2025 (5) TMI 916 - HC - GST

Fraudulent availment of Input Tax Credit (ITC) - reply of petitioner was not considered and no personal hearing was given prior to passing of the impugned order - violation of principles of natural justice - HELD THAT - This Court in the present writ petition is exercising jurisdiction under Article 226 of the Constitution of India and when there is an allegation of such large-scale fraud to the tune of more than Rs. 56.2 crores being committed with the involvement of a total of 527 firms including the Petitioner Firm the Court has to be circumspect in exercise of its powers - This Court notices a pattern in which such persons who had either availed of fraudulent ITC or have enabled the availment of fraudulent ITC repeatedly have challenged orders imposing penalty under Section 74 of the Central Goods and Services Act 2017 before this Court invoking the writ jurisdiction on some technical grounds. There is also no arbitrary exercise of power by the Department which would require exercising of writ jurisdiction. As is evident from the impugned order various persons and entities including that of the Petitioner have either facilitated availment of or in fact availed ITC by entering into arrangements with the main proponent Mr. Karan Kumar Agarwal - having seen the hearing notices the screenshot of the portal and the reply of the Petitioner Firm along with the statement of the Director of the Petitioner Firm which is recorded in the impugned order the Court is not inclined to entertain the present writ petition. Prima facie considering the contradictory stand taken in the reply and the statement of the Petitioner s Director the stand of the Department cannot be held to be incorrect or untenable. The impugned order does no warrant interference by this Court in exercise of writ jurisdiction - Petition dismissed.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the impugned order passed by the Additional Commissioner under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) for alleged fraudulent availment of Input Tax Credit (ITC) against the Petitioner Firm is liable to be set aside for non-consideration of the Petitioner's reply and denial of personal hearing.

2. Whether the Petitioner Firm had commenced operations during the relevant financial year 2017-18 and whether it had availed ITC fraudulently on the basis of goods-less invoices.

3. Whether the contradictory statements made by the Petitioner Firm in its written reply and the voluntary statement of its Director recorded under summons affect the credibility of the Petitioner's case.

4. Whether the writ jurisdiction under Articles 226 and 227 of the Constitution of India should be exercised in the present case, given the nature and scale of the alleged fraud and the procedural compliance by the Department.

Issue-wise Detailed Analysis

Issue 1: Alleged denial of personal hearing and non-consideration of Petitioner's reply

The relevant legal framework includes the principles of natural justice, especially the right to be heard before passing an adverse order, and procedural requirements under the CGST Act. The Petitioner contended that its reply was filed and a personal hearing was requested but was not granted, thus violating natural justice.

The Department's stand, supported by evidentiary material including hearing notices dated 27th November, 4th December, and 27th December 2024 and a portal screenshot showing non-uploading of any reply, was that the Petitioner did not attend the hearings and no reply was considered before passing the order.

The Court analyzed the documentary evidence and found that the show cause notice was duly issued and the Petitioner was given multiple opportunities for hearing. The Court noted the presence of a Form GST DRC-06 indicating a request for personal hearing but balanced this against the Department's evidence of non-attendance and non-filing of reply on the portal.

The Court concluded that there was no violation of natural justice or jurisdictional error. The procedural safeguards were complied with, and the Petitioner had the opportunity to be heard but did not avail it effectively.

Issue 2: Commencement of operations and fraudulent availment of ITC during FY 2017-18

The Petitioner's written reply stated that it was registered under GST from 28th November 2017 but had not commenced any trading or manufacturing activity during FY 2017-18; the manufacturing unit was under installation and only machinery and assets were being purchased. Therefore, it argued, there was no question of availing ITC on goods-less invoices from the firms linked to Mr. Karan Kumar Agarwal.

The Department's impugned order, however, relied on a voluntary statement of the Petitioner's Director recorded on 6th August 2022, where he admitted meeting Mr. Karan Kumar Agarwal, agreeing to receive goods-less invoices, paying 6% commission, and availing ITC on purchases from one of the implicated firms. The Director also acknowledged awareness of the illegality of such transactions under the GST law.

The Court noted the stark contradiction between the Petitioner's written reply and the Director's recorded statement. It found that the Director's admission undermined the Petitioner's claim of non-operation and non-involvement in fraudulent ITC.

Applying the law to these facts, the Court observed that the Petitioner had prima facie availed ITC fraudulently by entering into arrangements with the main proponent of the fraud, Mr. Karan Kumar Agarwal, and was part of a larger network of 527 firms involved in similar transactions.

Issue 3: Credibility of the Petitioner's case given contradictory statements

The Court emphasized the importance of consistency and good faith in representations made to the tax authorities and the Court. The contradictory positions taken by the Petitioner-denying any dealings with the fraudulent network in the written reply while admitting such dealings in the Director's statement-were held to seriously affect the Petitioner's credibility.

The Court also highlighted the broader context of large-scale fraudulent availment of ITC amounting to over Rs. 56.2 crores, which threatened the integrity of the GST framework designed to facilitate legitimate business transactions.

The Court treated the Petitioner's conflicting assertions as indicative of non-clean hands and noted that such conduct disentitles the Petitioner from relief under writ jurisdiction.

Issue 4: Exercise of writ jurisdiction in cases involving large-scale fraud and procedural compliance

The Court considered the scope of judicial review under Articles 226 and 227 of the Constitution, particularly in the context of tax matters involving allegations of fraud. It acknowledged that while writ jurisdiction is a potent remedy, it should be exercised sparingly and not used to circumvent statutory appellate remedies or to challenge orders on purely technical grounds.

The Court observed a pattern of similar writ petitions challenging penalty orders under Section 74 of the CGST Act on technicalities, which if entertained, could undermine the tax administration's efforts to curb fraudulent ITC claims.

Given that the show cause notice was issued, personal hearing opportunities were provided, and no jurisdictional or procedural infirmity was found, the Court declined to interfere with the impugned order in writ jurisdiction.

The Court also underscored the need to protect the GST regime from erosion by fraudulent practices and emphasized that writ jurisdiction should not be exercised where the Petitioner has not come with clean hands or where the Department's action is not arbitrary or illegal.

Significant Holdings

The Court held: "In such cases, so long as there is no violation of natural justice or jurisdictional error, writ jurisdiction ought not to be exercised, especially if the Petitioner has not come with clean hands."

It further observed: "Such large scale fraudulent availment of ITC without actual passing of goods or services may, if left unchecked, can lead to severe damage to the GST framework itself, which is meant to encourage legally entitled persons and businesses to avail of ITC."

The Court concluded that the impugned order was neither arbitrary nor untenable, and the contradictory statements of the Petitioner's Director corroborated the Department's allegations of fraudulent ITC availment.

Accordingly, the Court dismissed the writ petition with costs of Rs. 1 lakh payable to the Bar Association and declined the Petitioner's request for withdrawal of the petition, directing the Petitioner to pursue available statutory remedies such as appeal.