Arrest under GST Act for ITC scam by fake invoices – Supreme Court dismisses SLP. High Court had held that such acts are threat to the very implementation of a law within a short duration of its inception.
ABCAUS Case Law Citation:
ABCAUS 2970 (2019) (05) SC
The Supreme Court recently dismissed a SLP filed by the Petitioners alleged to have involved in circular trading by claiming input tax credit on materials never purchased and passing on such input tax credit to companies to whom they never sold any goods.
“we are not inclined to interfere. The special leave petition is accordingly dismissed.” said the Apex Court after hearing the the petitioners and after perusing the relevant materials.
In the instant case, the Petitioners were primarily the directors (Past and/or present) / Chief Financial Officer and Partner of a Partnership Firm who had Challenged the summons issued by the Superintendent (Anti Evasion) of the GST Commissionerate, under Section 70 of the Central Goods and Services Tax Act, 2017 (CGST Act) and the invocation of the penal provisions under Section 69 of the Act.
In few cases the petitioners had not responded to the summon, one had alleged threatening with arrest and prosecution if he did not appear for investigation. Over all there were allegation of circular trading by claiming input tax credit on materials never purchased and passing on such input tax credit to companies to whom they never sold any goods. The Department had estimated that fake GST invoices were issued to the total value of about Rs.1,289 crores and the benefit of wrongful ITC passed on by the petitioners was to the tune of about Rs.225 crores..
Since the petitioners in these writ petitions were apprehending arrest, at the time when they came up before the Hon’ble High Court, they were granted interim protective orders, not to arrest the petitioners, but on condition that they appeared before the concerned authorities, whenever summoned and also cooperated in the investigation.
As per the counter affidavit filed by the Superintendent (Anti Evasion), the allegations were that the petitioners had floated//incorporated several Proprietary concerns/ Partnership Firms/ Limited Companies to claim input tax credit on the basis of certain invoices, without there being any actual physical receipt of goods.
The Hon’ble High Court observed that the petitioners agreed and undertook to appear before the officers and cooperate in the investigation. However, their main grievance was about the possibility of their arrest and detention to custody. But the objection of the respondents was that writ proceedings are not to be converted into proceedings for anticipatory bail.
The Hon’ble High Court opined that what the petitioners were seeking in these cases was a direction to the respondents not to arrest them in exercise of the power conferred by Section 69(1) of the CGST Act, 2017 which in essence, was akin to a prayer for anticipatory bail.
The issue before the High Court was not if the arrest under GST Act can be made without First Information Report (FIR)? but the real issue was whether Article 226 can be used as a substitute to section 438 Cr.P.C?
The High Court was of the view that Since no first information report gets registered before the power of arrest under Section 69(1) of the CGST Act, 2017 is invoked, the petitioners cannot invoke Section 438 of the Code of Criminal Procedure for anticipatory bail. Therefore, the only way they can seek protection against pre-trial arrest (actually pre-prosecution arrest) is to invoke the jurisdiction of the High Court under Article 226 of the Constitution of India.
The Hon’ble High Court deliberated in details with the applicability of Code of Criminal Procedure and jurisdiction of the Hon’ble High Court under Article 226 of the Constitution of India with respect to the provisions of the CGST Act related to arrest.
The contention of the petitioners was that the CGST Act, 2017 prescribes a procedure for assessment even in cases where the information furnished in the returns is found to have discrepancies and that unless a summary assessment or special audit is conducted determining the liability, no offence can be made out under the Act. Therefore, it was their contention that even a prosecution cannot be launched without an assessment and that therefore, there was no question of any arrest.
The Hon’ble High Court opined that to say that a prosecution could be launched only after the completion of the assessment, goes contrary to Section 132 of the CGST Act, 2017. The list of offences included in sub-Section (1) of Section 132 of CGST Act, 2017 have no co-relation to assessment. Issue of invoices or bills without supply of goods and the availing of ITC by using such invoices or bills, are made offences under clauses (b) and (c) of sub-Section (1) of Section 132 of the CGST Act. The prosecutions for these offences do not depend upon the completion of assessment.
In view of the tune of the ITC allegedly passed on by the petitioners by fake invoices, the Hon’ble High Court opined that even if the Court allowed the petitioners to apply for compounding, they may have a meeting point with the Department as the liability arising out of the alleged actions on the part of the petitioners was so huge. Therefore, the argument that there could not be any arrest as long as the offences were compoundable, was rejected.
With respect to the contention that the arrest of a person which will not facilitate further investigation, has to be discouraged, since the same has the potential to punish a person before trial, the Hon’ble High Court also observed that objects of pre-trial arrest and detention to custody pending trial, are manifold as indicated in section 41 of the Code.
Thus the Hon’ble High Court opined that the petitioners could not be placed in a higher pedestal than those seeking anticipatory bail. On the other hand, the jurisdiction under Article 226 has to be sparingly used, as cautioned by the Supreme Court.
The Hon’ble High Court opined that uf, even before the GST regime is put on tracks, some one can exploit the law, without the actual purchase or sale of goods or hiring or rendering of services, projecting a huge turnover that remained only on paper, giving rise to a claim for input tax credit to the tune of about Rs.225.00 crores, there is nothing wrong in the respondents thinking that persons involved should be arrested.
The Hon’ble High Court opined that generally, in all other fiscal laws, the offences that we have traditionally known revolve around evasion of liability. In such cases, the Government is only deprived of what is due to them. But in fraudulent ITC claims, of the nature allegedly made by the petitioners, a huge liability is created for the Government. Therefore, the acts complained of against the petitioners constituted a threat to the very implementation of a law within a short duration of its inception.
Accordingly, the Hon’ble High Court despite the finding that the writ petitions were maintainable and despite the finding that the protection under Sections 41 and 41-A of Cr.P.C., may be available to persons said to have committed cognizable and non-bailable offences under this Act and despite the finding that there were incongruities within Section 69 and between Sections 69 and 132 of the CGST Act, 2017, the Hon’ble High Court declined to grant relief to the petitioners against arrest.