In a recent order dated 15.02.2021, Hon’ble Bombay High Court, in the case of Daulat Samirmal Mehta v. Union of India, W.P. No. 471 of 2021 has passed an important order on power to make arrest under Section 69 of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017). As per the facts of the case, the Petitioner was accused of commission of offences under Section 132(1)(b) and Section 132(1)(c) of the CGST Act, 2017.

In the aforesaid matter, a petition under Article 226 of the Constitution of India was filed by challenging constitutional validity of Section132(1)(b) of the CGST Act, 2017 and sought a declaration that the power under Section 69 of the CGST Act, 2017 can only be exercised upon determination of the liability.

A further prayer has been made to restrain Respondent No.4 (GST Department) from filing any criminal complaint against the petitioner for alleged violation of the provisions of the CGST Act, 2017 which are compoundable offences. Additionally, petitioner sought a direction to Respondent Nos. 2 and 3 to take a decision by passing a speaking order on the compounding applications dated 28.01.2021 filed by the petitioner and the two companies of which he is a director. An interim prayer has also been made for enlarging the petitioner on bail since he is under judicial custody with effect from 21.01.2021.

Herein, we would like to focus on the verdict given by the Hon’ble Court regarding compounding application filed by the petitioner.

Facts of the Case

In the year 2018, Respondent No.4 initiated an investigation on the basis of intelligence inputs regarding alleged fraudulent availment and utilization of input tax credit (ITC) by one M/s. Al Fara’s Infra projects Private Limited on the basis of bogus invoices without actual receipt of goods or services.

During the course of the investigation, statements of various persons including certain officials of M/s. Al Fara’s Infra Projects Private Limited were recorded. In so far petitioner is concerned, on several occasions, summons were issued to him by the office of Respondent No.4 under section 70 of the CGST Act and in response to the summons, petitioner had appeared before the investigating officer in the office of Respondent No.4 whereafter his statements were recorded on 05.12.2018, 12.12.2018, 04.01.2019,15.02.2019 and 21.01.2021.

After recording his last statement on 21.01.2021, petitioner was arrested by officials working in the office of Respondent No.4 whereafter he was produced before the Additional Chief Metropolitan Magistrate, 8th Court, Esplanade, Mumbai along with remand application.

Remand application disclosed that petitioner is accused of committing offence under section 132(1)(c) of the CGST Act, 2017 as his companies had fraudulently availed and utilized ineligible input tax credit (ITC) amounting to Rs.122.59 crores approximately on the strength of bogus invoices without actual receipt of goods or services as mentioned in the respective invoices; besides committing an offence under Section 132(1)(b) of the CGST Act, 2017 as it was alleged that companies of the petitioner had fraudulently issued bogus invoices and passed on ineligible ITC to various companies without actual supply of goods or services mentioned in the respective invoices thereby leading to wrongful passing on of ITC amounting to approximately Rs.191.66 crores to the recipient companies.

By the said remand application, the arresting authority sought for judicial custody of the petitioner for a period of 14 days seeking liberty to interrogate the petitioner in jail custody.

In the meanwhile, on behalf of the petitioner and the two companies of which he is the director, three separate compounding applications dated 28.01.2021 were filled under section 138 of the CGST Act, 2017 before Respondent Nos.2 and 3 for compounding of the offences and to prevent further infringement of the personal liberty of the petitioner. Petitioner has stated that though he does not admit any of the allegations levelled against him, he has, nonetheless, filed applications for compounding to avoid multiplicity of proceedings as well as to avoid the rigours of prosecution besides any further prejudice tohis personal liberty.

Court observations in this matter.

The Hon’ble Court mentioned that under Section 138(1) of the CGST Act, 2017 any offence under the said act either before or after institution of prosecution, may be compounded by the commissioner on payment by the person accused of the offence to the central government or to the state government, as the case may be, of such compounding amount in such manner as may be prescribed.

This provision only highlights the fact that CGST Act, 2017 is primarily an enactment for collection of revenue which is the primary objective of the said legislation. Arrest is only incidental to achieve the above objective. Therefore, we find in sub-section (3) of section 138 that on payment of the compounding amount, no further proceeding shall be initiated against the accused person in respect of the same offence under the CGST Act,2017 and any criminal proceedings if already initiated shall stand abated.

Use of the word “shall” is quite instructive as it conveys the legislative intent that once compounding takes place, no further proceeding shall be initiated against the accused person in respect of the same offence and if any criminal proceeding has been initiated, the same would stand abated.


Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.           

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April 2021