GST Recovery Powers Under Section 79: When Can Authorities Attach Funds Transferred by Clerical Error?
Introduction: The Boundaries of Third-Party Recovery in GST Law
The Calcutta High Court's recent decision in Jai Balaji Industries Limited & Anr. v. Assistant Commissioner of Sales Tax & Ors. has clarified critical boundaries around the application of third-party recovery provisions under the Goods and Services Tax framework. The judgment establishes that tax authorities cannot appropriate funds that were accidentally deposited into a defaulter's bank account due to human error in electronic fund transfers. This ruling reinforces the principle that recovery mechanisms, though powerful, must respect fundamental principles of ownership and legal entitlement.
The case revolves around a straightforward banking mistake that led to complex legal questions: Can tax authorities treat inadvertently transferred money as belonging to a tax defaulter merely because it landed in that person's account? The High Court answered with an emphatic no.
Factual Matrix: A Simple Typing Error With Complex Consequences
The Mistaken Transfers
On December 23, 2024, the first petitioner, Jai Balaji Industries, initiated an RTGS transaction intending to send ₹20,00,000 to its vendor, M/s. Mortex International. The intended beneficiary maintained an account with Yes Bank Limited at its Dalhousie Branch, Stephen House, with the account number ending in "8005".
However, during the transaction entry process, a typographical mistake occurred. The person making the transfer entered an account number ending in "8025" instead of "8005". This minor digit transposition resulted in the entire sum being credited to an entirely different entity—Sai Fertilizers Pvt. Ltd., which later became the added respondent in the proceedings.
Compounding the initial error, the petitioner subsequently transferred an additional ₹5,00,000, which also landed in the same incorrect account belonging to Sai Fertilizers Pvt. Ltd. The total amount now sitting in the wrong account stood at ₹25,00,000.
Discovery and Attempted Rectification
Upon discovering the mistake, the petitioner immediately contacted Yes Bank Limited with a request to reverse both transactions and credit the funds to the rightful accounts. Rather than processing the reversal, the bank placed the funds on hold status.
Despite repeated representations from the petitioner, the bank maintained its freeze on the amount and declined to return the money to the original remitter.
Escalation to RBI Ombudsman
Frustrated by the bank's inaction, the petitioner approached the RBI Ombudsman seeking intervention. On March 21, 2025, the Ombudsman disposed of the complaint with a finding that the customer himself had entered incorrect beneficiary account details. The Ombudsman concluded there was no deficiency attributable to the regulated entity (the bank) in facilitating the transaction as instructed by the customer.
While this finding absolved the bank of service deficiency, it did nothing to resolve the petitioner's fundamental problem—recovering the misdirected funds.
The Tax Department's Intervention: Invoking Section 79
Discovery of the Defaulter Status
The situation took a new turn when it was discovered that Sai Fertilizers Pvt. Ltd., the unintended recipient, was a defaulter with outstanding GST liabilities.
The Assistant Commissioner of Revenue issued communication to Yes Bank Limited dated March 19, 2025, asserting the tax department's right to attach the funds sitting in the defaulter's account.
The Legal Basis Claimed by Revenue Authorities
The tax authorities relied upon Section 79(1)(c) of the CGST/WBGST Act, 2017, which empowers them to recover outstanding tax dues through third-party attachment. The provision allows the proper officer to issue a notice in writing requiring any person from whom money is due to the defaulter, or who holds money for or on account of the defaulter, to pay such amounts directly to the Government.
The Assistant Commissioner specifically advised the bank to act in accordance with this provision, noting that there existed no provision for temporary withdrawal of demand notices when no litigation was pending and no competent court had granted any stay on recovery proceedings.
The Revenue's position was straightforward: since the money was physically present in the defaulter's account and under the bank's control on behalf of that account holder, it constituted "money held on account of such person" within the meaning of Section 79(1)(c), and therefore could be attached to satisfy outstanding tax arrears.
The Added Respondent's Position: A Categorical Disclaimer
A crucial development in the case was the stance adopted by Sai Fertilizers Pvt. Ltd. itself—the entity whose account had received the misdirected funds.
Affidavit Before the Notary Public
On January 7, 2026, Sai Fertilizers executed an affidavit before a Notary Public, which was subsequently forwarded to the petitioner. This sworn statement contained several critical admissions:
The affidavit acknowledged that on December 23, 2025, a sum of ₹20,00,000 was credited to their account via RTGS from the first petitioner.
It confirmed that subsequently, on April 2, 2025, an additional ₹5,00,000 was credited to the same account.
Most importantly, the affidavit categorically stated that the aggregate sum of ₹25,00,000 did not belong to Sai Fertilizers Private Limited.
The company confirmed it had no business relationship whatsoever with the petitioners regarding these transactions.
The affidavit explicitly recognized that these funds had been transferred to their account due to a clerical or typographical error by the petitioner—specifically, typing an account ending in "8025" instead of "8005".
Sai Fertilizers stated unequivocally that it had no objection if the entire amount of ₹25,00,000 were remitted or reversed back to the first petitioner's account.
This affidavit proved to be a decisive piece of evidence, as it eliminated any possible claim that the funds were legally "due" to the defaulter.
Judicial Analysis: The High Court's Interpretation of Section 79
Understanding the Scope of Section 79(1)(c)(i)
Justice Krishna Rao undertook a careful examination of the provision invoked by the tax authorities. The full text of Section 79(1)(c)(i) of the CGST/WBGST Act, 2017 provides:
"The proper officer may, by a notice in writing, require any other person from whom money is due or may become due to such person or who holds or may subsequently hold money for or on account of such person, to pay the Government either forthwith upon the money becoming due or being held, or within the time specified in the notice not being before the money becomes due or is held, so much of the money as is sufficient to pay the amount due from such person or the whole of the money when it is equal to or less than that amount."
The Essential Pre-Conditions
The Court identified that for Section 79(1)(c)(i) to apply, certain conditions must be satisfied:
Money Due: There must be money that is due or may become due from a third party to the defaulter, OR
Money Held: The third party must hold or may subsequently hold money for or on account of the defaulter
The critical element is that there must be a legal relationship—typically a debtor-creditor relationship—between the third party and the defaulter that creates an entitlement in favor of the defaulter.
Application to the Present Facts
The Court examined whether the funds held by Yes Bank Limited could be characterized as "money held for or on account of" Sai Fertilizers Pvt. Ltd. within the contemplation of the statutory provision.
Finding on the Account Number Similarity: The judgment noted that the last four digits of the intended beneficiary's account (M/s. Mortex International) were "8005" whereas the added respondent's account ended with "8025". This remarkable similarity supported the petitioner's contention that a genuine typographical error had occurred during the transaction entry process.