Mastermind Liability, “Taxable Person” and Writ Discipline in Fake ITC Litigation

Abstract:

The rapid increase in fraudulent Input Tax Credit (ITC) networks has led Indian High Courts to rethink how liability is defined under the Central Goods and Service Tax Act, 2017 (CGST Act). In Devender Singh v. Additional Commissioner, CGST Delhi West (2025) 37 Centax 10 (Del.), the Delhi High Court interpreted “taxable person” in a way that allows penalties under Section 122 to be imposed on the actual person controlling fake or non-existent firms.

This article examines:

1. The Delhi High Court’s doctrinal expansion of “taxable person”;

2. Its restrictive approach to writ jurisdiction in fraudulent ITC matters; and

3. A comparative survey of other High Courts, particularly Punjab & Haryana, Allahabad, Gujarat, and Madras.

This article argues that a new approach to anti-fraud law is developing, with the Delhi High Court leading efforts to protect government revenue through its decisions.

I. Introduction

The GST system relies on the smooth flow of Input Tax Credit under Section 16 of the CGST Act. Fraudulent ITC networks, which often use shell companies, circular trading, fake registrations, and false exports, threaten the very structure of the system.

Judicial intervention in such matters raises three critical questions:

1. Who qualifies as a “taxable person” when the registered entity is fictitious?

2. Is cross-examination an inherent right in GST adjudication?

3. Should writ courts entertain challenges where statutory appeals are available?

The Delhi High Court’s decision in Devender Singh provides a definitive response to these questions.

II. Factual Background and Holding of the Delhi High Court

In Devender Singh, the investigation revealed:

• 41 firms allegedly availing ITC without actual receipt of goods;
• 116 interconnected fake firms linked through common IP addresses, mobile numbers and geolocations;
• Allegations that the petitioner was the mastermind behind circular transactions and bogus exports.

The impugned order imposed penalties aggregating to approximately ₹48.14 crores .

A. Core Issue

Whether a director/partner operating fake firms could avoid penalty under Section 122(1) on the ground that he was not a “taxable person.”

B. Ratio Decidendi

The Court held:

In cases involving fake and non-existent firms with no genuine incorporation or commercial activity, the person who created and operated such firms for fraudulent ITC would be treated as the “taxable person.”

This is a significant doctrinal move. It allows the court to look beyond the company structure and identify the real person who benefits from the fraud.

III. Interpretation of “Taxable Person”: A Purposive Expansion

Section 2(107) of the CGST Act defines “taxable person” as a person who is registered or liable to be registered under the Act.

The petitioner argued that, since the firms were registered entities, liability should attach to them, not to him personally.

The Court rejected this formalistic argument. It reasoned that:

• Where firms are sham or non-existent, the statutory framework cannot be defeated by artificial structuring.
• If the court accepted the petitioner’s argument, it would create a gap in liability, leaving no one accountable for large-scale fraud.

Doctrinal Significance

This interpretation is consistent with:

• Substance-over-form doctrine
• Anti-evasion principles in tax jurisprudence
• The broader principle that statutory interpretation must not facilitate fraud

The judgment implicitly aligns GST penalty jurisprudence with corporate veil-piercing principles traditionally applied in company law.

IV. Cross-Examination in GST Adjudication

The petitioner sought cross-examination of various witnesses whose statements formed part of the investigation record.

The Delhi High Court reaffirmed:

• Cross-examination is not an absolute right in quasi-judicial GST proceedings.
• It must be shown that denial causes specific prejudice.
• Blanket requests cannot convert adjudication into a mini-trial.

This position is consistent with earlier Delhi decisions, which emphasise that GST adjudication is document-driven and administrative in character.

V. Writ Jurisdiction and the Discipline of Section 107 Appeals

A recurring theme in Delhi High Court jurisprudence is judicial restraint in fraudulent ITC matters.

The Court reiterated:

• Existence of an alternative remedy under Section 107 bars writ intervention except in exceptional cases.
• Fraudulent ITC cases involve complex factual analysis unsuitable for writ adjudication.
• Writ courts should not become parallel appellate forums.

This shows the court’s commitment to maintaining the legal process and preventing parties from choosing courts just to get a favorable outcome.

V. Comparative High Court Position

A. Punjab & Haryana High Court

The P&H High Court has shown comparatively greater emphasis on procedural safeguards:

• Orders have been set aside where cross-examination was denied without adequate reasoning.
• Natural justice scrutiny is sometimes more rigorous.

However, in large-scale ITC fraud cases supported by documentary evidence, interference remains limited.

B. Allahabad High Court

Allahabad High Court jurisprudence reflects:

• Strict scrutiny of SCN drafting and quantification.
• Intervention where foundational jurisdictional defects exist.

Nevertheless, where fraud is substantiated through digital and banking trails, writ relief is rarely granted.

C. Gujarat High Court

Gujarat High Court aligns more closely with Delhi in fraudulent ITC cases:

• Strong reliance on the alternative remedy doctrine.
• Limited writ interference absent jurisdictional infirmity.

D. Madras High Court

Madras High Court emphasizes procedural fairness:

• Reasoned adjudication is mandatory.
• Cross-examination may be required where statements are the sole basis of the demand.

Yet, in structured fraud networks, the Court has shown deference to departmental findings.

VII. Emerging Judicial Models

Two discernible models emerge:

1. Systemic Protection Model (Delhi HC)

• Revenue integrity prioritized.
• Purposive interpretation of “taxable person.”
• Strong alternative remedy discipline.

2. Procedural Compliance Model (Certain Other HCs)

• Greater scrutiny of natural justice compliance.
• More willingness to quash defective proceedings.

However, High Courts are coming together on one point: they are less willing to protect fraudulent ITC networks.

VIII. Implications for GST Litigation

A. For Assessees

• Technical pleas based on formal entity status are unlikely to succeed in fraud cases.
• Cross-examination must be justified with specific prejudice.
• Appellate remedy under Section 107 remains the primary recourse.

B. For Revenue Authorities

• Digital forensic linkage (IP, banking, device trails) strengthens adjudication.
• Detailed, reasoned orders are critical to withstand judicial scrutiny.
• Identification of the “controlling mind” is essential in fake firm cases.

IX. Conclusion

The Devender Singh decision marks an important step in the development of GST anti-fraud law. By broadening the meaning of “taxable person” to include the person behind fake companies, the Delhi High Court has made sure that the law cannot be undermined by using company structures as a cover.

Simultaneously, its insistence on appellate discipline under Section 107 underscores judicial restraint in revenue matters involving complex fact matrices.

While other High Courts continue to emphasise procedural safeguards, a broader national trend is unmistakable:

Courts are increasingly unwilling to permit the misuse of GST’s ITC mechanism through shell entities and circular trading structures.

The jurisprudential trajectory suggests that Looking ahead, it seems that future cases about fraudulent ITC will focus less on technical legal arguments and more on strong evidence and the overall integrity of the GST system.