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April 13, 2021

Bombay high court refused bail to taxpayer in case of alleged Fake ITC exceeding Rs. 5 Crore

by Mahesh Mara in GST

Bombay high court refused bail to taxpayer in case of alleged Fake ITC exceeding Rs. 5 Crore

What is Section 132(1) of the CGST act?

Punishment related to certain offence under GST is covered under section 132(1). Section 132(1) states that Whoever commits any of the following offences:

(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;

(e) evades tax, fraudulently avails input tax credit or fraudulently obtains refund and where such offence is not covered under clauses (a) to (d);

shall be punishable–

(i) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine;

(ii) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds two hundred lakh rupees but does not exceed five hundred lakh rupees, with imprisonment for a term which may extend to three years and with fine;

(iii) in the case of any other offence where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds one hundred lakh rupees but does not exceed two hundred lakh rupees, with imprisonment for a term which may extend to one year and with fine;

(iv) in cases where he commits or abets the commission of an offence specified in clause (f) or clause (g) or clause (j), he shall be punishable with imprisonment for a term which may extend to six months or with fine or with both.

(2) Where any person convicted of an offence under this section is again convicted of an offence under this section, then, he shall be punishable for the second and for every subsequent offence with imprisonment for a term which may extend to five years and with fine.

Fact of the case

The petitioner has approached this Court claiming that his arrest under the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”), is illegal as he has been kept in custody in a bailable offence. On this basis, the petitioner seeks a direction for his release forthwith. The petitioner was arrested on 30.12.2020 and he was produced before the Additional Chief Metropolitan Magistrate, Mumbai, who remanded the petitioner to magisterial custody.

The Respondent proceeded against the taxpayer on the basis that he had committed offence under section 132 (1) (b) (c) of the CGST Act and that since the input tax credit wrongly availed by the taxpayer exceeded Rs. 500 lakh (Rs.5 crores) and the offence was punishable with imprisonment for a term, which could extend to five years and with fine under section 132 (1) (i) of the CGST Act, it was a cognizable and non-bailable offence under sub-section (5).

The petitioner was effectively operating four business establishments which had indulged in fake purchase invoices and sale invoices whereby bogus input tax credit was claimed to the tune of at least Rs.11.54 crores and the amount
of wrongful input tax credit passed on through fake sale invoices was not less than Rs.9.29 crores. On the basis of such figures arrived at during the investigation initiated against the petitioner, he was put under arrest on 30.12.2020.

Issue of the case

The Taxpayer contended that the entire action of arresting the petitioner and then his remand to judicial custody was illegal as four specific distinct legal entities were wrongly treated as one and thereupon it was wrongly treated as if the input tax credit illegally availed exceeded the figure of Rs. 5 crores. It was also submitted that the arrest and continued custody of the taxpayer was wholly illegal and, therefore, unsustainable.

Observation of the court

Respondent contended that although four firms or business establishments were the subject matter of investigation and proceedings in the present case, there was ample material on record to show that all of them were effectively operated and controlled only by the petitioner. It was submitted that the petitioner himself was the proprietor and Karta of two such firms and although his father was the proprietor and Karta of the other two firms, each and every aspect of the activity pertaining to all the four firms or establishments was controlled by the petitioner himself. Respondent further submitted that the KYC details of bank accounts of all the four firms were that of the petitioner. It was his email ID and mobile number that were linked to all the accounts of the firms and the e-Way Bill Registration data also demonstrated that it was the email of the petitioner, that was used for registration in respect of all the four firms. Therefore, Respondent submitted that it was the petitioner alone, who had committed the offences under section 132 (1) (b) (c) of the CGST Act and he could not claim that the offences were noncognizable and bailable because the input tax credit wrongly availed by the four firms could not be clubbed together.  Respondent further submitted that the material available through investigation clearly demonstrated that the addresses against which the four firms were shown to be carrying out business were stated to be leased premises, but the owners of such premises had stated on affidavits that they had never met the petitioner or his father and that their signatures on the documents pertaining to the lease deeds were forged. On this basis, it was emphasized that the entire alleged business activity was fraudulent and that input tax credit was wrongly availed by the petitioner on the basis of such fake sale and purchase activities. On this basis, it was submitted that the action of arresting the petitioner could not be said to be illegal because he had clearly committed offences that were cognizable and non-bailable under section 132 (5) of the CGST Act.

High Court observed that in tax frauds the modus operandi of creating fictitious entities to get around the rigours of law is not unknown. The High Courts relied upon by the learned counsel for the petitioner are concerned, in the case of Makemytrip (India) Pvt. Ltd. Vs. Union of India, the Delhi Court found on facts that even, prima facie, the petitioners therein could not be held to have violated the provisions of the Finance Act,1994 and Customs Act, 1962 or the Central Excise Act, 1944, thereby showing that power to arrest could not be exercised.

The order of this Court passed in Champsi M. Shah Vs. Union of India can also be of no assistance to the petitioner because it is passed in the facts that case without any discussion on the question of alleged illegality in exercise of power to arrest.

The judgment of the Madhya Pradesh High Court in the case of Jagdish Arora & Anr. Vs. Union of India4, held in favour of the petitioners on the basis that the material on record did not show existence of “reasons to believe” as contemplated under Section 69 of the CGST Act to proceed for the arrest of the petitioners. It was specifically found in paragraph 38 of the judgment that the petitioners therein could not be said to be responsible for the concerned company. But, as noted above, such is not the situation in the present case and therefore, the said judgment is clearly distinguishable. In view of the above, the High court was of the opinion that the petitioner has not been able to make out a case for exercising jurisdiction of this court under Article 226 of the Constitution of India. Therefore, the prayers made in the present writ petition cannot be granted.

Conclusion

In view of the above observation, Court ruled that the taxpayer was the person who committed the aforesaid offences. Thus, the petition was dismissed and bail was not granted to the taxpayer.

Read the full order of Bombay High Court from below Link

Bombay-high-court-refused-bail-to-taxpayer-in-case-of-alleged-Fake-ITC-exceeding-Rs

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