Allahabad High Court Quashed Overjealous GST Recovery when 10% Pre-Deposit already made in Section 112

When the wheels of tax administration move too swiftly, they risk running roughshod over the very safeguards that keep the system fair. The recent Allahabad High Court decision in S.A.B. Engg Works v. State of U.P. is a timely reminder that procedural discipline is not a mere technicality—it is the backbone of taxpayer rights and administrative legitimacy.

Why This Judgment Matters

At the heart of this case lies a simple but critical question: Can the GST department recover tax dues immediately after a first appeal is dismissed, even when the law provides a clear window for further appeal and a mechanism to stay recovery? The High Court’s answer is a resounding no, and its reasoning is instructive for taxpayers, practitioners, and authorities alike.

The controversy arose when tax authorities, just four days after rejecting a taxpayer’s first appeal, swooped in to recover the entire disputed amount from the taxpayer’s electronic ledgers. This action, the petitioner argued, ignored the statutory right to file a second appeal before the GST Appellate Tribunal (GSTAT) under Section 112 of the CGST Act—a right that comes with a three-month limitation period and a built-in stay on recovery upon a 10% pre-deposit.

The court’s intervention was not just about the facts of one case. It was about upholding the architecture of GST litigation, where each step—demand, appeal, pre-deposit, and recovery—must follow a prescribed order. When the department bypasses these steps, it risks turning the appellate process into a hollow formality.

What This Article Will Cover

This article unpacks the S.A.B. Engg Works judgment in three parts:

• First, we’ll set out the case background, the sequence of events, and the legal issues that came to a head.
• Next, we’ll analyze the High Court’s reasoning, focusing on the interplay between Section 78 (recovery timing) and Section 112 (appeal and pre-deposit), and the binding effect of departmental circulars.
• Finally, we’ll explore the broader implications for GST litigation, practical guidance for taxpayers, and the accounting and policy angles that flow from this precedent.

By the end, you’ll see why this judgment is more than a procedural skirmish—it’s a reaffirmation of the rule of law in GST administration, and a blueprint for both taxpayers and authorities navigating the appellate maze.

Case Background and Chronology: S.A.B. Engg Works v. State of U.P.

To appreciate the full impact of the Allahabad High Court’s ruling, it’s essential to trace the journey that led S.A.B. Engg Works to the courtroom. The facts of this case are a textbook example of how procedural missteps by tax authorities can trigger judicial intervention.

A. Timeline of Events

• 29 April 2024: The GST authorities raised a demand against S.A.B. Engg Works, alleging tax dues under the CGST Act.
• First Appeal Filed: Exercising its statutory right, the petitioner promptly filed an appeal under Section 107, accompanied by the requisite pre-deposit—a standard step in GST dispute resolution.
• 24 January 2025: The first appellate authority rejected the appeal. This order, by law, triggered a new three-month window for the taxpayer to approach the GST Appellate Tribunal (GSTAT) under Section 112.
• 29 January 2025: In a move that would become the crux of the dispute, the department recovered ?1,55,079 from the petitioner’s electronic credit and cash ledgers—just four days after the appellate order.

B. The Department’s Recovery Action

The authorities invoked Section 79 of the CGST Act, which empowers them to recover dues by various means, including direct deductions from electronic ledgers. However, this power is not absolute; it is circumscribed by other provisions—most notably, Section 78 (which prescribes a waiting period before recovery) and Section 112 (which provides a stay on recovery upon a 10% pre-deposit during the appeal window).

In this case, the department’s haste was evident. Instead of waiting for the statutory period to lapse or for the taxpayer to exercise their appellate rights, the authorities moved to recover the entire demand almost immediately.

C. The Petitioner’s Legal Challenge

S.A.B. Engg Works did not merely object to the recovery on factual grounds. Their challenge was rooted in the law:

• Statutory Right to Appeal: Section 112 of the CGST Act grants every aggrieved taxpayer a three-month window to file a second appeal before the GSTAT. Crucially, this right is not illusory; it is protected by a mechanism that allows the taxpayer to stay recovery by depositing 10% of the disputed amount.
• Procedural Grievance: By recovering the full amount within days, the department effectively denied the petitioner the opportunity to avail this remedy. The action, they argued, rendered the statutory safeguard under Section 112(9) nugatory.
• Reliance on CBIC Circular (11 July 2024): The petitioner pointed to a recent circular from the Central Board of Indirect Taxes and Customs (CBIC), which specifically addressed the practical challenge of non-constitution of GSTATs. The circular allowed taxpayers to make the 10% pre-deposit and file an undertaking, with the assurance that the balance demand would remain stayed until the tribunal was operational.

D. Key Legal Issues Framed

The dispute distilled into several pointed legal questions:

• Was the department justified in initiating recovery before the expiry of the three-month appeal period?
• Did the recovery action violate the procedural safeguards of Section 112(9) and the CBIC circular?
• What is the effect of the non-constitution of the GSTAT on the taxpayer’s appellate rights and the department’s recovery powers?
• How should the interplay between Section 78 (recovery timing), Section 79 (recovery modes), and Section 112 (appeal and stay) be harmonized?

A Microcosm of GST Litigation Challenges

This case is not an outlier. Across India, the delayed constitution of GSTATs has left taxpayers in procedural limbo, with departments sometimes pressing ahead with recovery despite clear statutory and administrative instructions to the contrary. The S.A.B. Engg Works saga thus became a test case for the judiciary to clarify the boundaries of departmental power and the sanctity of taxpayer rights.

For businesses based in Uttar Pradesh, including nearby locations like Aligarh and Allahabad, understanding these judicial pronouncements is critical to safeguarding your interests in GST matters.

Judicial Reasoning and Interpretation: How the High Court Restored Procedural Balance

The Allahabad High Court’s judgment in S.A.B. Engg Works v. State of U.P. is a study in statutory fidelity and judicial restraint. Rather than crafting new rights or reading between the lines, the Court anchored its reasoning in the text and structure of the CGST Act, the logic of the appellate process, and the binding force of departmental circulars. Let’s break down the key pillars of the Court’s analysis.

A. Section 78: The Statutory Waiting Period Before Recovery

The first port of call for the Court was Section 78 of the CGST Act. This provision is clear: after an order creating a tax demand, the taxpayer has three months to pay before recovery proceedings can begin. The only exception? If the “proper officer” records written reasons and finds it expedient in the interest of revenue, recovery can be accelerated. But this is not a blank cheque—such reasons must be specific, recorded, and justifiable.

In the S.A.B. Engg Works case, the department offered no such reasons. The recovery was not only swift but also unsupported by any written justification. The Court saw this as a direct violation of the statutory scheme—a procedural shortcut that undermined the taxpayer’s rights.

B. Section 112: The 10% Pre-Deposit and Automatic Stay

The heart of the controversy was Section 112, which governs appeals to the GST Appellate Tribunal. Here, the law is equally explicit: a taxpayer has three months from the appellate order to file a second appeal. Critically, upon making a pre-deposit of 10% of the disputed tax, the balance demand is automatically stayed (Section 112(9)). This mechanism is not a mere formality—it is a legislative compromise, balancing the government’s interest in revenue with the taxpayer’s right to contest a demand without facing immediate financial ruin.

The Court highlighted a crucial point: if the department is allowed to recover the entire demand before the three-month window closes, the statutory stay under Section 112(9) becomes meaningless. The right to appeal, in substance, would be hollowed out. The Court’s words were pointed: “Such action would render the said provisions of Section 112(9) of the Act as nugatory… which cannot be permitted.”

C. The Three-Month Limitation: Not Just a Technicality

The Court recognized that the three-month period for filing a second appeal is not a bureaucratic grace period—it is a substantive right. Taxpayers may need time to gather documents, seek legal advice, or arrange the pre-deposit. The law does not require the pre-deposit to be made on the very day the appellate order is passed; it can be made at any point within the three months. The department’s action, in effect, tried to compress this window to just four days, which the Court found indefensible.

For assistance in navigating GST appeals within this window, consider expert guidance from GST litigation services professionals.

D. The CBIC Circular of 11 July 2024: Binding Guidance in a Transitional Era

A unique feature of the current GST landscape is the delayed constitution of the GST Appellate Tribunal (GSTAT). Recognizing this, the CBIC issued a circular in July 2024, providing a practical workaround: taxpayers could make the 10% pre-deposit and file an undertaking to approach the tribunal once it is operational. The circular assured that, in such cases, the balance demand would remain stayed.

The Court treated this circular as binding on the department. It was not an optional guideline but a directive with the force of law, especially in the absence of a functioning tribunal. The department’s disregard for this circular was, in the Court’s view, a serious procedural lapse.

For a detailed understanding of such procedural safeguards and pre-deposit rules, see our blog post on clarity in GST pre-deposit from electronic credit ledger (ECL).

E. Key Judicial Findings and Quotes

The judgment is peppered with observations that reinforce the primacy of due process:

• On the effect of premature recovery: “The action as taken by the respondents… would render the said provisions of Section 112(9) of the Act as nugatory… which cannot be permitted.”
• On the CBIC circular: “The circular… is very clear and specific… the action initiated and executed by the respondents… cannot be sustained.”
• On departmental conduct: The Court did not mince words, describing the recovery as “wholly high-handed” and contrary to both the statute and the department’s own instructions.

F. The Remedy Ordered

The Court’s relief was both corrective and forward-looking. It quashed the recovery, directed the department to refund the amount over and above the 10% pre-deposit, and instructed both parties to comply with the CBIC circular’s requirements. The message was clear: statutory rights and procedural safeguards are not to be sacrificed at the altar of administrative convenience.

A Blueprint for GST Litigation Discipline

This judgment is more than a rebuke to overzealous recovery. It is a reaffirmation that the GST regime, for all its complexity, is anchored in the rule of law. The appellate process is not a hurdle for taxpayers—it is a constitutional guarantee. And when the law provides a stay on recovery upon a modest pre-deposit, that protection must be real, not illusory.

For companies in Delhi and Chandigarh, ensuring compliance with these procedural norms can prevent costly disputes and ensure smoother GST registration and compliance.