Petitions dismissed; taxpayer liable for fraudulent ITC claims after registration suspended and OTP misuse created seven firms

HC dismissed the writ petitions and upheld the demand for wrongful availment of ineligible ITC with interest and penalty after finding that the petitioner's GST registration (since 23 Nov 2018) had been suspended and the petitioner voluntarily provided an OTP to a third party, enabling creation of seven firms and fraudulent ITC claims exceeding Rs.50 crore. The court declined to conduct a factual investigation (noting such misuse requires police inquiry) and held the petitioner could not claim complete innocence, disposing of the petitions.

---

---

1. ISSUES PRESENTED and CONSIDERED

• Whether the Petitioner can challenge the confirmation of demand of wrongly availed ineligible Input Tax Credit (ITC) and difference in tax liability based on the misuse of the Petitioner's GST registration number.
• Whether the Petitioner was duly served with the Show Cause Notice (SCN) and the impugned orders under GST law.
• Whether the Petitioner's claim of non-operation of business and lack of knowledge of transactions under his GST registration number can absolve him of liability for the alleged wrongful availment of ITC and tax demands.
• The extent to which the Petitioner's voluntary sharing of OTP with a third party affects his claim of innocence and liability under GST law.
• Whether the Court can undertake a factual inquiry into the misuse of GST registration and fraudulent availment of ITC in a writ petition under Articles 226 and 227 of the Constitution.
• The scope and adequacy of ongoing police investigation into the alleged criminal misuse of the GST registration number and related offences under the Indian Penal Code (IPC).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Challenge to Confirmation of Demand of Wrongly Availed ITC and Tax Liability

Legal Framework and Precedents: The GST law mandates that Input Tax Credit can only be availed on valid transactions and by registered persons who have conducted business. Wrongful availment of ITC attracts demand, interest, and penalty under the CGST Act. The authorities have power to confirm such demands after due process including issuance of SCN.

Court's Interpretation and Reasoning: The Court noted that the impugned orders confirm substantial demands on account of alleged wrongful availment of ITC and tax liability differences. The Petitioner's GST registration was allegedly misused to claim ITC of over Rs. 1.14 crores and tax differences exceeding Rs. 8 crores. The Court observed that the Petitioner's claim of non-operation and ignorance of transactions is contradicted by the fact that multiple firms issued bills using the Petitioner's GST number.

Key Evidence and Findings: The police status report and investigation revealed that the Petitioner's GST number was used for transactions worth over Rs. 50 crores in 2019. Seven firms with distinct GST numbers issued invoices in the Petitioner's name. The Petitioner had voluntarily shared OTP to a third party for GST number suspension, which facilitated misuse.

Application of Law to Facts: The Court held that the Petitioner cannot claim complete innocence when he voluntarily provided access (OTP) that enabled misuse. The liability for wrongful availment of ITC and tax demands is not negated by the Petitioner's assertion of non-operation.

Treatment of Competing Arguments: The Petitioner argued lack of knowledge and non-operation; however, the Court found these claims insufficient given the evidence of misuse and voluntary facilitation by sharing OTP. The Respondents' contention of misuse without Petitioner's knowledge was accepted but did not absolve the Petitioner of liability.

Conclusions: The Court declined to interfere with the impugned orders confirming the demand of wrongly availed ITC and tax liabilities.

Issue 2: Service of Show Cause Notice and Impugned Orders

Legal Framework and Precedents: Proper service of notices and orders is a prerequisite for adjudication under GST law. Non-service may vitiate proceedings unless waived or proved otherwise.

Court's Interpretation and Reasoning: The Petitioner claimed non-service of SCN and impugned orders. However, the police investigation and status report indicated that the Petitioner was aware of GST registration issues and voluntarily engaged with third parties regarding GST number suspension.

Key Evidence and Findings: The Petitioner's own statements in the writ petition acknowledged interaction with GST authorities and third parties concerning the GST number. The Court inferred constructive knowledge of proceedings.

Application of Law to Facts: The Court observed that failure to receive SCN does not absolve the Petitioner from consequences of misuse and wrongful availment, especially given his involvement in sharing OTP and seeking suspension.

Treatment of Competing Arguments: The Petitioner's plea of non-service was not supported by evidence of ignorance or non-involvement. The Respondents' reliance on investigation reports and procedural compliance was accepted.

Conclusions: The Court did not find merit in the claim of non-service to warrant interference with the impugned orders.

Issue 3: Petitioner's Claim of Non-Operation and Lack of Knowledge

Legal Framework and Precedents: Mere registration without business operations does not exempt a person from liability if the registration is misused or if wrongful ITC is availed in their name. The GST framework imposes responsibility on registered persons to safeguard their registration credentials.

Court's Interpretation and Reasoning: The Court noted that the Petitioner did not conduct business but voluntarily provided OTP to a third party, enabling misuse. The Petitioner's failure to safeguard GST credentials undermined his claim of innocence.

Key Evidence and Findings: Police investigation disclosed that the Petitioner's GST registration was suspended but not cancelled, and misuse occurred post-registration. The Petitioner's interaction with an accountant who advised on cancellation and suspension was material.

Application of Law to Facts: The Court held that the Petitioner's claim of ignorance is insufficient to absolve liability where there is evidence of voluntary facilitation of misuse.

Treatment of Competing Arguments: The Petitioner's assertion of no business and no knowledge was weighed against the evidence of OTP sharing and police findings. The Court gave greater weight to the latter.

Conclusions: The Petitioner's claim of non-operation and ignorance does not exonerate him from liability for wrongful availment of ITC and tax demands.

Issue 4: Effect of Voluntary Sharing of OTP on Liability

Legal Framework and Precedents: Sharing of OTP or other credentials that enable access to GST registration details or filing is a serious breach of security and can lead to misuse. Registered persons have a duty to protect such information.

Court's Interpretation and Reasoning: The Court emphasized that the Petitioner voluntarily gave OTP to a third party who then misused the GST registration. This act shows negligence or complicity, which affects the Petitioner's claim of innocence.

Key Evidence and Findings: The police report detailed that the Petitioner shared OTP with a person named Tara Chand Sagar, who advised on cancellation but instead suspended the GST number, facilitating misuse.

Application of Law to Facts: The Court found that such voluntary sharing of OTP constitutes a breach of duty and is a proximate cause of misuse, thereby attracting liability.

Treatment of Competing Arguments: The Petitioner's argument of trusting a third party was not accepted as a defense to liability under GST law.

Conclusions: Voluntary sharing of OTP by the Petitioner is a significant factor negating his claim of innocence and supports confirmation of demand and penalties.

Issue 5: Scope of Court's Inquiry in Writ Petition Regarding Misuse and Fraudulent ITC

Legal Framework and Precedents: Writ jurisdiction under Articles 226 and 227 is limited and not intended to conduct detailed factual or criminal investigations. Such inquiries are within the domain of police and investigating agencies.

Court's Interpretation and Reasoning: The Court observed that the factual matrix involving misuse of GST registration and fraudulent availment of ITC requires detailed investigation, which cannot be conducted in a writ petition.

Key Evidence and Findings: The ongoing police investigation, registration of FIR, and collection of evidence by law enforcement were emphasized as appropriate forums for fact-finding.

Application of Law to Facts: The Court declined to undertake factual inquiries or re-assess evidence in the writ petitions, restricting its role to examining legality and procedural propriety.

Treatment of Competing Arguments: The Petitioner's plea for relief based on innocence and non-involvement was rejected on the ground that such factual disputes are to be resolved by police and adjudicating authorities.

Conclusions: The Court held that the writ petitions are not the appropriate forum for investigation into misuse and fraudulent ITC claims.

Issue 6: Adequacy and Progress of Police Investigation into Criminal Misuse

Legal Framework and Precedents: Allegations of criminal offences under IPC sections 419, 420, 468, 471, and 120B require police investigation and prosecution. The Court supervises to ensure investigation is underway but does not substitute police function.

Court's Interpretation and Reasoning: The Court perused the status report of the Delhi Police, noting registration of FIR and ongoing investigation including examination of suspects and collection of evidence.

Key Evidence and Findings: The police report detailed steps taken: issuance of notices under CrPC, identification of suspect firms, tracing of mobile and email changes, and examination of proprietors and accountants.

Application of Law to Facts: The Court found that the investigation was proceeding appropriately and that the Petitioner had legal remedies to pursue in the criminal investigation and adjudication process.

Treatment of Competing Arguments: The Petitioner's concern about misuse was acknowledged, but the Court emphasized reliance on police investigation rather than judicial intervention in writ proceedings.

Conclusions: The Court was satisfied with the adequacy of the ongoing police investigation and declined to interfere with the process.

---