Bogus GST ITC- HC rejects bail to prevent Tampering of Evidence

Mr. Ashok Kumar Vs Commissioner CGST & Central Excise (Bombay High Court)

Taking into consideration, the facts of the case, though the officers under the CGST Act, cannot seek custody of the arrested persons for completing the investigation, respondent’s contention that applicant’s detention in custody is necessary to prevent him from causing the evidence of the offence to disappear or tampering such evidence is well founded. Counsel for the respondent has correctly placed reliance on Section 41 of the Criminal Procedure Code in support of his argument and also relied on the Clause-(VI) of notings dated 20^th January, 2020 which suggest involvement of such two other persons.

In view of the facts of the case and in the larger interest of the public and the State, in serious cases like this, I am not inclined to exercise discretion under Section 439 of the Criminal Procedure Code in favour of applicant no.1. It is rejected.

So far as applicant no.2 is concerned, material on record indicates and suggest that, applicant no.2 is wife of applicant no.1 and is a dormant and sleeping partner and she is not participating in the day-to-day business of the firm. Applicant no.2 is a housewife. Having regard to these facts, in my view, custody of the applicants will not further the case/investigation of the respondent and therefore pre-arrest bail is granted to the applicant no.2 and pre-arrest bail application of applicant no.1 is rejected.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

1. Heard Counsel for the parties.

2. Perused file/notings produced by the Commissioner of CGST (Central Excise) Navi Mumbai, Commissioner-VIII.

3. Apprehending the arrest on accusation of  having committed a non-bailable offence in terms of Section 132(1)(b) and (c) read with Section 132(5) of the Central Goods and Services Tax Act, 2017 (“CGST Act” for short), applicants are seeking directions under Section 438 of the Criminal Procedure Code, that in the event of their arrest they shall be released on bail.

4. FACTS OF THE CASE :

(A) Applicants, who are partners of M/s. Sheela Sales Corporation, a ‘registered person’, within the meaning of Section 2(94) of the CGST Act is engaged in the business of trading. Applicant no.1 is husband of applicant no.2. Respondent no.1 is officer for the purposes of the said Act. Applicant no.1 would claim that applicant no.2 (his wife) being dormant partner, does not participate in the business of the firm at all.

(B). It appears, Form –GSTR-3B, a summary return of inward and outward supplies, filed by the applicants’ firm revealed that the said firm had availed, Input Tax Credit (ITC) of Rs.53.50 crores during the period July, 2017 to September, 2019 on invoices valued at Rs.352.92 crores.

(C)  It is the respondent’s case that, GSTR-3B  returns were filed belatedly, in as much as, GSTR-3B for the months, July, 2017 to January, 2018 were filed in October, 2018; GSTR –3B for the months March, 2018 to October, 2018 were filed in April, 2019; GSTR-3B for the months November, 2018 to July, 2019 were filed in November, 2019; and GSTR-3B for the months of August, 2019 to November, 2019 were filed in December, 2019.

(D). Upon noticing the gross irregularities committed by M/s. Sheela Sales Corporation (“firm” for short), Officer of the respondent no.1 initiated a preliminary enquiry wherein it was found that ITC of Rs.63.50 crores was availed by applicant’s firm on the basis of invoices said to be issued by M/s. Jai Bajrang Traders, a firm located at Uttar Pradesh. Further, investigation revealed that, M/s. Jai Bajrang Traders is not a genuine firm and moreso, the applicants’ firm had also failed to produce proof of movement of goods, such as copies of e-way bills or any other proof of receipt or storage of goods. The applicants had also failed to furnish, proof of payment made to M/s. Jai Bajrang Traders within 180 days. It is respondent’s case that, as per the provisions of second proviso to Section 16(2) of CGST Act, recipient has to make payment to the supplier of goods within 180 days of issue of invoice, and if he fails to make payment, then an amount equal to Input Tax Credit availed by the recipient shall be added to the tax liability. It is respondents’ case that, as per the provisions of Section 37(1) read with Rule 59 of CGST Act, every supplier has to furnish details of outward supply of goods in Form GSTR-I. On the basis of GSTR-1 filed by the supplier, Form GSTR-2A is autopopulated at the end of the recipient, wherein all details of inward supplies are captured. During the course of preliminary investigation, though efforts were made to generate GSTR-2A of the applicant’s firm from GSTN Portal, the same could not be generated.

(E) The investigation further revealed that, the applicant’s firm after availing the ITC of Rs.53.50 crores without any actual receipt of goods has also passed on the said ITC of Rs.53.50 crores to six firms, out of which five firms, namely M/s. Chandan Enterprises, M/s. Sheela Sales Private Limited, M/s. Chandan Sagar Sales Pvt. Ltd. M/s. Chandan Sagar Constructions Pvt. Ltd and M/s. Structeco Infrastructure Pvt. Ltd are closely held entities of M/s. Sheela Sales Corporation, in as much as proprietor or partner or a Director are common and are related to each other. Investigation also revealed that, above referred five firms have availed and passed on the said credit of Rs.63.50 crores to 360 other firms located in various parts of the country.

(F). The investigation, thus carried out revealed that applicant’s firm, namely M/s. Sheela Sales Corporation had not only availed fraudulent ITC of Rs.63.50 crores during the period July, 2017 to September, 2019 without any actual receipt of goods but also passed on the same to six firms out of which five firms are closely held entities of their firm.

(G) During the course of investigation, seven summonses were issued to applicant no.1 and four to applicant no.2; however, applicant no.1 responded only to two summonses dated 25^th November, 2019 and 17^th January, 2020. Applicant no.2 did not respond to the summons, at all.

(H) Avadh Bihari Baig who is Director of M/s. Sheela Sales Pvt. Ltd. was also summoned for recording the statement; however, he also did not honour the summons dated 20^th January, 2020.

(I).  It is respondents’ case that, applicant no.1 in his statement dated 9^th December, 2019 and 20^th January, 2020 admitted that none of his firms had received goods from M/s. Bajrang Traders on which invoices they have availed ITC of Rs.53.63 crores; and that none of his firms has made payment to M/s. Jai Bajrang Traders.

5. In essence, therefore the main allegation of the respondents is that, applicants are guilty of circular trading by claiming Input Tax Credit on the materials never purchased and passing on such Input Tax Credit to companies to whom they never sold any goods. It is therefore the contention of the respondent no.1, the availment of ITC of Rs.63.53 crores without actual receipt of goods in contravention of Section 132(1)(b) and (c) is a cognizable and non-bailable offence under Section 132(5) and punishable with imprisonment for a term which may extend to five years and with a fine under Section 142(1)(i) of the CGST Act.

6. As against this, it is applicants’ contention that,

(i) CGST Act, 2017 prescribes a procedure for assessment even in cases where the information furnished in the return sheet found to have discrepancies and unless a summary assessment/special audit is conducted for determining the liability, no offence can be said to be made out under the Act. In other words, prosecution cannot be launched without assessment and therefore there is no question of arrest.

(ii) That even otherwise, the applicants have filed GSTR-3B, returns though belatedly and therefore unless and until returns are scrutinized and the liability is determined, a prosecution cannot be launched.

(iii) That once returns are filed, at the highest, the respondents while assessing, are entitled to impose penalty.

(iv) In absence of First Information Report (FIR) , respondents cannot arrest the applicants.

(v) The issue as to whether arrest could be caused, and applicability of Criminal Procedure Code to the proceedings under the CGST Act is pending before the Hon’ble Supreme Court and in a matter of identical nature, Division Bench of this Court has protected the petitioners therein, by injuncting the respondents from taking coercive steps. Reliance has been placed on the order dated 31^st July, 2019 passed in Writ Petition No. 380 of 2019 (Asha Jain V/s. Union of India).

7. Mr. Saraogi, learned Counsel for the applicants, also furnished written submissions on behalf of the applicants on 5^th August, 2020 and for the first time contended that applicants are in possession of all relevant invoices (running into 2000 pages) and transport bills which the applicants are ready and willing to submit to the respondent no.1 and therefore till these bills are verified, applicants be granted protection from arrest.

Second contention in the written submission (for the first time) is that, the parties from whom the applicants have purchased the material had from time to time received OTP in respect of the transactions made and it is only through OTP, the transactions were done.

8. Before dealing with the contentions raised by the applicants, it may be stated that, M/s. Jai Bajrang Traders, have filed FIR against the applicants with police at Gyanpur, Uttar Pradesh on 29^th January, 2020 alleging therein that the present applicants have taken charge of their firm and forged the invoices in their favour. Though, the applicants have admitted the fact of registration of FIR, a copy of the FIR has not been produced, but it is contended in the written submission that, the police after investigation, found the allegation made by M/s. Jai Bajrang Traders were false on the face of it. However, no such report, exonerating the applicants has been filed. In the circumstances, the fact remains that, FIR has been lodged against the applicants by M/s. Jai Bajrang Traders from whom goods worth Rs.350.92 crores were allegedly purchased by the present applicants’ firm. It is one circumstance against the applicants, which requires investigation.

9. After perusing the note sheets in the file and the statement of applicant no.1 recorded in response to summons issued under Section 70 of the CGST Act, following facts emerge : (emphasis supplied)

(i) Applicants’ firm availed ITC of Rs.63.53 crores during the period July, 2017 to September, 2019 on invoices valued at Rs.352.92 crores.

(ii) M/s. Jai Bajrang Traders was sole supplier.

(iii) GSTR-3B Returns were filed belatedly, as detailed in paragraph-4(C) hereinabove.

(iv) In preliminary investigation, invoices allegedly issued by M/s. Jai Bajrang Traders were found not genuine as applicants had failed to produce proof of movement of goods, copies of e-way bills or any other proof of receipt/storage of goods.

(v) M/s. Jai Bajrang Traders, Uttar Pradesh had filed FIR against the applicants for forging their bills and availing Input Tax Credit without there being supply of goods.

(vi) That autopopulated Form GSTR – 2A could not be generated since the supplier i.e M/s. Jai Bajrang Traders had not furnished details of outward supply of goods in Form GSTR-I.

(vii) Applicants were not in possession of tax invoices or debit note issued by the so-called suppliers registered under CGST Act and had not received the goods while claiming input tax credit.

(viii) On verification from E-Way Bill Portal, it is found that no e-way bill has been generated in the name of M/s. Sheela Sales Corporation.

(ix) Applicant no.1 is proprietor, partner or Director in five Companies namely, M/s. Sheela Sales Corporation, Chandan Enterprises, M/s. Sheela Sales Private Limited, M/s. Chandan Sagar Sales Pvt. Ltd. and M/s. Chandan Sagar Construction.

(x) As per the GSTR-1 filed by M/s. Sheela Sales Corporation, they have made supplies to their closely held entities –

(10). Thus from the facts emerging on perusal of file notings and statements of applicant no.1 recorded in response to summons issued under Section 70 of the CGST Act, prima-facie suggest, applicants’ complicity/involvement in availing fake input tax credit without movement of goods on forged invoices Rs.63.50 crores in breach of provisions of Section 16 of CGST Act, which is cognizable offence under Section under Section 132(1)(b)(c) read with Section 132(5) of the CGST Act.

11. It may be stated that as per the provisions of Rule 138 of CGST Act, 2017 (E-Way Rules) generation of E-way bill is mandatory in case of inter-state supply of goods from 1^st April, 2018. Besides, as per the provisions of sub-rule(4) of Rule 138 of Central Goods and Services Act, 2017 a unique E-way bill number (EBN) generated on the common portal is also made available to the supplier, recipient and the transporter of goods. However, applicants have failed to produce EBN particulars, transporter’s details, proof of receipt of goods either by himself or his agent or warehouse keeper and payment proof either by himself or by agent or otherwise.

12. It may be stated that, the applicant no.1 in his statement recorded on 9^th December, 2019 and 20^th January, 2020 admitted, that neither his firm has received goods from M/s. Jai Bajrang Traders nor, has made any payment to M/s. Jai Bajrang Traders. In terms of Section 136 of the CGST Act, disclosure in the statement is “relevant” for proving any offence under the said Act. It may also be stated that, applicants have not retracted the statements. Under these circumstances, contention of respondents that, fraudulent ITC claim of Rs.63.53 crores is a matter of grave concern and requires thorough investigation for which applicants’ presence is absolutely necessary. This contention is well founded and deserves consideration.

13. It appears, the applicants instead co­operating with the ongoing investigation by submitting relevant documents and making themselves available for recording the statements, filed an anticipatory bail application before the District and Sessions Court, Thane and thereafter before this Court.

14. Let me now deal with the applicants’ contention that, unless returns GSTR-3B are verified and liability is determined, prosecution cannot be lodged. Chapter-XIX of the CGST Act, spells out offences committed by the registered person and penalties to be imposed; whereas, Chapter-XII lists out, modes of “assessments”. Section 2(11) of the Act, defines expression “assessment” which reads as under:

“Assessment” means determination of tax liability in this Act and includes self-assessment, re-assessment, provisional assessment, summary assessment and best judgment assessment.”

Upon reading the provisions contained in Chapter-XIX, it may be stated that scheme of the Act, does not make provisions of Section 122 to 138 applicable, subject to “assessment”. Both the Chapters, i.e. Chapter-XIX and Chapter-XII are distinct and application of the provisions thereunder are distinct and not subject to each other. If argument of applicants is accepted, it will turn the provisions of the prosecution nugatory. Therefore, this contention is also rejected.

15. Mr. Saraogi’s next contention is that, registration of FIR is a condition precedent for arresting the person, also deserves no consideration.

Section 69 of the CGST Act empowers Commissioner to order and authorize to arrest a person if he has “reason to believe” that person has committed any offence specified in Clause (a) or Clause (b) or Clause (c) or Clause (d) of sub-section (1) of section 132 which is punishable under Clause (i) or (ii) of sub-section (1) or sub­section (2) of the said Section. Herein, facts emerged from file notings do suggest that Commissioner has had, reason to believe, the applicant’s complicity in committing the offence under Clause (b) and (c) of sub-section (1) of Section 132 of the CGST Act. I have culled out the facts emerging from the notings hereinabove.

16. Mr. Saraogi’s next contention is, that a person facing similar charges has been protected by the Division Bench of this Court in the case of Sapna Jain V/s. Union of India in Writ Petition No. 1996 of 2019 and other connected petitions, vide order dated 8^th July, 2019 and therefore the applicants also be protected.

I have perused the order dated 8^th July, 2019. It appears, in Sapna Jamn’s (supra) case on 11^th April, 2019 Division Bench of this Court had issued notices to the respondents and directed not to take coercive action against the petitioner till the next date of hearing. Accordingly, petitions were adjourned. On 8^th July, 2019, the respondent-Union of India opposed the continuation of the ad-interim relief relying on the order of the Hon’ble Apex Court dated 29^th May, 2019 passed in Special Leave Appeal (Cri) No. 4322-4324/2019. It reads as under :

“. SLP (Crl.) Nos. 4322-4324/2019, Diary No. 15477/2019 and SLP (Crl.) No. 4546/2019

• • Delay condoned.
  • Issue notice returnable in four weeks.
  • As different High Courts of the country have taken divergent views in the matter, we are of the view that the position in law should be clarified by this Court. Hence, the notice.
  • As the accused-respondents have been granted the privilege of pre-arrest bail by the High Court by the impugned orders, at this stage, we are not inclined to interfere with the same. However, we make it clear that the High Courts while entertaining such request in future, will keep in mind that this Court by order dated 27.5.2019 passed in SLP (Crl.) No. 4438/2019 had dismissed the special leave petition filed against the judgment and order of the Telangana High Court in a similar matter, wherein the High Court of Telangana had taken a view contrary to what has been held by the High Court in the present case.”
  • Beyond the above, we do not consider it necessary to observe anything further.
  • The present matters alongwith other connected matters (SLP (Cri.) No.244/2019, W.P.(Crl.) No. 118/2019, T.C. (Crl.) No. 3/2018, T.C. (Crl.) No.4/2018, SLP (Crl.) No. 4634/2014, SLP (Crl.) No. 993/2016, W.P. (Crl.) No.389/2018, W.P. (Crl.) No. 333/2018 and W.P. (Crl.) No.34/2019) be listed before a Bench of three judges.

SLP (Crl.) No. 4571/2019

• Having heard learned counsel for the petitioner and upon perusing the relevant material, we are not inclined to interfere. The special leave petition is accordingly dismissed.
• Pending interlocutory applications, if any, shall stand disposed of.”
• In view of this order of the Hon’ble Apex Court, contention of Mr. Saraogi, seeking parity is rejected.

17. It may be stated that, for the first time, applicants in their written submissions filed before this Court on 5^th August, 2020 submitted that they are in possession of all the relevant documents in support of ITC claim and they are ready and willing to submit the same to the Officer of respondent no.1. Another contention raised for the first time is that, applicants had purchased material only after receiving the required OTP of transaction.

• These two submissions are prima-facie afterthought, in as much as, respondents had been afforded sufficient opportunities by issuing seven summons to applicant no.1 and four to applicant no.2; however, they did not produce any document to substantiate, that at the time of claiming Input Tax Credit, they were in possession of invoice and/or there was movement of goods from the supplier to the applicant’s firm or to their assignees. Infact, applicant no.1 in his statements dated 9^th December, 2019 and 20^th January, 2019 recorded in response to summons has admitted, thus :

“M/s. Sheela Sales Corporation does not receive material from M/s. Jai Bajrang Traders, a supplier located in UP. Neither any e-way bill is generated by M/s. Jai Bajrang Traders in the name of M/s. Sheela Sales Corporation. M/s. Jai Bajrang Traders only issued invoice in the name of M/s. Sheela Sales Corporation.”

This admission/statement has not been retracted by the applicant till date. Moreover, applicants did not produce invoice and transport receipts. On the backdrop of these facts, invoice and transport bills produced at the eleventh hour, is nothing but an attempt to prolong the proceedings, so that interim pre-arrest protection granted by this Court would continue to operate till the bills are verified.

• It is to be noted that, applicants in their written submissions did not explain why applicants could not produce invoices and other documents before the respondent-Officer and further when such invoices came in their possession. Applicants ought to have been explained and furnish the explanation in view of the fact that, M/s. Jai Bajrang Traders, the sole supplier has lodged FIR against the applicants for forging the invoices.
• Be that as it may, when respondents were confronted with these invoices and transport receipts, learned Counsel for the respondent would submit that invoices and transport bills were submitted to the office of the respondents recently. He would submit, some of the invoices and transport bills were verified by the Officer which revealed that, many of the vehicle  numbers are bogus and further also  found that vehicle’s  registration date is latter then the lorry receipt dates. A note submitted by the Counsel for the respondent, is reproduced hereinbelow :

“The documents submitted before the Hon’ble Court by the applicant’s advocate alongwith the written submission dated 05.08.2020 are as below:

1. Invoices issued by M/s. Jay Bajrang Traders (in respect of which M/s. Jay Bajrang Traders has filed a police complaint that the applicants have taken charge in respect of their (M/s. Jay Bajrang Traders) and have created necessary bills in their (applicant’s firm) favour.

2. Lorry receipts – verification of which revealed that many of the  Vehicle Nos. are bogus. In many cases,  it is found that the vehicle registration date is later than the Lorry receipts date. Details of five such Lorry receipts are given below for example –

III. Bank account statements of M/s. Chandan Enterprises M/s. Sheela Sales Pvt. Ltd. And M/s. Sheela Sales Corporation – a perusal of the same reveals that no payment has been made to M/s. Jay Bajrang Traders.

IV. GSTR-2A- which have been generated after initiation of investigation as the GSTR-1 were filed in November, 2019 and thereafter.

V. Form 3GB for F.Y. 2017-18 and 2019­20 which has been prepared on 24.12.2019 and 30.10.2019 respectively i.e. after initiation of investigation. Further, the Chartered Accountant has observed that ‘the books of accounts have not been produced for verification. Audit has been carried out on the basis of information and documents before us.” Thus, the authenticity of the said Form 3GB is itself in doubt as the same has been prepared without production of books of account. Copies of Form 3GB is annexed herewith.”

18. Thus taking into consideration, the facts of the case, though the officers under the CGST Act, cannot seek custody of the arrested persons for completing the investigation, respondent’s contention that applicant’s detention in custody is necessary to prevent him from causing the evidence of the offence to disappear or tampering such evidence is well founded. Counsel for the respondent has correctly placed reliance on Section 41 of the Criminal Procedure Code in support of his argument and also relied on the Clause-(VI) of notings dated 20^th January, 2020 which suggest involvement of such two other persons.

19. In view of the facts of the case and in the larger interest of the public and the State, in serious cases like this, I am not inclined to exercise discretion under Section 439 of the Criminal Procedure Code in favour of applicant no.1. It is rejected.

20. So far as applicant no.2 is concerned, material on record indicates and suggest that, applicant no.2 is wife of applicant no.1 and is a dormant and sleeping partner and she is not participating in the day-to-day business of the firm. Applicant no.2 is a housewife. Having regard to these facts, in my view, custody of the applicants will not further the case/investigation of the respondent and therefore pre-arrest bail is granted to the applicant no.2 and pre-arrest bail application of applicant no.1 is rejected. Hence, the following order is passed :

O R D E R

(i) Pre-arrest bail of applicant no.1 is rejected.

(ii) Pre-arrest bail of applicant no.2 is granted, subject to conditions viz. that in the event of her arrest, she shall be released on bail on furnishing bond in the sum of Rs.50,000/- with one or more sureties in the like amount.

(iii) In view of the prevailing Pandemic Covid-19, applicant no.2 is directed to be released on cash bail of equivalent amount.

(iv) The applicant no.2 shall furnish particulars of her residence and contact details to the Officer of respondent no.1 within seven days from the date of this order.

(v) Applicant no.2 shall respond to the notices/summons issued by respondent no.1 by attending to the office of respondent no.1.

(vi) Applicant no.2 shall not tamper with the evidence or attempt to influence or contact the complainant, witnesses or any person concerned with the case.

(vii) Applicant no.2 shall attend concerned police station as and when called and co-operate in the investigation.

21. At this stage, learned Counsel for the applicant prays that the interim relief granted to the applicant no.1 may be continued for a period of 8 weeks. Having regard to the facts of the case, I am not inclined to continue the interim relief. The prayer is rejected.

22. It is made clear that observations made hereinabove be construed as expression of opinion only for the purpose of granting bail and the same shall not in any way influence the trial in other proceedings.