2022 (8) TMI 367 - HC - GST

Seeking grant of pre-arrest bail - Availment and passing of fraudulent Input Tax Credit (ITC) - passing ITC without actual supply of goods in contravention of Section 16 of the CGST Act, 2017 - HELD THAT - The situation which, prima facie, obtains is that there is material to show that as many as 21 fake entities have been created to avail and further pass on ITC without the underlying transactions of sale and delivery of goods. The allegations are such that they warrant custodial interrogation. Mere presence of the applicant, before the authorities, or for that matter, the willingness of the applicant to cooperate with the investigation cannot serve the purpose of facilitating effective investigation and unearthing the fraud in all its facets. There is prima facie material to warrant interrogation of the applicant. The allegations are such that without personal interrogation of the applicant, fraud cannot be unearthed completely - the discretion cannot be exercised in favour of the applicant. Application dismissed.

Summary

Issues involved:
- Application for pre-arrest bail under Section 70 of the Central Goods and Services Tax Act, 2017
- Allegations of fraudulent Input Tax Credit (ITC) involving creation of fake firms
- Rejection of previous bail application by Additional Sessions Judge, Nashik
- Hearing before the High Court for pre-arrest bail
- Arguments regarding liability, lack of demand notice, and necessity of custodial interrogation
- Consideration of material evidence, money trail, and nexus with fake entities
- Comparison with previous judgments denying bail in similar cases

Analysis:
1. The applicant filed for pre-arrest bail under Section 70 of the CGST Act, 2017 due to allegations of fraudulent ITC involving the creation of 18 fake firms. The applicant's connection with these firms was established through investigations, leading to the rejection of a previous bail application by the Additional Sessions Judge, Nashik.

2. During the High Court hearing, the applicant argued against liability, citing the absence of a demand notice and a claimed benefit of only Rs.3.5 Crore. The respondent countered, highlighting the creation of 21 fake entities passing ITC without actual supply of goods, amounting to Rs.57.61 Crore. The respondent emphasized the necessity of custodial interrogation based on the money trail and evidence linking the applicant to the fraudulent activities.

3. The court considered the material provided, including details of the fake firms, transactions, and the applicant's involvement. The court noted the importance of personal interrogation to fully uncover the fraud. Referring to previous judgments, the court found prima facie evidence justifying custodial interrogation and denied the applicant's request for bail, ultimately rejecting the application and vacating interim protection.

4. The judgment highlighted the distinction between prosecution and assessment under the CGST Act, emphasizing that prosecution is not subject to the verification of returns or the registration of an FIR. The court also noted the Commissioner's authority to order arrest based on a belief of the accused's involvement in specified offenses, further supporting the decision to deny bail and proceed with custodial interrogation.

5. In conclusion, the court's decision was based on the substantial evidence linking the applicant to fraudulent activities involving fake entities and ITC manipulation. The denial of bail was justified by the need for thorough interrogation to uncover the extent of the fraud, as supported by previous judgments in similar cases.