Refund of Pre Deposit for Appeal under GST – Supreme Court Ruling 2026

Introduction

Refund of pre deposit for appeal under GST is an issue that has repeatedly led to disputes between taxpayers and the tax department, despite the substantive right to refund being well recognised once an appeal is decided in favour of the assessee. Under the GST appellate framework, an assessee is mandatorily required to make a pre-deposit under Section 107(6) for maintaining an appeal. Upon success in appeal, this pre-deposit becomes refundable as a consequence of the appellate order.

From a procedural standpoint, the mechanism for claiming refund under GST is already notified. In practice, assessees are required to file an application in Form GST RFD-01 on the common portal for claiming refund, including refund of amounts paid during the course of proceedings. Section 54 of the GST Act governs refund applications generally and prescribes a time limit of two years from the “relevant date” for filing such claims.

However, in cases where the refund of pre deposit for appeal under GST is claimed after the expiry of two years from the date of payment or appellate order, tax authorities have frequently rejected such claims by treating them as time-barred under Section 54(1). This has resulted in avoidable litigation, particularly where the appeal itself was allowed and the demand was set aside.

This precise controversy came up for consideration in a recent judgment of the Supreme Court of India in State of Jharkhand & Ors. vs M/s. BLA Infrastructure Pvt. Ltd., where the Court examined whether refund of statutory pre-deposit could be denied by invoking the limitation provisions of Section 54, and more importantly, which statutory provision governs such refund. The judgment has now brought clarity on the correct legal route and scope of refund of pre-deposit under GST.

Brief Subject Matter of Dispute regarding Refund of Pre Deposit for Appeal under GST

The dispute in State of Jharkhand & Ors. vs M/s. BLA Infrastructure Pvt. Ltd. arose from the rejection of a claim for refund of pre deposit for appeal under GST, despite the assessee having succeeded in appeal on merits.

The assessee, a registered taxpayer under the GST law, was subjected to a demand order passed by the State tax authorities. Aggrieved by the demand, the assessee preferred an appeal under Section 107 of the GST Act and, in compliance with Section 107(6), deposited 10% of the disputed tax amount as a statutory pre-deposit for maintaining the appeal.

The appellate authority subsequently allowed the appeal in favour of the assessee and set aside the demand. Following the appellate success, the assessee initiated the process for refund of the statutory pre-deposit by filing a refund application in the prescribed manner.

However, the tax department did not process the refund and instead issued a deficiency memo, treating the claim as a refund under Section 54 of the GST Act and rejecting it on the ground that the application was filed beyond the two-year limitation period prescribed under Section 54(1).

Aggrieved by the rejection of refund, the assessee approached the Jharkhand High Court by way of a writ petition, contending that once the appeal was allowed, the State had no authority to retain the pre-deposit and that rejection of refund on limitation was illegal.

The High Court allowed the writ petition and directed refund of the pre-deposit with interest. The State of Jharkhand, while not disputing the assessee’s entitlement to refund, challenged the High Court’s judgment before the Supreme Court of India, primarily on the ground that the High Court had erred in examining and interpreting Section 54, whereas refund of pre-deposit ought to have been considered under the appellate provisions of the GST Act.

This sequence of events formed the subject matter of consideration before the High Court and, subsequently, before the Supreme Court.

Findings and Decision by the Jharkhand High Court

The Jharkhand High Court examined the matter primarily from the perspective of statutory entitlement to refund after appellate success and the constitutional limitation on the State’s power to retain money.

At the outset, the High Court noted that there was no dispute on facts that the assessee had made a statutory pre-deposit under Section 107(6) and that the appeal had been allowed in its favour. The only reason for denial of refund was the department’s view that the refund application was time-barred under Section 54(1).

Retention of Pre-Deposit after Appeal – Article 265

The High Court held that once an appeal is allowed, the very basis for retention of the pre-deposit disappears. Any continued retention of such amount would be without authority of law and would offend Article 265 of the Constitution. In this context, the Court made the following categorical observation:

“Once refund is by way of statutory exercise, the same cannot be retained neither by the State, nor by the Centre… withholding of the pre-deposit amount without any reasonable cause would be hit by Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by authority of law.”

This observation formed the constitutional foundation of the High Court’s reasoning and underscored that procedural provisions cannot be used to legitimise retention of money once the demand itself has been set aside.

Interpretation of Section 54 and the Word “May”

Since the department had relied upon Section 54(1) to reject the claim as time-barred, the High Court examined the nature of the limitation prescribed therein. The Court specifically focused on the language used in Section 54(1), which provides that a person “may make an application before the expiry of two years from the relevant date”.

The High Court observed that the legislature had consciously used the word “may”, and not “shall”, and held that such usage ordinarily indicates that the provision is directory and not mandatory. In this regard, the Court recorded:

“The language couched in Section 54 is ‘may make an application before the expiry of two years from the relevant date’. The word ‘may’ as would appear in different statutes, is normally directory in nature and not mandatory.”

To reinforce this interpretation, the High Court referred to and relied upon several judicial precedents, including judgments of the Supreme Court explaining that the use of “may” does not automatically make a provision mandatory and that legislative intent, statutory context, and consequences must be considered.

Reliance on Earlier Judicial Precedents

The High Court also relied upon the decision of the Madras High Court in Lenovo India Pvt. Ltd., where it was held that the time limit under Section 54(1) is not mandatory in all cases and that legitimate refund claims cannot be denied merely on the ground of delay, particularly when there is no unjust enrichment.

Quoting from the said judgment, the High Court noted:

“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.”

Applying these principles, the High Court concluded that rejection of the refund of pre deposit for appeal under GST solely on the ground of limitation was arbitrary, unreasonable, and legally unsustainable.

Final Direction of the High Court

On the above reasoning, the High Court quashed the deficiency memo rejecting the refund claim and directed the tax authorities to process and grant refund of the statutory pre-deposit along with applicable interest, within the time stipulated by the Court.

The High Court thus decisively held that procedural interpretation of Section 54 cannot override the substantive right of an assessee to receive back the pre-deposit after succeeding in appeal.

Findings and Decision by the Supreme Court

The judgment of the Supreme Court of India in State of Jharkhand & Ors. vs M/s. BLA Infrastructure Pvt. Ltd. addressed the controversy in a narrow but decisive manner. Importantly, the Supreme Court noted at the outset that the entitlement of the assessee to refund of the pre-deposit was not in dispute. The appeal by the State was confined to the statutory provision under which such refund should be granted.

Correct Statutory Route for Refund of Pre-Deposit

The principal submission of the State before the Supreme Court was that the refund in question did not arise under Section 54 of the GST Act, but was a consequence of the statutory pre-deposit made for filing the appeal. Accepting this submission, the Supreme Court held in clear terms:

“The refund to be made to the respondent in relation to the statutory pre-deposit made by it for maintaining the appeal, in which it thereafter succeeded, would be under the provisions of Section 107(6) read with Section 115 of the Jharkhand Goods and Services Tax Act, and not under Section 54 thereof.”

By this finding, the Supreme Court authoritatively clarified that the refund of pre deposit for appeal under GST is intrinsically linked to the appellate provisions, and not to the general refund mechanism under Section 54.

Section 54 Interpretation Held to Be Unnecessary

Having clarified the correct statutory route, the Supreme Court expressly disapproved the necessity of the High Court’s detailed interpretation of Section 54 in the context of pre-deposit refund. The Court observed:

“We are in agreement with the submission made by the learned senior counsel that the subject refund was relatable to Section 107(6) read with Section 115 of the Jharkhand GST Act, and to that extent, the exercise undertaken by the High Court with regard to Section 54 thereof was unnecessary.”

This observation is of considerable technical importance. The Supreme Court did not hold that the High Court’s interpretation of Section 54 was incorrect in law; rather, it clarified that Section 54 itself was not the governing provision, and therefore the interpretative exercise undertaken by the High Court was not required for deciding the issue at hand.

Relief to the Assessee Not Disturbed

Crucially, while correcting the statutory route, the Supreme Court was careful to ensure that the substantive relief granted to the assessee was not taken away. The Court categorically directed that the refund must still be granted, along with interest, stating:

“In the light of this order, the amount to be refunded to the respondent shall be refunded with interest thereon in accordance with law within a period of four weeks from today.”

Thus, the Supreme Court affirmed the assessee’s right to refund of the pre-deposit, while clarifying that such refund flows from Section 107(6) read with Section 115, and not from Section 54.

Nature of the Supreme Court’s Clarification

The Supreme Court’s order therefore performs a corrective and clarificatory function. It does not negate the High Court’s concern regarding unjust retention of money, nor does it deny the refund. Instead, it streamlines the legal framework by:

• separating general refund provisions from appellate pre-deposit refunds, and

• preventing future disputes by clearly identifying the correct statutory source of the refund.

In effect, the Supreme Court ensured that procedural confusion under Section 54 does not dilute or delay the consequence of a successful appeal, while maintaining fidelity to the statutory scheme of the GST Act.

To Sum Up

The judgments in State of Jharkhand & Ors. vs M/s. BLA Infrastructure Pvt. Ltd. have now conclusively settled the law on refund of pre deposit for appeal under GST. Once an assessee succeeds in appeal, the statutory pre-deposit made under Section 107(6) becomes refundable as a direct consequence of the appellate order, and its retention by the State thereafter has no authority of law.

While the assessee is still required to claim the refund through the prescribed procedure, the statutory source of such refund is Section 107(6) read with Section 115, and not Section 54 of the GST Act. Accordingly, the limitation provisions of Section 54 cannot be invoked to deny refund of pre-deposit.

By clarifying the correct statutory route while preserving the assessee’s right to refund with interest, the Supreme Court has removed a major procedural hurdle and provided much-needed certainty in the law governing refund of pre-deposit under GST.

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