2025 (11) TMI 845 - HC - GST

Writ petition dismissed against penalty under Section 122 CGST for fraudulent ITC via bogus firms; appeal under Section 107 available

The HC dismissed the writ petition challenging imposition of penalty under Section 122 of the CGST Act, finding evidence of fraudulent availment of input ... Levy of penalty u/s 122 of the CGST Act - Fraudulent availment of Input Tax Credit - operating several non-existing and bogus firms - HELD THAT:- From the evidence on record, it is clear that the associates of the Petitioner were involved and their services were utilised by the Petitioner and his son for creation of the fake firms. This Court has consistently taken the view that in cases involving fraudulent availment of ITC, ordinarily, the Court would not be inclined to exercise its writ jurisdiction. It is routinely seen in such cases that there are complex transactions involved which require factual analysis and consideration of voluminous evidence, as also the detailed orders passed after investigation by the Department. In such cases, it would be necessary to consider the burden on the exchequer as also the nature of impact on the GST regime, and balance the same against the interest of the Petitioners, which is secured by availing the right to statutory appeal. Finally, insofar as the circular being Circular No. 254/11/2025 – GST dated 27th October 2025 appointing the ‘proper officer’ is concerned, the SCN has been issued by the Additional Commissioner, who cannot be held to be not a ‘proper officer’ as the said Additional Commissioner is duly empowered under the CGST Act to issue notices under Section 122 of the CGST Act. In view of the fraudulent nature of the Petitioner’s conduct this Court is of the opinion that the present writ petition challenging the impugned order under such circumstances, does not warrant interference under writ jurisdiction. The impugned order is an appealable order under Section 107 of the CGST Act. The petition is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Section 122 of the CGST Act can be imposed on an individual who is not the registered 'taxable person' but is alleged to have created, controlled and operated fake/non-existent firms that fraudulently availed Input Tax Credit (ITC). 2. Whether denial of an opportunity for cross-examination of witnesses whose statements were relied upon by the adjudicating authority amounts to violation of principles of natural justice warranting quashing of the impugned adjudicatory order. 3. Whether a writ under Article 226 is maintainable in matters involving complex factual matrices of alleged fraudulent availment of ITC, or whether the petitioner must be relegated to statutory appellate remedy under Section 107 of the CGST Act. 4. Whether the Additional Commissioner who issued the Show Cause Notice and passed the adjudicatory order was a 'proper officer' under the CGST Act in view of a subsequent administrative circular designating proper officers. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Imposition of penalty on person behind fake/non-existent firms (interpretation of 'taxable person' and Section 122) Legal framework: Section 121/122 of the CGST Act prescribes penalty provisions applicable to a 'taxable person'; Section 155 places burden on the claimant to prove eligibility for ITC; Section 20 IGST and parallel SGST provisions addressed regarding cross-jurisdictional penalties. Precedent Treatment: The Court cited prior decisions emphasizing that statutory penal provisions apply subject to their language and scheme; no precedent was treated as overruling the statutory text, but the Court relied on principles developed in related GST and tax jurisprudence concerning attribution of responsibility where paper or non-existent entities are used to perpetrate fraud. Interpretation and reasoning: The Court held that where firms are non-existent, paper entities or fraudulently constituted, the phrase 'taxable person' must be read in context. If no real person/entity can be identified as the taxable person because the firm is fictitious, liability can be fastened upon the real persons who created, controlled and used such firms to avail fraudulent ITC. The adjudicating authority's findings - common IP addresses/devices, overlapping mobile numbers/emails, bank accounts operated at direction of the individual, recovered documents from the individual's devices, and witness statements linking the individual to creation/use of bogus firms - provide a factual foundation for treating the individual as liable under Sections 122(1)(ii) and 122(1)(vii) (and other applicable provisions) jointly and severally with the bogus firms. Ratio vs. Obiter: Ratio - In cases of fake/non-existent firms used to perpetrate GST fraud, penal liability can extend to persons who masterminded, controlled and operated those firms notwithstanding literal registration status, because otherwise fraud would escape punishment. Obiter - Observations on policy consequences for the GST regime and hypothetical applications to different fact patterns. Conclusions: Petitioner's challenge that penalty cannot be imposed because he is not a 'taxable person' is rejected on the facts: where the available material demonstrates active creation, control and operation of bogus firms, Section 122 penalties can be imposed on the person responsible for the fraud. Issue 2 - Right to cross-examination in CGST adjudication and alleged breach of natural justice Legal framework: Adjudication under the CGST Act is quasi-judicial; unlike Customs Act Section 138B, the CGST scheme lacks an explicit statutory right to cross-examine witnesses during adjudication; general principles of natural justice apply but are subject to statutory scheme and the authority's discretion. Precedent Treatment: The Court relied on its own earlier decisions and other authorities recognizing that cross-examination is not an absolute right in quasi-judicial proceedings and may be refused where documentary evidence suffices, where requests are vague/blanket, or where the requesting party fails to show potential prejudice. Cases cited include decisions permitting or conditioning cross-examination and those denying it when documentary corroboration exists. Interpretation and reasoning: The adjudicating authority considered the request for cross-examination, noting statutory omission of an express right and relevant judicial guidance. The authority reasonably rejected a blanket request where statements were corroborated by independent documentary and forensic evidence (e.g., IP traces, bank operations, recovered documents, transporters' statements). The Court emphasized that a party seeking cross-examination must show specific reasons and identify specific witnesses whose testimony, if tested, could cause prejudice; otherwise allowing cross-examination risks converting adjudication into protracted mini-trials and delaying proceedings. Ratio vs. Obiter: Ratio - Denial of cross-examination does not infringe natural justice where the request is non-specific, documentary and independent evidence corroborates the statements relied on, and the party fails to demonstrate likely prejudice. Obiter - Discussion on the limited scope of cross-examination in GST adjudication and practical admonitions against blanket requests. Conclusions: The refusal to permit cross-examination was legally sustainable. No violation of natural justice was shown because the request was not specific, the evidence relied upon was documentary and corroborated, and petitioner had earlier opportunities to seek cross-examination in prior proceedings. Issue 3 - Maintainability of writ petition versus availability of statutory appeal (Article 226 and Section 107) Legal framework: Writ jurisdiction under Article 226 is extraordinary; statutory remedy via Section 107 is available for challenge to adjudicatory orders; established tests permit writs only in exceptional circumstances (breach of fundamental rights, jurisdictional excess, violation of natural justice causing prejudice, challenge to vires). Precedent Treatment: The Court followed binding and persuasive authority holding that writs should not ordinarily be entertained where an efficacious alternative statutory remedy exists, especially in complex factual/technical tax matters involving substantial exchequer interest. Prior High Court and Supreme Court rulings were cited to underline relegation to appeal in absence of those exceptional circumstances. Interpretation and reasoning: Given the complexity of the alleged fraud - numerous interconnected firms, voluminous documentary and forensic evidence, and significant potential impact on the GST regime and the public exchequer - the Court concluded that the proper forum for adjudication of factual disputes and assessment of penalties is the appellate forum under Section 107. The petitioner did not establish any of the exceptional circumstances warranting exercise of writ jurisdiction (no established violation of principles of natural justice causing prejudice, no excess of jurisdiction, no vires challenge). Ratio vs. Obiter: Ratio - Writ jurisdiction should not be exercised to bypass the appellate remedy where complex factual adjudication and assessment of voluminous evidence are involved; petitioners must pursue the statutory appeal unless exceptional circumstances are demonstrated. Obiter - Policy considerations about protecting the GST regime and preventing multiplicity of proceedings. Conclusions: The writ petition was not maintainable and was dismissed; petitioner was relegated to file the statutory appeal under Section 107 (subject to applicable pre-deposit rules and timelines), with liberty granted to seek appellate remedy. Issue 4 - Validity of the adjudicating officer as 'proper officer' despite subsequent circular Legal framework: CGST Act empowers specified officers to issue notices and adjudicate; administrative circulars may designate officials but cannot retrospectively oust powers vested by statute unless inconsistent with legislative scheme. Precedent Treatment: The Court observed that the Additional Commissioner is one of the officers empowered under the CGST Act and that the issuance of a subsequent circular does not retroactively affect the statutory competence of an Additional Commissioner who issued the SCN. Interpretation and reasoning: The authority of the Additional Commissioner to issue notices under Section 122 flows from the Act; circular designating certain officials as 'proper officers' does not negate the statutory power already vested in the Additional Commissioner for issuance of the SCN and adjudication in the present case. Ratio vs. Obiter: Ratio - The impugned proceedings by the Additional Commissioner cannot be invalidated on the ground that a later circular designated 'proper officers'; statutory empowerment of the Additional Commissioner suffices. Obiter - Observations that administrative designations must align with statutory powers and cannot be used to defeat substantive adjudication where the officer is statutorily competent. Conclusions: Challenge to adjudicator's status based on the circular fails; the Additional Commissioner was a proper officer for issuing the SCN and passing the impugned order.