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Clubbing of tax evasion under GST: an innovative way to trigger arrest provisions

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Clubbing of tax evasion under GST: an innovative way to trigger arrest provisions
By: Anubhav Gupta
February 13, 2021
All Articles by: Anubhav Gupta       View Profile
  • Contents

The Bombay High Court vide its judgment dated 08.02.2021, has raised a new question instead of delivering an answer to the correct and firm interpretation of the legislation. In the case of YOGESH JAGDISH KANODIA, VERSUS THE STATE OF MAHARASHTRA, ASSISTANT COMMISSIONER OF STATE TAX, MUMBAI. [2021 (2) TMI 386 - BOMBAY HIGH COURT] the primary issue before the Hon’ble High Court was to deal with the arrest of an individual; whether correct in terms of Section 132 and 69 of the CGST Act.


  • The petitioner, a businessman, was arrested on 30.12.2020 and produced before the Additional Chief Metropolitan Magistrate, Mumbai on account of commission of offence under Section 132 (1) (b) (c) of the CGST Act and that since the input tax credit wrongly availed by the petitioner exceeded ₹ 500 lakh (₹ 5 crores) and the offence was punishable with imprisonment for a term, which could extend to five years and with fine under section 132 (1) (i) of the CGST Act, it was a cognizable and non-bailable offence under sub-section (5).
  • It was alleged on the Petitioner that he was operating four different establishments , involved in purchase of fake invoices in order to avail bogus input tax credit amounting to ₹ 11.54 crores, and passed on input tax credit amounting to ₹ 9.29 crores (approx..) through fake invoices. The petition was filed before the Bombay High Court seeking bail of the Petitioner.


It was the case of the Petitioner that the four different establishments in question being distinct legal entities have been treated as one and the alleged illegal availment of ITC (exceeding ₹ 5 crore) was wrongly calculated. If the establishments were to be treated as four separate legal entities, the alleged availment of illegal ITC would not have exceeded the provided threshold. Irrelevant of the fact that the Petitioner has wrongly availed the said ITC or not, if the amount is less than ₹ 5 crore, then the offence is non-cognizable and bailable under Section 132 of the CGST Act. The Petitioner was a proprietor of one establishment, Karta of the HUF operating the other. The third establishment was in the name of the father of the Petitioner, while the father being Karta of the HUF operating the last. The definition of ‘person’ under Section 2(84) was reiterated and contended that all person listed were distinct. The Petitioners also alleged that the arrest was not in compliance of Section 69 of the Act.

The Respondents weakened the Petitioner’s arguments by stating that all establishments were controlled and operated by one person; the Petitioner. Several facts such as that KYC details of bank accounts of all the firms were that of the Petitioner, Petitioner’s email ID and mobile number linked to the firm’s account, generated E-Way Bills and Registrations of the firm were produced before the Hon’ble High Court to prove that the offence was committed by the Petitioner alone. The Respondent’s case was based on establishing ill and fraudulent intent of the Petitioner pointing out that the signatures on the lease deed of business premises were forged and the vehicles used for transport of goods as claimed by the petitioner never actually transported such goods. It was hence averted that the abovementioned facts gave the Commissioner ‘sufficient reasons to believe’ that arrested of the Petitioner be warranted.


The Hon’ble High Court observed that “In tax frauds the modus operandi of creating fictitious entities to get around the rigours of law is not unknown” and thoroughly relied upon the material available on record. The Hon’ble High Court hence ruled that the offences had been committed warranting arrest, only because multiple entities are created and run by a single individual for carrying out activities. Thus, the petition was dismissed and bail was not granted to the Petitioner saying that the Petitioner has not been able to make out a case for exercising jurisdiction of the court under Article 226 of the Constitution of India.


Since there have been several precedents on strict interpretation of law, the same should also have been followed in the present case. The present judgment has raised questions on fair interpretation of Section 2(84) of the CGST Act & its interplay with Sections 132 & 69. The Hon’ble High Court may have ruled upon principles but has overlooked the distinction of ‘person’ as provided under the said provision. The Petitioner may be linked to all the establishments via all the material on record, but is still recognized as distinct as per the law. Further, in absence of any express provision allowing for calculation of threshold by clubbing alleged violations by separate legal entities, such interpretation can have far reaching consequences in cases where arrest provisions would otherwise not be triggered.

On the flip side, this interpretation allows the revenue authorities to track down and arrest those offenders and fly by night operations, who operate through multiple entities while ensuring that the threshold limits are not breached by individual firms/ registration, thereby avoiding rigours of law.

The present judgment will surely entail further clarifications/ discussion in order to provide a definite interpretation of the provisions of the Act. It would not be unfathomable to see an amendment to GST Law in near future for introduction of an express provision allowing such clubbing. Till then, those operating multiple entities/ GSTINs need to keep close tabs on cumulative amounts of alleged tax evasions/ input tax credit wrongly availed for all such entities.


Anubhav Gupta, Principal Associate, Khurana & Khurana, Advocates & IP Attorneys and Gaurav Sharma, 3rd Year Student, Symbiosis Law School, Pune

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By: Anubhav Gupta - February 13, 2021


Discussions to this article


I am afraid that the article is missing the woods for the trees.

Wording the title as "innovative way to trigger arrest provisions" itself is indicative of what ails the present day interpretative jargon.

The issue is of bogus invoices and taking ITC on the same.

By trying to colour it with a concept of "clubbing", I feel, will not get much mileage.

Perhaps, the following lines from the Apex Court decision would put the issue in perspective -

"It is, however, also well settled that fraud vitiates all solemn acts. Fraudulent actions shall render the act a nullity. It would be non est in the eyes of law. - Please see - Civil Appeal No. 2696 of 2007 : M/s TANNA AND MODI Vs CIT, MUMBAI-XXV = 2007 (5) TMI 200 - SUPREME COURT.

May be I am wrong, but it would always be prudent to understand the central idea of these provisions which are in a way designed to put a spoke in the wheels of those 'innovative' groups of people who are hell bent upon sucking the blood of the economy and impoverish the nation as a whole.


By: Sumit Srivastava
Dated: 15/02/2021


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