively amending Section 16 of the CGST Act) been in force from July 1, 2017. However, Section 150 has no bearing on statutory pre-deposits made to pursue an appeal. These are not in the nature of tax dues but are conditional payments for access to appellate remedy—and must be refunded once the appeal succeeds.
Yet, despite this clarification, the Department continues to invoke Section 54(1) to reject refund applications of pre-deposits, citing the two-year limitation. Such a stand is not only legally untenable but also defeats the very purpose of statutory safeguards. It risks reducing appellate success to a hollow victory if taxpayers are forced to fight a second battle just to get their own money back.
Final Words: The Triumph of Substance Over Form
This case reinforces an essential principle of tax jurisprudence: the law exists to serve justice, not to obstruct it. When a taxpayer wins their appeal, the refund of the pre-deposit is not a favor—it's a statutory and constitutional right. No portal glitch, circular misreading, or procedural excuse can justify withholding it.
In BLA Infrastructure's fight for refund lies a broader truth: when justice is won, bureaucracy must not stand in its way."
"Justice is not complete until the refund is paid."
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.