1. Recently print as well as online media has written a lot about arrests under GST. The sudden surge in the interest stems from the fact that the Supreme Court has refused to interfere with a decision of a High Court which did not prevent the arrest of the directors/employees (concerned with the alleged act of evasion) by the department without even issuing a show-cause notice or making an assessment. The objective of the present article is to briefly examine the referred decisions and leave the readers with certain important questions which shall require deeper examination by the highest court to lay down important principles. This is because the power to arrest, although required to ensure that the evaders are met with the strictest punishment, can also incentivize corruption if left unchecked.
Case before the Telangana High Court
2. Bunch of writ petitions were filed before the Telangana High Court (re: V. Ramana Reddy v. Union of India WP No.4764 of 2019) essentially arguing for a relief by way of preventing arrests of certain persons (directors/employees concerned with the act) allegedly involved in facilitating/claiming fake input tax credit without actual movement of goods.
3. Facts involved in the referred petitions were similar. Essentially summons were issued by the department threatening prosecution (in some cases) or even authorizing arrests of the persons alleged to be involved in facilitating/claiming fake input tax credit without actual movement of goods.
4. High Court refusing to prevent the arrests made following observations:
5. A writ petition under Article 226 of the Constitution of India can be filed by the petitioners seeking direction from the Court not to arrest them. The High Court observed that Sec. 438 of the Code of Criminal Procedure for anticipatory bail cannot be invoked in the present case as no first information report gets registered before the power of arrest under Section 69(1) of the CGST Act, 2017 is invoked. However as the enquiry by the officers of the GST Commissionerate is not a criminal proceeding, it is nevertheless a judicial proceeding and hence unless the power to invoke Sec. 438 supra is not specifically ousted by a special enactment (e.g. Section 18 of the Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act, 1989), a recourse can be taken to Article 226 which provides for the power of the High Court to grant appropriate reliefs. However relying on the earlier decision of the Supreme Court (re: Km. Hema Mishra v. State of Uttar Pradesh 2014 (4) SCC 453) High Court observed that such power under Article 226 should be exercised with extreme caution and sparingly in those cases where the arrest of a person would lead to total miscarriage of justice. Hence in the present petitions, High Court found it permissible to entertain the petition seeking prevention of arrest by the GST department.
6. Protection under Sections 41 and 41-A of the Code of Criminal Procedure may also be available to the petitioner. Section 41A was inserted in the Code of Criminal Procedure by way of Criminal Procedure Code Amendment Act, 2008 and was further modified by another Amendment Act, 2010. Section 41A(3) of Cr.P.C., prohibits the arrest of a person who complies and continues to comply with a notice for appearance issued under sub-section (1) of Section 41A of Cr.P.C. However, Section 41A(3) of Cr.P.C. also gives discretion to the Police Officer, for reasons to be recorded, to arrest the person even though he complied with and continued to comply with the notice under sub-Section (1) of Section 41A of the Code. It was further observed that said protection can be sought even before the arrest of the person and not only after the arrest u/s 69(3) of the CGST Act, 2017. In the present case High Court however did not find favor of preventing the arrest by exercising the said provisions. It seems that the same is based on the fact that if “reason to believe” as appearing u/s 69(1) is available and even if the same is not recorded on the warrant authorizing the arrest (but recorded on their file) the department still has the power to arrest.
7. There are certain incongruities between Sections 69 and 132 of the CGST Act, 2017. Under sub-Section (1) of Section 69, the power to order arrest is available only in cases where the Commissioner has reasons to believe that a person has committed any offence specified in clauses (a) to (d) of sub-Section (1) of Section 132 CGST Act, 2017. These offences are as under:
a) supplies any goods or services or both without issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax
b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax
c) avails input tax credit using such invoice or bill referred to in clause (b);
d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due
8. The maximum tenure of imprisonment depends on the amount of tax involved (e.g. 5 years if the tax amount involved exceeds INR 5 crores). Further said offences are made cognizable and non-bailable under Section 132(5) of the CGST Act, 2017. Therefore the power of the Commissioner to order the arrest of a person, can be exercised only in cases where such a person is believed to have committed a cognizable and non-bailable offence. Hence as against 12 different types of offences from clauses (a) to (l) u/s 132(1) only 4 types of offences referred above which have been declared cognizable and non-bailable can lead to arrest. This observation is further fortified by the fact that Sec. 69(2) of the CGST Act, 2017 obliges the Officer, who carries out the arrest to inform the arrested person of the grounds of arrest and to produce him before a Magistrate within 24 hours. Hence the same can only apply to cognizable and non-bailable offences.
9. Interestingly though Sec. 69(3) deals in entirety only with cases of persons arrested for the offences which are indicated as non-cognizable and bailable. While clause (a) of sub-Section (3) gives two options to the Officer carrying out the arrest, namely, to grant bail by himself or to forward the arrested person to the custody of the Magistrate, clause (b) confers the powers of an Officer in charge of a police station, upon the Deputy Commissioner or the Assistant Commissioner (GST), for the purpose of releasing an arrested person on bail, in the case of non-cognizable and bailable offences. Thus even though Section 69(1) of the CGST Act, 2017 does not confer any power upon the Commissioner to order the arrest of a person, who has committed an offence which is non-cognizable and bailable, sub-Section (3) of Section 69 of the CGST Act, 2017 deals with the grant of bail, remand to custody and the procedure for grant of bail to a person accused of the commission of non-cognizable and bailable offences. Hence clearly there is some incongruity between sub-Sections (1) and (3) of Section 69 read with section 132 of the CGST Act, 2017.
10. To say that a prosecution can 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. Therefore, the argument that there cannot be an arrest even before adjudication or assessment was not found acceptable.
11. Merely because compounding of an offence is permissible (by paying dues as well as compounding fees) cannot be a ground to prevent the arrest. The Court observed that in the present case even if the petitioner are allowed to apply for compounding the Court did not find that there can be any meeting point given the huge sum involved (as department will surely reject the offer) and hence on this ground an arrest cannot be prevented.
12. It was also observed that even though the officer making an arrest is not a police officer, the same cannot prevent the arrest because Sec. 69(2) obliges the Officer authorized to arrest the person, to produce the arrested person before a Magistrate within 24 hours. Immediately, upon production, the Magistrate may either remand him to judicial custody or admit the arrested person to bail, in accordance with the procedure prescribed under the Code of Criminal Procedure. There is no question of police custody or custody to the Proper Officer in cases of this nature.
13. The objective of arresting a person need not be only to facilitate further investigation. The Court observed that objects of pre-trial arrest and detention to custody pending trial, are manifold as indicated in section 41 of the Code. It includes preventing such person from committing any further offence or making any inducement, threat or promise to any person acquainted with the facts of the case so as to dissuade him from disclosing such facts.
14. Lastly on the present facts involved, despite above observations, without going much into the merits of it as the cases are yet to be adjudicated by the department and only the limited question before the Court was with respect to whether an arrest can be made or not, the Court held that the main allegation of the Department against the petitioners is that they are guilty 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 has 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 is to the tune of about Rs. 225 crores. GST law is yet to reach its second anniversary and if someone 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, the Court found nothing wrong in the department seeking arrests of such persons.
Before the Supreme Court
15. The Supreme Court vide SLP (Crl.) No. 4430/2019 dismissed the petition challenging the above referred Telangana High Court judgment. Further the Supreme Court in the case of Union of India v. Sapna Jain & Ors. SLP (Crl.) No. 4322-4324/2019 while issuing the notice, wherein department has filed the SLP against an interim order of Bombay High Court directing the department not to make arrests, cautioned the High Courts to consider the dismissal of SLP by it against the Telangana High Court ruling for future cases. Hence the Supreme Court has now appreciated the possibility of varied views of the issue and hence has decided to hear the matter in due course.
Larger issues to be considered by the Supreme Court
16. Above discussions hence brings us to a point wherein we will have to wait till the Supreme Court has a say on the following larger issues:
a) Can a writ be entertained by the Court seeking prevention from arrest in all the cases or only in certain exceptional cases ? If it can be entertained only certain cases, what shall be the factors that the Court must consider while deciding whether to admit or not ?
b) When can protection under sections 41 and 41-A of the Code of Criminal Procedure be available to the petitioner ? Whether the “reason to believe” should be beyond a reasonable doubt or can even be circumstantial ?
c) How to resolve incongruities between Sections 69 and 132 of the CGST Act, 2017 ? Can an arrest be made only in cases where the offence is cognizable and non-bailable ?
d) Can a person be arrested even without serving him with the notice to afford an opportunity for hearing ? Also can an arrest precede assessment ?
e) Can an arrest be made if a person can make an application for compounding ? Can an arrest be made without rejecting an application for compounding, if made prior to arrest ?
f) Apart from an hindrance in investigation, on what other grounds can an arrest be made ?
g) What yardsticks must be considered by the department before invoking the power to arrest so as to ensure that the said power does not become a tool to encourage corruption ?
17. Author believe that the answers to all the questions highlighted above shall determine the way the provisions related to arrests shall be exercised in future. Author however believes that on one side an evader should be met with strictest punishment but on the other side an innocent should not be punished without affording an opportunity ? A fine balance needs to be maintained and it is hoped that the Supreme Court will maintain the same when they decide the case ?
(views are strictly personal)