GST: DRC-13 Quashed; Automatic Stay After Sec.107 Appeal with 10% Pre-Deposit

Introduction

Across India, businesses are increasingly facing aggressive GST recovery actions, with the department swiftly issuing Form DRC-13 notices to banks and third parties. These notices, often resulting in sudden account attachments or freezing of funds, can disrupt business operations overnight. For CFOs, finance heads, and advisors, the pressure to respond quickly—and correctly—has never been higher.

This article aims to empower you with a clear, legally robust roadmap to halt wrongful GST recoveries. We break down the statutory protections available under Section 107 of the CGST Act, especially the power of the 10% pre-deposit, and show how recent judicial pronouncements have reinforced these safeguards. Our goal is to help you act decisively, protect your liquidity, and ensure compliance—without getting lost in legal jargon.

A landmark example is the Samrat Marble (HP High Court, Nov 2025) judgment, which clarified that once a taxpayer files an appeal under Section 107 and pays the mandatory 10% pre-deposit, any ongoing recovery—such as a DRC-13 bank attachment—must be immediately withdrawn. The Court’s clear stance: the statutory stay is “automatic,” not discretionary, and applies even to recovery actions already in motion, provided the government has not yet received the funds.

In the sections that follow, we will:

• Analyse the statutory framework (Section 107, Rule 145, DRC-13)
• Unpack the Samrat Marble judgment and its practical impact
• Map out real-world scenarios (before/after appeal, funds frozen, DD issued)
• Provide actionable checklists, specimen representations, and compliance reminders
• Address FAQs and common misconceptions

Whether you are a business owner, CFO, or professional advisor, this guide will help you respond swiftly and confidently to any DRC-13 recovery—arming you with the legal tools and practical steps to safeguard your business. For expert assistance, consider consulting chartered accountants in Chandigarh who specialize in GST litigation and recovery matters.

Statutory Framework: Section 107, Rule 145, and DRC-13

Section 107(6)-(7): Appeal Mechanism and Automatic Stay Explained

Section 107 of the CGST Act provides the right to appeal against any order or decision passed by an adjudicating authority. However, this right comes with a statutory condition: the appellant must pay the full amount of admitted tax, interest, fine, fee, and penalty, plus a pre-deposit of 10% of the disputed tax.

• Section 107(6): Mandates the pre-deposit as a prerequisite for the appeal to be admitted.
• Section 107(7): Once the pre-deposit is made, “recovery of the balance amount shall be deemed to be stayed.”

This means that the moment you file an appeal and pay the 10% pre-deposit, the law itself puts an automatic brake on any further recovery of the disputed amount. There is no need to apply separately for a stay; the protection is built into the statute.

Section 79 and Rule 145: Anatomy of DRC-13 Notices

Section 79 empowers the department to recover unpaid dues by various means, including attachment of bank accounts or instructing third parties to pay amounts due to the taxpayer directly to the government. Rule 145 operationalises this by providing for the issuance of Form DRC-13—a notice to a bank or third party to pay the specified sum.

• Legal Basis: DRC-13 is typically issued when the department believes recovery is necessary and the demand is not being met voluntarily.
• Department Practice: In practice, DRC-13 is often issued soon after a demand order, sometimes even before the taxpayer has had a fair chance to appeal.

Interlink—How the Provisions Interact

The interplay between these provisions is crucial. While Section 79/Rule 145 allows for aggressive recovery, Section 107(6)-(7) acts as a statutory shield once the appeal and pre-deposit are in place. The law is clear: recovery actions must pause the moment the pre-deposit is made, and any ongoing steps (like a DRC-13 attachment) lose their legal force for the disputed portion.

Businesses looking for detailed support can explore GST litigation services to safeguard against such aggressive recovery actions.

Case Law Analysis: Samrat Marble (HP HC, Nov 2025)

The Samrat Marble case from the Himachal Pradesh High Court has become a touchstone for businesses and professionals grappling with aggressive GST recoveries. Let’s break down the facts, the Court’s reasoning, and the practical lessons for anyone facing a DRC-13 notice.

Material Facts Recap

• The taxpayer received two demand orders in October 2022.
• On 23 July 2025, the department issued a DRC-13 notice to the taxpayer’s bank, freezing the account and prompting the bank to issue a demand draft (DD) for the disputed amount. The DD, however, was not yet encashed by the department.
• The very next day, the taxpayer filed appeals under Section 107 and deposited the mandatory 10% pre-deposit.
• The taxpayer promptly informed both the department and the bank about the appeal and pre-deposit.

High Court Decision Highlights

The High Court’s order is both clear and business-friendly:

1. DRC-13 Loses Efficacy Once Appeal and Pre-Deposit Are Made
   The Court held that the DRC-13 notice, though validly issued before the appeal, “lost its efficacy and relevancy” the moment the taxpayer fulfilled the statutory pre-deposit condition. The department could not lawfully proceed with recovery for the balance disputed amount.
2. Stay Is “Automatic,” Not Discretionary—Scope and Retroactive Effect
   The stay on recovery is not something the taxpayer must separately apply for. It is “deemed” by law, effective from the date of pre-deposit. This means that even if recovery steps (like DRC-13) were initiated before the appeal, they must be withdrawn if the funds have not yet reached the government.
3. Return of Demand Draft (If Unencashed), De-freeze of Bank
   Since the DD was not encashed, the Court directed the department to return it to the taxpayer and ordered the bank to de-freeze the account immediately. This ensures that business liquidity is restored without delay.
4. Distinction Between Admitted Tax & Disputed Tax
   The stay applies only to the “disputed” portion of the demand. Any “admitted” tax (i.e., the part the taxpayer accepts as payable) must be paid and is not protected by the stay.

Key Takeaways for Practitioners

• Timing Is Everything: The statutory stay kicks in the moment the appeal and pre-deposit are completed, regardless of when the DRC-13 was issued.
• Scope of Protection: The stay covers only the disputed portion, not the admitted tax.
• Retroactive Shield: If recovery actions are in progress but not completed (e.g., funds frozen, DD issued but not encashed), those actions must be reversed.
• Prompt Intimation Is Critical: Immediate communication to both the department and the bank is essential to trigger the withdrawal of DRC-13 and restoration of accounts.

For businesses operating in Delhi or surrounding areas, local expertise provided by chartered accountants in Delhi can be instrumental in navigating such recovery disputes.

Scenario Mapping: Recovery Actions vis-à-vis Appeal and Pre-deposit

Understanding how the law plays out in real-world situations is vital. Here’s a practical mapping of common scenarios:

DRC-13 / Recovery BEFORE Filing Appeal

• Situation: The department issues DRC-13, and the bank freezes the account or issues a DD, but the taxpayer has not yet filed an appeal.
• Action: If the taxpayer files the appeal and pays the 10% pre-deposit before the funds are credited to the government, the statutory stay applies immediately.
• Result: The department must withdraw the DRC-13, instruct the bank to de-freeze the account, and return any unencashed DDs.

DRC-13 / Recovery AFTER Filing Appeal

• Situation: The department issues DRC-13 after the taxpayer has already filed the appeal and paid the pre-deposit.
• Action: Such recovery is outright illegal. The department must immediately nullify the DRC-13, and the bank must not act on it.
• Consequence: Any continued recovery attempt can be challenged in court, and the officials may be held accountable for contempt or overreach.

Partial Execution: Funds Frozen/DD Issued but Not Encased

• Situation: The bank has frozen funds or issued a DD, but the money has not yet reached the government.
• Legal Status: The property (funds/DD) must be returned to the taxpayer. The DRC-13 loses force, and the bank must de-freeze the account.

Funds Already Credited to Government Before Appeal

• Situation: The bank has already transferred the funds to the government before the taxpayer could file the appeal.
• Result: The statutory stay does not operate retrospectively to reverse completed recoveries. The taxpayer’s remedy is limited to seeking refund or adjustment through the appellate process.

See also our detailed post on GST Appeals – 4 Months Limitation Not Set in Stone, Decide on Merits for insights on appellate procedures.

Legal Doctrines: Retrospective Effect and Extent of Statutory Stay

The statutory stay under Section 107(6)-(7) is not just a procedural safeguard—it is a substantive legal right that operates with both immediacy and, in certain cases, retrospective effect. Let’s unpack the legal doctrines and their practical implications for businesses and advisors.

Judicial Reasoning on “Deemed Stay” from Date of Pre-Deposit

Courts, including in the Samrat Marble case, have consistently held that the stay on recovery is “deemed” and automatic from the date the statutory pre-deposit is made along with the appeal. There is no requirement for a separate stay application or order. The law itself interposes a barrier to further recovery of the disputed demand, and this protection is triggered the moment the pre-deposit is credited.

Stay vis-à-vis Different Modes of Recovery (Sec.79/Rule 145)

The statutory stay applies to all modes of recovery under Section 79, including:

• DRC-13 notices to banks/third parties (Rule 145)
• Attachment of property or accounts
• Garnishee orders

If the department or a bank is in the process of executing a DRC-13, but the funds have not yet been credited to the government, the stay halts the process. Any further action—such as encashing a demand draft or transferring attached funds—becomes unlawful.

Admitted Tax vs. Disputed Tax—Scope of Stay

The stay under Section 107(7) covers only the “balance amount”—that is, the portion of the demand under dispute. The admitted tax (the part the taxpayer accepts as due) must be paid in full before the appeal is admitted, and is not protected by the stay. This distinction is crucial when communicating with the department and the bank: only the disputed portion is shielded, and any admitted liability remains recoverable.

Limitations and Exceptions to Stay

• Department’s Scope for Action: The department cannot continue or initiate recovery for the disputed portion once the pre-deposit is made and the appeal is filed. However, if the taxpayer fails to pay the admitted tax or the pre-deposit, recovery can proceed for those amounts.
• Possible Exceptions: The only exceptions to the automatic stay are in cases of fraud, willful misstatement, or suppression of facts, where the department may seek to override the stay by specific legal proceedings. Such cases are rare and must be justified with clear evidence.

For further understanding on stay and related procedural compliance, refer to GST Consultancy Services.

Quick-Action Checklist for Businesses & CFOs

When faced with a DRC-13 notice or any aggressive recovery action, speed and documentation are your best allies. Here’s a stepwise checklist to ensure you activate your statutory protections without delay:

Immediate Steps When DRC-13 Received

1. Assess Status: Check if an appeal has already been filed. If not, prepare to file immediately.
2. File Appeal & Pre-Deposit: File the statutory appeal under Section 107 and pay the 10% pre-deposit (plus admitted tax, if any).
3. Intimate Department & Bank: Send written intimation to both the GST department and the bank, attaching proof of appeal filing and pre-deposit.

Documentary Proofs & Communications

• To Department:
• Covering letter requesting withdrawal of DRC-13 and return of any unencashed DD
• Copy of appeal acknowledgment
• Copy of pre-deposit challan
• Statement clarifying admitted vs. disputed tax
• To Bank:
• Letter requesting de-freezing of account and return of DD (if applicable)
• Copies of above documents
• Reference to Section 107(6)-(7) and recent judicial pronouncements

Tracking and Recording Official Responses

• Maintain a log of all communications sent and received.
• Follow up in writing if there is any delay in action by the department or bank.
• Escalate to higher authorities or approach the High Court if relief is not granted promptly.

Outsourcing these compliance and tracking tasks can be smoothened by professional outsourcing services for efficiency and accuracy.

FAQs on DRC-13, Sec. 107 Appeal, and Recovery Stay

Q1. Does the automatic stay require immediate withdrawal of DRC-13?
Yes. Once the appeal is filed and the 10% pre-deposit is paid, the department must withdraw the DRC-13 and instruct the bank to de-freeze the account for the disputed portion.

Q2. What if a demand draft is issued but not encashed by the department?
The demand draft must be returned to the taxpayer. The department cannot lawfully encash it after the statutory stay is triggered.

Q3. Can recovery proceed while the appeal is pending with 10% pre-deposit?
No. Recovery for the disputed portion is automatically stayed. Only the admitted tax can be recovered.

Q4. Which portion is protected: only disputed or admitted + disputed?
Only the disputed portion is protected by the stay. The admitted tax must be paid before the appeal is admitted.

Q5. Actions to take if department/bank refuses relief?
Send a formal representation citing Section 107(6)-(7) and relevant case law. If relief is still denied, escalate to the Commissioner or approach the High Court.

Q6. Risks in delayed intimation to authorities?
Delays can result in funds being credited to the government, after which the stay cannot reverse the recovery. Always intimate promptly and in writing.

Q7. What misconceptions should businesses/banks avoid?

• Believing that a separate stay order is needed (it is automatic by law)
• Assuming the stay covers admitted tax (it does not)
• Thinking recovery can continue if DRC-13 was issued before the appeal (it cannot, if funds not yet credited)

For detailed help, check our blog post on GST Notice Upload to GSTN Portal is Treated as Served.

Compliance Reminders and Risk Mitigation for Businesses

• Timeliness: File appeals and make pre-deposits without delay.
• Proof Retention: Keep all challans, appeal acknowledgments, and correspondence.
• Proactive Communication: Intimate both department and bank in writing, with enclosures.
• Internal Checklists: Ensure finance and compliance teams are trained on Section 107 protections.
• Staff Training: Regularly update staff on legal developments and statutory safeguards.

For those looking to strengthen their internal controls, outsourcing services can help maintain checks on compliance and documentation.