2025 (4) TMI 1282 - HC - GST

Legality of arrest of the petitioner under Section 132(1)(c) read with Section 132(1)(i) and Section 132(5) of the Central Goods and Services Tax Act 2017 (CGST Act) - absence of a prior adjudication or quantified demand under Section 74 of the CGST Act - fraudulent availment of Input Tax Credit (ITC) on the basis of allegedly fake invoices and non-physical receipt of goods - HELD THAT - The service Tax Authorities before proceeding against the tax payer either for recovery of tax due or penalty or before deciding to lodge a criminal complaint must consider all the relevant documents in relation to receipt of goods and services and in case of contravention of Section 132 (1) (c) of Central Goods and services Tax Act if the Authorities are of the view that on offence under the said section is committed should either cause inspection at the business premises of the tax payer to satisfy themselves or ask the tax-payer for clarification before deciding to proceed against the tax-payer under Section 132 of CGST Act. It is to be remembered that the reputation of a business man tarnishes when a complaint is lodged against him and he is arrested in connection with his business activity. As CGST Authority is not an individual but Government Authority and State within the meaning of Article 12 of the Constitution it is not only their duty to ensure revenue of the state in accordance with law but also to see that business men tax payers are not unnecessarily harassed and their reputation is not tarnished and personal liberty is not unnecessarily infringed. Thus the Authority should proceed in a reasonable manner and apply their mind before deciding to set the criminal law in motion against a tax-payer. In the instant matter the CGST Authority upon receiving the report of panchanama dated 30/03/2025 ought to have applied their mind and could have conducted further enquiry or give an opportunity to the petitioner of being heard before lodging the complaint on 31/03/2025 and arresting the petitioner. However as the CGST Authority has on enquiry collected some information and documents before lodging the complaint it would not be proper to make any further observation with regard to the merits of the case but it is necessary to decide as to whether petitioner should be granted bail. In the instant case the petitioner is charged with committing an offence the maximum punishment of which is five years. Now considering the materials on record it appears that the relevant documents and information is with the respondent authority thus there is no scope for tampering evidence. As the petitioner has his business there is no chance to abscond. Moreover it appears from record that the petitioner has-co-operated with the respondent authority. As a question of law is raised that once the petitioner has filed bail application before the Learned Sessions Court the bail application before this Court is not maintainable and the Learned Advocate for the petitioner submits that the bail application before Sessions Court is filed due to miscommunication and petition before session court will be withdrawn as not pressed it is necessary to address on this issue - In this regard it is to be noted that although Section 439 CrPC read with Section 483 of Bharatiya Nagarik Suraksha Sanhita 2023 confers special power upon High Court and Court of Session to grant bail but once an application is filed before Court of Session another should not be filed in High Court without withdrawal from sessions Court However as bail applications are not affirmed by the accused and the accused simply executes vokalatnama being in custody without having knowledge what specific steps are taken he cannot be made to suffer for no laches on his part. The petitioner be released on bail with 2 sureties of Rs. 10, 000/- each subject to satisfaction of Learned ACJM Siliguri. Conclusion - The arrest was effected without any judicial warrant and significantly before any formal complaint had been filed before the Learned Magistrate. No adjudication proceedings show cause notice or quantification of demand under Section 74 of the CGST Act preceded the arrest nor was there any material indicating culpable intent. The arrest therefore is not only disproportionate but wholly unjustified in law and facts. Bail application allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether the arrest of the petitioner under Section 132(1)(c) read with Section 132(1)(i) and Section 132(5) of the Central Goods and Services Tax Act, 2017 (CGST Act) was lawful and justified, particularly in the absence of a prior adjudication or quantified demand under Section 74 of the CGST Act.

- Whether the petitioner, as authorized signatory of M/S Buddhu Sha and Co., was liable for fraudulent availment of Input Tax Credit (ITC) on the basis of allegedly fake invoices and non-physical receipt of goods.

- Whether the non-availability of toll plaza crossing records for vehicles carrying goods, as reflected in E-way Bills, constitutes sufficient "material" or "reason to believe" to justify arrest under the CGST Act.

- Whether the authorities complied with procedural safeguards and guidelines regarding arrest under the CGST Act, including recording and furnishing "reasons to believe" based on credible material.

- Whether the petitioner's cooperation during investigation and absence of incriminating material found during search operations negates the justification for arrest.

- Whether the bail application before the High Court is maintainable in view of a pending bail application before the Sessions Court.

- The appropriate exercise of discretion regarding grant of bail considering the nature of the offence, evidence, and conduct of the petitioner.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Lawfulness and justification of arrest under CGST Act

The relevant legal framework includes Section 132(1)(c), Section 132(1)(i), and Section 132(5) of the CGST Act, which prescribe punishment for offences involving fraudulent availment of ITC, and Section 69(1) which empowers the Commissioner to arrest a person if there is reason to believe that the person has committed such offence. The Court also considered the procedural safeguards mandated by judicial precedents and Ministry of Finance guidelines (Instruction No. 02/2022-23 GST Investigation dated 17.08.2022).

The Court noted that the arrest was effected without a judicial warrant and prior to filing of any formal complaint, and without any adjudication or quantification of demand under Section 74. The arrest memo did not specify the amount of tax evaded or ITC wrongly availed. The petitioner was arrested on the basis of an Arrest Authorisation Order dated 30.03.2025 issued by the Commissioner, CGST and CX, Siliguri, citing the alleged wrongful availment of ITC amounting to Rs. 37.29 crores based on invoices without actual supply of goods.

The Court emphasized the distinction between "reason to believe" and mere suspicion, citing Supreme Court precedents which require that "reasons to believe" must be recorded in writing, based on credible material, and must be furnished to the arrestee to enable challenge of the arrest. The Court found that the arrest lacked such recorded reasons to believe and was not supported by credible material, rendering it illegal and unjustified.

The Court also relied on the Ministry of Finance's guidelines which mandate that arrest under the CGST Act should not be routine or mechanical but only when necessary to ensure investigation, prevent tampering with evidence, or when the accused is likely to abscond. Given the petitioner's consistent cooperation and absence of any such risk, the arrest was disproportionate.

Issue 2: Allegation of fraudulent availment of ITC based on non-physical receipt of goods

The allegation rests on the claim that vehicles carrying goods, as per 232 E-way Bills issued by ITC Ltd., did not cross all toll plazas on the designated route, implying non-movement of goods and hence bogus ITC claims.

The Court examined the evidence from the panchanama dated 30.03.2025, which recorded physical verification of stock at the petitioner's premises. The verification found all physical stocks in line with stock summaries, no unaccounted or excess stock, and photographic evidence of batch numbers matching invoices. CCTV footage confirmed the arrival and unloading of goods corresponding to a specific E-way Bill for which toll crossing records were missing.

The Court noted that the absence of toll plaza crossing records is not a statutory requirement and cannot be treated as conclusive proof of non-movement of goods. The investigating officers themselves doubted the authenticity of toll crossing data. The Court found that the physical stock verification and documentary evidence furnished by the petitioner created an arguable case negating the allegation of bogus ITC.

Reliance was placed on judicial precedents holding that authorities must consider all relevant documents and evidence before proceeding against a taxpayer, and that mere absence of certain electronic records does not conclusively establish fraud.

Issue 3: Compliance with procedural safeguards and recording of reasons to believe

The Court referred to Supreme Court rulings emphasizing the mandatory nature of recording "reasons to believe" in writing by the authority ordering arrest, and furnishing the same to the accused. Failure to do so renders the arrest illegal.

In the present case, the arrest order and memo did not disclose any detailed reasons or material forming the basis of belief that the petitioner had committed a non-bailable offence. The arrest was made abruptly after a search operation that yielded no incriminating material and despite the petitioner's full cooperation. The Court found this to be a gross abuse of power and arbitrary exercise of arrest authority.

Issue 4: Effect of petitioner's cooperation and absence of incriminating material

The petitioner voluntarily cooperated during the search and investigation, providing access to accounting software and net banking interfaces. No unaccounted stock, cash, or incriminating documents were found or seized. The panchanama recorded these findings and was initially handed over to the petitioner, who refused to replace it with a different version presented by officers later.

The Court observed that such cooperation and absence of adverse findings significantly weaken the prosecution's case and negate the necessity or justification for arrest.

Issue 5: Maintainability of bail application before High Court

The Union of India argued that a bail application was pending before the Sessions Court and therefore the High Court application was not maintainable. The petitioner submitted that the Sessions Court application was filed due to miscommunication and would be withdrawn.

The Court acknowledged that ordinarily, once an application is filed before the Sessions Court, another should not be filed in the High Court without withdrawal. However, it recognized that the accused may not be aware of procedural steps taken by counsel and should not suffer for such lapses. The Court dismissed the Sessions Court bail application as not pressed and proceeded to decide the present application.

Issue 6: Grant of bail considering nature of offence and facts

The offence under Section 132(1)(c) read with Section 132(1)(i) of the CGST Act carries punishment up to five years imprisonment, as the alleged amount involved exceeds Rs. 5 crore.

Considering the materials on record, including the petitioner's cooperation, absence of risk of tampering with evidence, and no likelihood of absconding, the Court found no justification for continued detention during investigation.

The Court also took note of the petitioner's prior compliance with summons and document production, and the fact that adjudication proceedings for an earlier financial year were dropped.

Accordingly, the Court exercised its discretion to grant bail, subject to furnishing bail bonds and sureties, and conditions to cooperate with investigation and not prejudice the inquiry or trial.

3. SIGNIFICANT HOLDINGS

"The arrest was effected without any judicial warrant and significantly before any formal complaint had been filed before the Learned Magistrate... no adjudication proceedings show cause notice or quantification of demand under Section 74 of the CGST Act preceded the arrest, nor was there any material indicating culpable intent... The arrest therefore is not only disproportionate but wholly unjustified in law and facts."

"The absence of toll plaza crossing records is not a statutory requirement and cannot be treated as conclusive proof of non-movement of goods... The panchanama dated 30-03-2025 does not corroborate the case against the petitioner."

"The reasons to believe must be based on creditable material... failure to record and furnish the reasons to believe results in illegal arrest... The power to arrest must be exercised carefully and not in a routine or mechanical manner."

"Personal liberty is an important aspect of our constitutional mandate... merely because an arrest can be made because it is lawful does not mandate that arrest must be made... If the Investigating Officer has no reason to believe that the accused will abscond or disobey summons and has, in fact, throughout cooperated with the investigation we fail to appreciate why there should be a compulsion on the officer to arrest the accused."

"The CGST Authority is not only duty bound to ensure revenue of the state in accordance with law but also to see that businessmen, taxpayers are not unnecessarily harassed and their reputation is not tarnished and personal liberty is not unnecessarily infringed."

"Considering the nature of allegation, materials on record, period of detention and stage of investigation this Court is of the view that further detention of the petitioner is not necessary for the purpose of investigation. Hence the petitioner should be granted bail."

"Once an application is filed before the Court of Session another should not be filed in High Court without withdrawal from Sessions Court. However, accused cannot be made to suffer for no laches on his part."