A recent judgment of the Telangana High Court (dated 18 April 2019) and its approval by the Supreme Court (on 27 May 2019) has caused considerable disquiet among the professional and business community who are subject to the CGST Act. They fear that the genie of Inspector Raj which was being pushed back into the bottle over the last few years, seems to have been resurrected.
Some manufacturing entities dealing with the manufacture of iron and steel products were searched by the officials of the Hyderabad GST Commissionerate (‘Department’) on 27 February 2019. Challenging the summons issued under Section 70 of the CGST Act and the invocation of the arrest provisions under Section 69, these entities filed a writ in the High Court.
The following facts were alleged by the Department:
- That these entities had claimed input tax credit (ITC) on the basis of fake invoices without there being any actual physical receipt of goods
- That these entities also issued many fake invoices charging GST without the supply of goods against the invoices
- That in response to the summons issued under Section 70, the concerned persons or their employees appeared and made voluntary statements, giving details as to how huge the ITC claims were generated on paper
- That the fraudulent ITC claimed by all these entities totaled to a whopping sum of Rs 224.05 crores
- That the entities had thus committed offences under clauses (b), (c) and (f) of sub-section (1) of Section 132, all of which may be punishable with imprisonment which may extend to 5 years apart from a fine
- That the offences committed by the petitioners were cognizable and non-bailable in terms of Section 132(5)
- That the present writ petitions were nothing but applications for anticipatory bail filed under Article 226 of the Constitution of India and hence, the writ petitions were liable to be dismissed
How Writ Proceedings Could Be Converted Into Anticipatory Bail Proceedings
An analysis of the judgment reveals that the doomsday scenario informing the professional and business community is somewhat exaggerated. But the Supreme Court’s observations in another matter on the same subject is rightly a cause for concern for them.
Firstly, the High Court observed that until a prosecution is launched, no criminal proceedings can be taken to commence; that persons who are summoned under Section 70(1) and persons whose arrest is authorised under Section 69(1) are not to be treated as persons accused of any offence until a prosecution is launched; and that an officer authorised under Section 69(1) to arrest a person is not a police officer.
If the inquiry initiated by the Department was actually a criminal proceeding, then the entities could perhaps have invoked the jurisdiction of this Court or of the Court of Sessions under Section 438 of Code of Criminal Procedure (CrPC) for anticipatory bail. But if the inquiry by the Department is not a criminal proceeding (it is a judicial proceeding), and yet the Department is empowered to arrest a person on the basis of a reason to believe that such a person is guilty of the commission of an offence, then the only recourse available to such persons, to protect their personal liberties, is to invoke Article 226 of the Constitution of India. Hence, writ proceedings could be converted into proceedings for anticipatory bail.
Why the High Court Held The Argument To Be Unsustainable
Secondly, the Court rejected the contention of the Department that in view of Section 69(3), the entities cannot fall back upon the limited protection against arrest, found in Sections 41 and 41A of CrPC. The Department had contended that these sections come into play only after the arrest, not before. The Court held that the moment the Department had reasons to believe that a person had committed a cognisable and non-bailable offence, the safeguards, as provided in Sections 41 and 41A of CrPC, had to be kept in mind. Normally, under Sub-Section (3) of Section 41A of CrPC, a person who complies with a notice for appearance, is not be arrested, though the section does not provide an absolutely irrevocable guarantee against arrest. If the arrest does take place, then reasons need to be recorded.
Thirdly, the entities claimed that all the offences under the Act were compoundable under Sub-Section (1) of Section 138 and that therefore, there was no necessity to arrest a person for the alleged commission of an offence which was compoundable. On the surface of it, the High Court held that the said argument was quite appealing. But, on the facts of the case, the Court held the argument was not sustainable for two reasons:
- the entities had not offered to compound the offence
- compounding could be allowed only after making the payment of tax, interest and penalty
‘GST Regime In Nascent Stage, Tech Glitches Yet To Be Resolved’
The Court was of the opinion that even if it allowed the entities to apply for compounding, they may not have a meeting point with the Department as the liability arising out of the alleged actions was so huge. The Court, however, dismissed the writ on the facts and circumstances of the case. It observed that the jurisdiction under Article 226 had to be sparingly used, as cautioned by the Supreme Court in Km. Hema Mishra case.
It further observed that the GST regime was at its nascent stage. The law was yet to reach its second anniversary. There were a lot of technical glitches in the matter of furnishing of returns, making ITC claims etc. Any number of circulars had to be issued by the Government of India for removing these technical glitches.
Given the fact that even before the GST regime was put on track, someone could 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, giving rise to a claim for input tax credit to the tune of Rs 225 crores – there was nothing wrong in the Department thinking that the persons involved should be arrested. Generally, in all other fiscal laws, the offences that were traditionally known, revolved around the evasion of liability.
Two Critical Takeaways from GST ‘Arrests’ Case
In such cases, the government was only deprived of what was due to it. But in fraudulent ITC claims, of the nature allegedly made by the entities, a huge liability was created for the government. Therefore, the acts complained of against the entities constituted a threat to the very implementation of a law within a short duration of its inception.
To sum up, the Court held that writ proceedings could be converted into proceedings for anticipatory bail; and that the protection under Sections 41 and 41A of CrPC was available to persons said to have committed cognisable and non-bailable offences.
But in this case, given its particular facts and circumstances, it rejected the writ. If another case comes up tomorrow with different facts and circumstances, the Court may allow the writ. It will depend from case to case. Even with respect to compounding, the Court rejected the argument in view of the particular facts and circumstances. Tomorrow, in another case, it may be different.
Though the decision is case-specific, the two critical takeaways are the fact that under GST, a person can apply for anticipatory bail through the mechanism of a writ under Article 226 of the Constitution, and that the limited protection against arrest provided by Sections 41 and 41A of CrPC are available even before the arrest. The Supreme Court upheld the order of the High Court by stating that upon perusing the relevant material, it was not inclined to interfere.
Why SC’s Observations & Directions Need a Re-Think
In another matter, on appeals filed by the Centre against orders passed by the Bombay High Court, granting pre-arrest bail to CGST Act violators on the ground that the Department had not registered any FIR as warranted under the CrPC, the Supreme Court made it clear to the High Courts that while entertaining such requests in the future, they will keep in mind that the Supreme Court had upheld the judgment of the Telangana High Court in a similar matter, wherein it took a view contrary to that of the Bombay High Court. It is reported that when the Senior Advocate requested the CJI to delete the reference to the apex court upholding the Telangana HC order as it would “close all doors” to seek relief, the Bench refused to oblige and said, “That is the whole idea”.
It thus appears that the Supreme Court has directed the High Courts not to grant anticipatory bail to GST offenders.
With all due respect, the Supreme Court’s observations and directions need re-consideration. The upholding of the Telangana High Court order by it does not mean that High Courts cannot grant anticipatory bail in suitable cases, or that the limited protection of sections 41and 41A of CrPC is not available. The Telangana High Court, as discussed above, had approved both the issues (upheld by the Supreme Court).
However, in view of the facts and circumstances of this particular matter before it, the High Court had refused anticipatory bail which is discretionary and to given sparingly in appropriate cases. But there is no automatic refusal. Merits of each case will have to be seen. The Supreme Court seems to have tarred all such cases – present and future - with the same brush as used in the Telangana case.
Arrest & Jail After the Case Has Been Tried & Won Is the Way to Go
However, there is a silver lining. The powers of arrest in the GST law, in view of different High Courts taking different views, will be examined by a three-judge bench.
The Bench may delete this provision. Section 69(2) obliges the Department to produce the arrested person before a Magistrate within 24 hours. Immediately, upon appearing, the Magistrate may either remand him to judicial custody or admit the arrested person to bail. There is no question of Departmental custody of the offender to advance the cause of investigation. Of course, the arrest can be for other reasons as well, but its primary purpose is custodial interrogation. Sending the offender to jail, without holding him to aid the investigation, doesn’t serve any substantive purpose. The provision is subject to abuse because it allows a discretion to the Department. It raises the spectre of unbridled power. It has the potential to punish a person before trial.
The Income Tax Act has no such provision for arrest. So why should the CGST Act be any different?
Of course, it doesn’t mean that the guilty should not be punished. If any offences have been detected, then prosecute the offenders. Shockingly, the success ratio of convictions is abysmally low. The justice delivery system needs to be comprehensively overhauled: fast-track courts, revamping the institution of public prosecutors, posting of efficient officers in the prosecution wing and improved co-ordination between all stakeholders. Arrest and jail after the case has been tried and won is the way to go, not BEFORE. Else it will turn ‘Less Government, More Governance’ on its head.
(Ajay Mankotia is a former IRS officer who now runs his own tax and legal advisory. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)