2019 (4) TMI 1320 - HC - GST

Court upholds GST Act summons & arrests for circular trading, denies protection against arrest, emphasizing seriousness.

The court dismissed the writ petitions challenging summons under Section 70 of the CGST Act and the invocation of penal provisions under Section 69. It ... Power of arrest under Section 69 of the CGST Act - summons under Section 70 of the CGST Act - judicial proceedings for enquiries under Section 70(2) - availability of writ jurisdiction under Article 226 for pre arrest relief - applicability of Sections 41 and 41A of the Cr.P.C. - cognizable and non bailable offences under Section 132 of the CGST Act - incongruity between Sections 69 and 132 of the CGST Act - compounding of offences under Section 138 of the CGST ActAvailability of writ jurisdiction under Article 226 for pre arrest relief - power of arrest under Section 69 of the CGST Act - Whether petitioners could seek protection against arrest under Article 226 as a substitute for anticipatory bail under Section 438 Cr.P.C. - HELD THAT: - The Court held that where the enquiry under the CGST Act is not a criminal prosecution and Section 438 Cr.P.C. is not available, persons threatened with arrest under Section 69(1) may invoke the High Court's jurisdiction under Article 226 for pre arrest protection. The power under Article 226 to grant such relief exists subject to the caution and sparing exercise laid down by the Supreme Court (Kartar Singh and Km. Hema Mishra). A writ of mandamus, however, cannot be used to prevent the performance of statutory functions; the Court must therefore balance the petitioners' personal liberty against the statutory powers of the Commissioner and the nature of allegations.Article 226 is available as a remedy for pre arrest protection, but the jurisdiction must be exercised sparingly and cautiously.Applicability of Sections 41 and 41A of the Cr.P.C. - judicial proceedings for enquiries under Section 70(2) - Whether safeguards in Sections 41 and 41A Cr.P.C. apply to persons summoned/arrested under Sections 70 and 69 of the CGST Act. - HELD THAT: - The Court observed that enquiries under Section 70(1) are deemed 'judicial proceedings' under Section 70(2) and that there are express cross references to Cr.P.C. elsewhere in the CGST Act (e.g., Section 67(10) and Section 69(3)). Consequently, the limited protection against arrest embodied in Sections 41 and 41A Cr.P.C. may be relevant and ought to be kept in mind when arrest is contemplated under Section 69(1), even though the formal application of Cr.P.C. is triggered after arrest. Section 41A(3) does not confer an absolute bar to arrest (it permits arrest for recorded reasons), and Section 69(1) uses the different standard of 'reasons to believe.'Safeguards in Sections 41 and 41A Cr.P.C. are relevant considerations when an arrest is authorised under Section 69, but do not operate as an absolute bar.Incongruity between Sections 69 and 132 of the CGST Act - cognizable and non bailable offences under Section 132 of the CGST Act - Whether there are inconsistencies between the arrest and bail provisions in Sections 69 and 132 and the consequences of those incongruities. - HELD THAT: - The Court identified textual incongruities: Section 69(1) authorises arrest only where the Commissioner has 'reasons to believe' that an offence under clauses (a)-(d) of Section 132(1) (which are made cognizable and non bailable under Section 132(5)) has been committed; yet Section 69(3) deals with procedures (bail/remand) relevant to non cognizable and bailable offences. The Court noted this internal inconsistency and that references to Cr.P.C. in the CGST Act create overlap, but concluded that such anomalies do not deprive the Court of its duty to consider statutory safeguards and to adjudicate writ petitions seeking pre arrest relief.There are textual incongruities between Sections 69 and 132; these inconsistencies require judicial caution but do not preclude consideration of pre arrest relief.Compounding of offences under Section 138 of the CGST Act - Whether the compoundable nature of offences under Section 138 precludes arrest and warrants grant of pre arrest protection. - HELD THAT: - The Court rejected the contention that compounding renders arrest unnecessary. Although many offences are compoundable even before prosecution, compounding requires payment of tax, interest and penalty under the proviso, and petitioners had not offered to compound. Given the large alleged liabilities, compounding may not be a realistic alternative, and compounding being available does not automatically negate the statutory power to arrest where other considerations (including prevention of further offences and protection of evidence) exist.Compounding availability does not by itself preclude arrest or entitle petitioners to pre arrest relief.Power of arrest under Section 69 of the CGST Act - availability of writ jurisdiction under Article 226 for pre arrest relief - Whether, on the facts and allegations in these petitions, interim protection against arrest should be granted. - HELD THAT: - Having considered the nature and magnitude of the allegations (alleged circular trading, large paper turnover and substantial wrongful ITC), the nascent nature of the GST regime and the threat to revenue, the Court applied the principle that Article 226 relief must be sparingly granted. Although the petitions were maintainable and statutory safeguards were relevant, the special facts - large alleged fraud on revenue and the potential threat to the GST scheme - weighed against granting protection. The Court also noted that arrest under Section 69 serves several objects (prevent further offences, protect evidence, enable proper investigation), not merely to facilitate interrogation.On the facts of these cases, protection against arrest was refused and the writ petitions dismissed.Final Conclusion: Though High Court jurisdiction under Article 226 is available to seek pre arrest protection when Section 438 Cr.P.C. is inapplicable and statutory safeguards in Sections 41/41A Cr.P.C. are relevant to arrests under Section 69, the jurisdiction is to be exercised sparingly. In the present matters, having regard to the serious allegations of large scale fraudulent ITC and circular trading and the threat posed to the revenue and GST implementation, the Court refused to grant protection and dismissed the writ petitions. Issues Involved:1. Validity of summons issued under Section 70 of the CGST Act.2. Invocation of penal provisions under Section 69 of the CGST Act.3. Arrest and detention of individuals under Section 69 of the CGST Act.4. Applicability of Sections 41 and 41-A of the Cr.P.C. to CGST Act proceedings.5. Entitlement to protection against arrest under Article 226 of the Constitution of India.6. Interpretation of 'reasons to believe' under Section 69(1) of the CGST Act.7. Compoundability of offences under Section 138 of the CGST Act.Detailed Analysis:1. Validity of Summons Issued Under Section 70 of the CGST Act:The petitioners, comprising directors and CFOs of various companies, challenged the summons issued under Section 70 of the CGST Act. The court noted that the proper officer under this section has the power to summon any person to give evidence or produce documents necessary for an inquiry, and such inquiries are deemed judicial proceedings. The petitioners' main grievance was the potential for arrest and detention following these summonses.2. Invocation of Penal Provisions Under Section 69 of the CGST Act:Section 69(1) empowers the Commissioner to authorize the arrest of a person believed to have committed cognizable and non-bailable offences under Section 132(1)(a) to (d). The court found that the Commissioner must have 'reasons to believe' to authorize such arrests, which should be recorded in the files, though not necessarily in the arrest authorization itself.3. Arrest and Detention of Individuals Under Section 69 of the CGST Act:The court examined the circumstances under which the petitioners were summoned and detained. It was noted that the petitioners were accused of circular trading and fraudulent ITC claims amounting to Rs. 225 crores. Despite the petitioners' compliance with the summons, the court found the respondents' actions justified due to the severity of the alleged offences and the potential threat to the GST regime.4. Applicability of Sections 41 and 41-A of the Cr.P.C. to CGST Act Proceedings:The court discussed the applicability of Sections 41 and 41-A of the Cr.P.C. to arrests under the CGST Act. It was concluded that these provisions, which provide safeguards against arrest, could be applicable even in CGST Act cases. However, the court noted that the phrase 'reasons to believe' under Section 69(1) of the CGST Act differs from 'reasons to be recorded' under Section 41A(3) of the Cr.P.C.5. Entitlement to Protection Against Arrest Under Article 226 of the Constitution of India:The court acknowledged that Article 226 could be invoked for protection against arrest, especially when Section 438 Cr.P.C. (anticipatory bail) is not applicable. However, it emphasized that this jurisdiction should be exercised sparingly and only in exceptional cases. The court found that the petitioners' cases did not warrant such protection due to the gravity of the allegations.6. Interpretation of 'Reasons to Believe' Under Section 69(1) of the CGST Act:The court clarified that 'reasons to believe' under Section 69(1) of the CGST Act implies that the Commissioner must have sufficient cause to believe that an offence has been committed. This belief must be based on recorded reasons, which need not be disclosed in the arrest authorization but should be present in the official files.7. Compoundability of Offences Under Section 138 of the CGST Act:The petitioners argued that since all offences under the CGST Act are compoundable, arrest was unnecessary. The court rejected this argument, noting that compounding requires payment of tax, interest, and penalty. Given the substantial alleged liability of Rs. 225 crores, the court found compounding impractical in this case.Conclusion:The court dismissed the writ petitions, finding that the petitioners were not entitled to protection against arrest due to the serious nature of the allegations and the potential threat to the GST regime. The court emphasized the importance of maintaining the integrity of the GST system, especially given its nascent stage. Consequently, the miscellaneous petitions were also dismissed, and no costs were awarded.