2025 (9) TMI 384 - DSC - GST

Bail denied in CGST case for orchestrating sham firms to claim fraudulent Input Tax Credit causing Rs.29.81 crore loss

Deepak Kumar Versus UOI, CGST Ghaziabad.

Deepak Kumar Versus UOI, CGST Ghaziabad. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the arrest and detention of the accused complied with statutory and constitutional safeguards (Article 22, provision corresponding to Section 50 Cr.P.C., and Section 69 of the CGST Act) including supply of grounds of arrest and 'reason to believe'. 2. Whether the period of custodial detention began from the moment the accused's personal liberty was restrained (initial apprehension) for reckoning the 24-hour limit for presentation before magistrate. 3. Whether statements recorded under the departmental provisions (including under the GST statute) and the circumstances of their recording render them inadmissible or of no evidentiary value (coercion, lack of cross-examination, behind-the-back recording). 4. Whether there existed legally sufficient material to justify arrest without warrant under the GST code (existence of 'reason to believe', satisfaction of elements of non-bailable cognizable offence, and threshold monetary limits) and whether the power of arrest was exercised legitimately in the facts of the matter. 5. Whether the accused should be released on bail by applying the principles governing bail in economic offences (considering nature of allegations, gravity, evidence on record, risk of tampering, flight risk, and public interest). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Compliance with statutory and constitutional safeguards at time of arrest (supply of grounds of arrest and 'reason to believe') Legal framework: Arresting authorities must furnish grounds of arrest forthwith (statutory provision corresponding to Section 50 Cr.P.C./Article 22(1)), and under the GST scheme a recorded 'reason to believe' by competent authority is required prior to arrest (statutory requirement corresponding to Section 69 and related provisions). The 'reason to believe' must reflect satisfaction and refer to material forming basis of non-bailable offence. Precedent treatment: The applicant relied on authorities establishing that grounds must be supplied immediately and that 'reason to believe' is to be recorded and supplied (subject to narrow redaction exceptions). The respondent relied on authorities permitting arrest under GST where material indicates serious economic offence. The Court considered both lines. Interpretation and reasoning: The Court examined the record for formation and supply of 'reason to believe' and timing of communication of grounds. The applicant alleged non-furnishing and delay; the Department asserted grounds and reasons were provided and relied on investigative material recovered. The Court accepted the Department's contention that materials recovered (stamps, devices, documents, statements) formed basis for arrest and that judicial remand proceedings were undertaken. Ratio vs. Obiter: Ratio - Arrest under the GST code must be supported by recorded reasons and material; delay or absence may render arrest illegal. Obiter - procedural nuances on redaction and internal confidentiality in exceptional cases. Conclusions: Court found that although statutory safeguards were argued to be violated by the applicant, the record contained investigative material (documents, devices, admissions, stamps, bank entries) which the Department relied on to justify arrest. The Court concluded the statutory preconditions for arrest under the GST code were, on the material before it, sufficiently satisfied and that the Department's exercise of arrest powers was not shown to be mala fide. Issue 2 - Commencement of detention period for reckoning the 24-hour limit Legal framework: Constitutional guarantee under Article 22(2) and corresponding statutory provision prescribe maximum detention period before presentation to magistrate; the detention period runs from the time of restraint on liberty (apprehension), not necessarily from the time recorded on arrest memo. Precedent treatment: Applicant relied on authorities holding that detention commences when restraint is placed (initial apprehension) and that failure to produce within statutory period renders custody illegal. Respondent disputed prolonged detention and stated arrest and production complied with remand process. Interpretation and reasoning: Court noted established principle that 'arrest'/detention begins when liberty is restrained and not merely when formal arrest is recorded. The applicant alleged being restrained from noon of the first day until production next day; Department asserted production within permissible timeframe and that arrest memo and remand were processed promptly. The Court examined remand and other record entries. Ratio vs. Obiter: Ratio - Time of restraint is relevant for computing statutory limits; evidence of actual restraint is required to impugn legality. Obiter - procedural expectations regarding CCTV and preservation when contested. Conclusions: The Court considered the competing narratives but accepted the Department's account that arrest, medical examination and production before the judicial court occurred as recorded, and did not find the statutory 24-hour safeguard breached so as to vitiate arrest in the circumstances before it. Issue 3 - Admissibility and evidentiary value of departmental statements recorded during investigation Legal framework: Statements recorded by departmental officers may be admissible subject to statutory safeguards and requirements for cross-examination in subsequent proceedings; coerced or uncorroborated confessions or statements recorded without due process may have limited evidentiary value. Precedent treatment: Applicant relied on precedents that statements recorded behind the back and without opportunity for cross-examination lack probative value; Department relied on admissions recorded during investigation and subsequent corroborating documentary evidence. Interpretation and reasoning: The Court analysed the content of statements and the surrounding circumstances: voluntary admissions concerning control of firms, possession of stamps, mobile numbers linked to GST registrations, bank credits and inter-firm transactions were recorded and signed by the accused. The Department produced contemporaneous inventories, panchnamas and corroborative documentary and electronic material linking the accused to multiple entities and transactions. Ratio vs. Obiter: Ratio - Statements admitting control and specific acts, when corroborated by seized documentary/electronic material, can be significant evidence; Obiter - cautionary note on statements recorded under duress remains applicable where coercion is demonstrated. Conclusions: The Court treated the recorded statements as materially corroborative (given seizure of stamps, devices, bank entries and linked GST portal evidence) and not rendered inadmissible merely by the applicant's assertions of coercion absent persuasive proof of such coercion. Issue 4 - Sufficiency of material for arrest under GST provisions and exercise of arrest power in economic offence context Legal framework: Arrest without warrant under the GST code requires satisfaction of statutory conditions (including monetary thresholds and non-bailable offence categories) supported by material establishing culpability; arrest power is to be exercised cautiously and in exceptional circumstances for economic offences of grave magnitude. Precedent treatment: The Court weighed principles that economic offences warrant serious view while also acknowledging safeguards against arbitrary arrest; both sides relied on authoritative principles concerning gravity, conspiratorial elements and losses to public exchequer. Interpretation and reasoning: The record demonstrated alleged operation of a cartel of non-operational firms, fake invoices, stamps and identity documents, bank transactions routed among entities, mobile numbers used for GST filing, admitted control of multiple entities and a quantified alleged loss/ default (multiple crores). The Department asserted flight risk and habitual past conduct; the applicant denied ownership/operation and claimed only consultancy role and absence of incriminating recovery. The Court evaluated magnitude, depth of documentary/electronic corroboration, and admissions. Ratio vs. Obiter: Ratio - Where investigative material discloses organized misuse of multiple GST-registered entities to generate and claim fraudulent ITC and refunds of significant magnitude, arrest power under the GST code may be legitimately exercised; Obiter - categories of circumstances where arrest should be sparingly used. Conclusions: The Court found substantial material prima facie indicating orchestration of bogus firms, possession of indicia of control and inter-firm fund flows; in view of the gravity and scale alleged, the exercise of arrest power was held justified and not an abuse of authority in the present record. Issue 5 - Bail: application of principles for economic offences and balancing factors Legal framework: Bail in economic offences requires balancing individual liberty (presumption of innocence; 'bail is rule') against gravity of offence, prima facie evidence, risk of flight, tampering with evidence or witnesses, public interest and magnitude of alleged loss. Precedent treatment: Applicant relied on authorities favouring bail where offences are not grave, evidence is documentary and secured on record, absence of flight risk and absence of danger of tampering; Department relied on authorities treating economic offences as a class apart where bail may be denied when conspiratorial organized offences with large public loss are prima facie shown. Interpretation and reasoning: The Court assessed competing factors: (a) seriousness and quantified alleged loss (multi-crore ITC/refund fraud) and systemic organized conduct; (b) seized material and admissions linking accused to multiple entities and transactions; (c) past involvement/ adverse proceedings suggesting risk factors; (d) Department's lack of specific claim regarding tampering risk in judicial remand application but reliance on material seized and possibility of flight. The applicant's contentions of documentary nature of offences, cooperation, lack of prior conviction, willingness to abide conditions and to surrender passport were weighed. Ratio vs. Obiter: Ratio - In the presence of substantial prima facie material indicating organized economic fraud of substantial magnitude and risk indicators, denial of bail is an appropriate exercise of discretion; Obiter - where documentary evidence is wholly on record and no risk of tampering or flight is shown, bail may be the norm. Conclusions: Applying the legal tests and considering the scale of alleged economic misconduct, corroborative recoveries and admissions, and material suggesting habitual evasive conduct, the Court exercised discretion to refuse bail. The decision rests on the Court's conclusion that the gravity and character of the allegations and supporting material outweighed the factors favouring bail in this instance.