Krishna Murari Singh VS The Union of India

The petitioner has approached this court to challenge the validity of Section 132(1)(b) and (c) of the Central Goods and Services Tax Act, 2017 (CGST Act). The petitioner argues that these provisions are unconstitutional. Additionally, the petitioner seeks a declaration that the exercise of power under Section 69 of the CGST Act should only occur after the determination of liability. The petitioner contends that their arrest is illegal, violates Section 69 and its intended purpose, and is contrary to the judgments of the Supreme Court of India and various High Courts. Consequently, the petitioner requests to be granted bail.

In the case, the petitioner, who is the Chairman and Managing Director of M/s. Global Space Technologies Limited (GSTL), stated that a search and seizure operation was conducted at GSTL’s premises in October 2020. Following this, the petitioner received a summons to appear before the Superintendent (Anti Evasion) of the Central Goods and Services Tax (CGST) department on October 19, 2020. Since the petitioner was out of town, his accountant attended the summons and provided the requested information about the company’s directors and office location. The accountant also submitted details via email, including tally and ledger information.

The petitioner was subsequently summoned on multiple dates, including March 9, 12, 17, 19, 22, and 23 in 2021. The petitioner attended all these summonses except for one, during which he was recovering from an angioplasty procedure. On March 23, 2021, the petitioner was arrested. He was produced before the Magistrate in Belapur the following day, where the respondents sought his remand. On the same day, the petitioner filed a bail application.

In the remand application presented by the respondents to the Magistrate, several allegations were made against the petitioner. Among these was the accusation that the petitioner had failed to deposit tax collected amounting to Rs. 6,30,00,000/- with the government, and this allegation was supported by evidence provided by the respondents.

The representative from Axis Bank has detailed the investigation findings regarding M/s. VRD Retails, a company discovered to be fraudulent with no legitimate transactions with GSTL. The transactions conducted by VRD Retails were solely on paper, based on bogus invoices, for items like gift boxes, food, and beverages. This fraudulent activity led to the improper availing of Input Tax Credit (ITC) amounting to Rs. 2 Crores without the actual receipt of any goods or services.

Further scrutiny revealed that the petitioner had been involved in transactions and supplies that were not reported to the tax department. The vehicle registration numbers listed on the purchase invoices and e-way bills for supplies to certain entities were found to be fictitious and non-existent. Throughout the investigation, the petitioner had been evasive, providing false information to authorities. The tax evasion identified in this case amounts to Rs. 9.90 Crores, and despite being the sole decision-maker and aware of the fraudulent activities, the petitioner pleaded ignorance.

The petitioner contested the allegations, claiming that the remand application lacked specific details about the invoices, the alleged illegal ITC availed, and the calculations of GST liabilities. However, due to the seriousness of the charges, the petitioner was remanded to judicial custody until April 7, 2021. During this custody period, the petitioner’s statement was recorded by respondent no.2. A reply to the bail application was filed by respondent no.2 on April 1, 2021, and the Magistrate subsequently rejected the bail application on April 6, 2021.

The petitioner was produced before the judicial authorities, but the detailed allegations and the substantial evidence of tax evasion and fraudulent activities led to the continued judicial custody and rejection of the bail application.

M/s. VRD Retails has been identified as a fraudulent company involved in deceptive transactions with GSTL. These transactions were conducted solely on paper using fake invoices for items such as gift boxes and food and beverages. The company fraudulently claimed Input Tax Credit (ITC) amounting to Rs. 2 Crores without receiving any actual goods or services. Additionally, the petitioner, the sole decision-maker in this case, was found to have concealed transactions and supplies from the tax department. The vehicle registration numbers listed on purchase invoices and e-way bills were fictitious, contributing to a tax evasion of Rs. 9.90 Crores. Despite being aware of these illegal activities, the petitioner claimed ignorance.

The petitioner contends that the allegations lack specific details regarding the invoices, the illegal ITC claims, and the calculations of GST liabilities. Consequently, the petitioner was remanded to judicial custody until April 7, 2021. During this period, the petitioner’s statement was recorded, and a bail application filed by respondent no.2 was subsequently rejected by the Magistrate on April 6, 2021. The petitioner remains in judicial custody following the extension of his remand.

Mr. Ponda, the senior advocate representing the petitioner, argues that bail should not be refused unless there is evidence that the petitioner might not appear for trial or could interfere with witnesses or obstruct justice. The petitioner has been cooperative since the initial search and seizure, responding to all summonses. He has also made a bona fide deposit of Rs. 45 Lakhs without admitting liability. Mr. Ponda asserts that the Magistrate failed to consider a precedent set by the High Court in the case of Daulat Samirmal Mehta vs. Union of India (Civil Writ Petition No. 471 of 2020, decided on February 15, 2021). This precedent, based on Supreme Court judgments, emphasizes that bail, rather than jail, should be the rule in cases not involving serious crimes like rape, murder, or terrorism, especially when the case has not reached the pre-trial stage and there has been no formal accusation like an FIR or complaint. The petitioner’s case, according to Mr. Ponda, aligns with the principles established in the Daulat case.

The argument presented is that the search and seizure operation has already been completed, and the purported fake invoices, balance-sheets, ledgers, and other documents have been confiscated for further investigation. Consequently, the petitioner’s custody is deemed unnecessary.

Mr. Ponda asserts that any statements made by or concerning the petitioner are not inherently admissible as evidence. He references the case of Daulat, indicating that Section 136 of the CGST Act becomes relevant only when the trial commences. He emphasizes that admissions made before revenue officials under the CGST Act are not automatically admissible in court without judicial acceptance.

Furthermore, Mr. Ponda argues that there is no logical connection between the belief that the petitioner has committed the alleged offense and the necessity for his arrest and custody. He notes that no substantial evidence has been presented to justify the reasons for believing the petitioner’s involvement. It is argued that such reasons must be documented in writing with proper consideration by the commissioner.

Additionally, Mr. Ponda cites the decision of the Delhi High Court in Makemytrip (India) Private Limited Vs. Union of India, 2016 (44) STR 481, to support his position.

In the presented legal context, several key arguments have been put forth regarding the arrest and detention of the petitioner in relation to alleged tax offenses under the CGST Act:

7. The submission is made that a search and seizure operation has already yielded purportedly incriminating documents like fake invoices and financial records. It is argued that since these materials are already in possession for further investigation, there is no necessity for the continued custody of the petitioner.

8. Mr. Ponda, the petitioner’s counsel, asserts that any statements attributed to the petitioner or against the petitioner are not automatically admissible as evidence. He cites legal precedent indicating that admissions made under the CGST Act are contingent upon court acceptance and are not inherently admissible.

9. It is contended that there is a lack of coherent and justifiable connection between the purported ‘reasons to believe’ that the petitioner committed the alleged offenses and the decision to arrest and detain them. The petitioner argues that no concrete evidence supporting these reasons has been presented on record, emphasizing the requirement for such reasons to be documented by the commissioner.

10. Reference is made to a Delhi High Court decision involving MakeMyTrip (India) Private Limited vs. Union of India, highlighting that arrests should not be made on arbitrary grounds but must be substantiated by credible evidence. The petitioner stresses that ‘reasons to believe’ should not be a mere formality but should be substantiated by a genuine necessity for arrest.

11. Section 138 of the CGST Act is cited to support the argument that the offenses under this act are compoundable, thereby questioning the necessity of the petitioner’s arrest. It is argued that the primary objective of the CGST Act is revenue collection, not punitive action against individuals. The petitioner further contends that any criminal proceedings initiated should be deemed abated under Section 138(3).

12. Mr. Ponda further contends that despite the petitioner’s cooperation and payment attempts, the arrest was made based on allegations of non-payment of GST and illegal availment of Input Tax Credit (ITC). He argues that the government lacks authority to resort to extrajudicial measures for tax collection, labeling such actions as coercive and unauthorized.

In essence, the petitioner’s defense challenges the validity and necessity of their arrest under the CGST Act, emphasizing procedural lapses, lack of substantive evidence, and asserting that the arrest was disproportionate to the alleged offenses, which they argue are primarily of an economic nature related to tax compliance rather than criminal intent. 

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