2025 (6) TMI 1153 - HC - GST

Seeking grant of bail - Fraudulent availment and passing of Input Tax Credit (ITC) without actual receipt of goods - HELD THAT - Upon perusal of the case records including the Preliminary Report E-way bill records GSTR filings and statements of officials of the Directorate General of GST Intelligence (DGGI) this Court is of the considered view that the allegations although at the stage of investigation are serious in nature involving an organized and deliberate scheme to defraud the exchequer through fraudulent availment and passing of Input Tax Credit (ITC). It is pertinent to note that the offence under Section 132 (1) (b) 132 (1) (c) and 132 (1) (f) of the CGST Act 2017 pertains to issuance and use of fake invoices without actual supply of goods or services which has a direct bearing on public revenue and financial integrity of the nation. These offences if the amount exceeds Rs. 5 crore are categorized as non-bailable and cognizable under Section 132 (5) of the Act. In the present case the quantum of wrongly availed ITC is over Rs. 11.97 crore clearly crossing the statutory threshold for denial of bail at the threshold stage. The Petitioners claim that they are permanent residents and unlikely to abscond is noted. However risk to the process of investigation is not only about physical disappearance. It includes the ability to influence data coordinate narratives and weaken the evidentiary foundation in subtle ways. In financial cases of this nature control over systems or knowledge of procedural gaps can be just as critical. This Court is conscious of the principle that pre-trial detention should not be punitive. However in matters involving substantial public funds and systemic breach of trust restraint is warranted. The gravity of allegations the scale of suspected financial irregularities and the ongoing nature of the investigation collectively suggest that this may not be the appropriate stage to extend the relief sought. Conclusion - i) The prima facie case against the petitioners for fraudulent availment and passing of ITC without actual receipt of goods is established by documentary and electronic evidence including significant discrepancies in tax returns and absence of physical movement of goods. Both the BLAPLs are accordingly dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

• Whether the petitioners, accused under Sections 132 (1) (b), 132 (1) (c), 132 (1) (f), 132 (1) (I), and 132 (5) of the CGST Act, 2017, are entitled to bail given the allegations of fraudulent availment and passing of Input Tax Credit (ITC) without actual receipt or supply of goods.
• The applicability and interpretation of the CGST Act provisions concerning fraudulent ITC claims, particularly the threshold for non-bailability under Section 132 (5) when the amount involved exceeds Rs. 5 crore.
• The relevance and sufficiency of documentary and electronic evidence, including discrepancies between GSTR-3B and GSTR-2A/2B filings, E-way bill records, and toll plaza data, in establishing a prima facie case of fraud.
• The extent of individual liability of the petitioners, especially distinguishing the role of an employee vis-`a-vis the proprietor in the alleged fraudulent scheme.
• The risk of tampering with evidence, influencing witnesses, or derailing the investigation if bail is granted, considering the nature of economic offences and digital evidence.
• The balance between the right to pre-trial liberty and the necessity of safeguarding the integrity of a complex financial investigation involving substantial public funds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Bail under Sections 132 (1) and 132 (5) of the CGST Act

The legal framework under the CGST Act classifies offences involving fraudulent availment or passing of ITC without actual supply as cognizable and non-bailable when the amount involved exceeds Rs. 5 crore (Section 132 (5)). The petitioners face charges under multiple sub-sections of Section 132 (1), relating to issuance and use of fake invoices, fraudulent ITC claims, and related offences.

The Court referred to authoritative precedents emphasizing the gravity of economic offences. In particular, the Supreme Court in the cited judgment highlighted that economic offences "constitute a class apart" and require a "different approach" in bail matters due to their serious impact on the economy and public funds. The Court reiterated that factors such as the nature of accusations, evidence, severity of punishment, and risk of witness tampering must guide bail decisions.

Applying this framework, the Court noted the quantum of alleged fraud here-over Rs. 11.97 crore in ITC claimed fraudulently-well beyond the statutory threshold for non-bailability. This establishes a prima facie case warranting denial of bail at this stage.

Issue 2: Sufficiency and Nature of Evidence Establishing Prima Facie Case

The investigation revealed significant discrepancies between the ITC claimed in GSTR-3B returns and the inward supplies reflected in GSTR-2A/2B, with the latter being substantially lower. Additionally, E-way bill records purportedly generated for transport of goods lacked corresponding physical movement evidence, as vehicles did not pass any toll plazas on the relevant routes. These factors collectively cast serious doubt on the authenticity of the transactions.

The prosecution also presented a money trail showing substantial bank transfers to the proprietor and relatives from co-accused and third parties, alongside statements under Section 70 of the CGST Act from recipient firms admitting receipt of fake ITC and voluntary repayments. This documentary and electronic evidence, while susceptible to digital manipulation, was considered sufficient at this investigative stage to establish a prima facie case of a coordinated fraudulent scheme.

The Court acknowledged the petitioners' argument relying on statutory provisions recognizing constructive delivery and documentary entitlement (Section 16 (2) (b) of the CGST Act and related provisions). However, it held that such nuanced legal contentions about invoice validity and input matching are not amenable to final adjudication at the bail stage.

Issue 3: Individual Liability and Role of Petitioners

The petitioner A. Kumar Rao claimed to be merely an employee with no involvement in financial dealings, asserting false implication. The proprietor, Samir Kumar Sahu, contended that the allegations were baseless and that taxes were duly paid on output supplies.

The Court observed that offences under the CGST Act often involve layered responsibilities and that the employee's proximity to the firm's operations does not exclude his potential involvement. The material on record did not exclude his operational role, and thus, his release could risk interference with the investigation.

Regarding the proprietor, while his reliance on legal provisions for constructive delivery was noted, the Court emphasized that the large disparity in ITC claims and absence of physical verification markers justified continued custody pending trial.

Issue 4: Risk of Tampering with Evidence and Investigation Integrity

The Court highlighted the unique vulnerabilities of electronic and documentary evidence in economic offences, noting that digital records can be manipulated or cloud-stored data altered. Given the ongoing investigation involving multiple recipient firms and complex financial transactions, the possibility of witness intimidation or evidence tampering was a significant concern.

Although the petitioners claimed permanent residency and low flight risk, the Court held that the risk extended beyond physical disappearance to include the potential to influence digital evidence or coordinate narratives, which is critical in such cases.

Issue 5: Balancing Pre-trial Liberty and Public Interest

The Court reaffirmed the principle that pre-trial detention should not be punitive but balanced against the necessity to protect public funds and maintain trust in the justice system. Given the scale of the alleged fraud, the systemic breach of trust, and the ongoing investigation, the Court concluded that bail was not appropriate at this stage.

3. SIGNIFICANT HOLDINGS

The Court held:

"Economic offences constitute a class apart and need to be visited with a different approach in the matter of bail. The economic offence having deep rooted conspiracies and involving huge loss of public funds needs to be viewed seriously and considered as grave offences affecting the economy of the country as a whole and thereby posing serious threat to the financial health of the country."

It was further observed:

"The entire Community is aggrieved if the economic offenders who ruin the economy of the State are not brought to book. A murder may be committed in the heat of moment upon passions being aroused. An economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community."

The Court concluded that:

• The prima facie case against the petitioners for fraudulent availment and passing of ITC without actual receipt of goods is established by documentary and electronic evidence, including significant discrepancies in tax returns and absence of physical movement of goods.
• The offences under Sections 132 (1) (b), (c), (f), and (I) of the CGST Act, involving amounts exceeding Rs. 5 crore, are cognizable and non-bailable under Section 132 (5), justifying denial of bail at this stage.
• The petitioners' claims regarding their roles and legal defenses based on constructive delivery and documentary entitlement cannot be adjudicated conclusively at the bail stage.
• The risk of tampering with digital evidence and influencing witnesses in a complex financial investigation militates against grant of bail.
• Pre-trial detention is warranted given the gravity of the offences, scale of financial fraud, and the need to protect the integrity of the investigation and public interest.

Accordingly, the bail applications of both petitioners were dismissed.