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2025 (7) TMI 136 - HC - GSTEligibility to pass Input Tax Credit (ITC) on the strength of invoices without actual supply of goods - reasons to believe - gross violation of provision of Section 132(1) of the Assam Goods and Services Tax Act 2017 - HELD THAT - It is the admitted fact that the respondent No. 2 issued authorization of arrest of the petitioner to the respondent No. 3. On perusal of the grounds of arrest it appears that certain reasons have been assigned for effecting the arrest. But it cannot be denied that there was no proper compliance of Section 41/41-A of Cr.P.C. corresponding to Section 35(3) of BNSS which are mandatorily required to be followed. From the view expressed by the Hon ble Supreme Court in case of Radhika Agarwal 2025 (2) TMI 1162 - SUPREME COURT (LB) it is evident that though the GST is a special enactment but the same cannot be considered as a complete Code in itself as regards to the provision of search seizure and arrest and as stated above the provision of Code of Criminal Procedure would be applicable unless it is expressly or impliedly barred by the provision of the said Act. But here in the instant case it is seen that there is no compliance of Section 41/41-A of Cr.P.C. corresponding to Section 35(3) of BNSS which is mandatorily required to be followed as per the guidelines of Hon ble Supreme Court in the cases of Arnesh Kumar Vs. State of Bihar 2014 (7) TMI 1143 - SUPREME COURT and reiterated in Satender Kumar Antil Vs. CBI 2022 (8) TMI 152 - SUPREME COURT . It is also an admitted position that though the grounds of arrest were communicated to the present petitioner but there is no communication of reasons to believe which ought to have been recorded before issuing authorization letter of arrest. As held by the Hon ble Supreme Court in case of Radhika Agarwal the requirement of furnishing the reasons to believe to the arrestee is not a mere formality but a substantive safeguard enabling the person concerned to challenge the legality of the arrest in accordance with law. But here in the instant case though it is stated that the reasons to believe were duly recorded by the competent authority prior to issuance of the authorization to arrest but there is nothing on record to show that the same were communicated to the petitioner either at the time of arrest or along with the grounds of arrest. Such non-communication of foundational reasons vitiates the process and undermines the safeguards guaranteed under law rendering the arrest procedurally infirm. It is also an admitted fact that while the grounds of arrest were communicated to the petitioner at the time of arrest under Section 69 of the CGST Act but the reasons to believe forming the basis of the arrest authorization were not communicated to the present petitioner. Furthermore it is also a fact that the accused/petitioner is in judicial custody since 10.06.2025 but there was no prayer made by the respondent authorities for custodial interrogation or police remand of the petitioner during his custody. This Court finds it to be a fit case to extend the benefit of interim bail to the accused/petitioner till disposal of the present criminal petition under Section 482 Cr.P.C. - List the matter after the ensuing summer vacation on a date to be fixed by the Registry.
1. ISSUES PRESENTED and CONSIDERED
- Whether the arrest of the petitioner under Sections 132(1)(b) and 132(1)(c) of the Assam Goods and Services Tax Act, 2017 (AGST Act) was legally valid and authorized. - Whether the authorization of arrest issued under Section 69 of the AGST Act complied with the mandatory requirement of recording and communicating "reasons to believe" to the petitioner. - Whether the procedural safeguards under Section 35(3) of the Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023, corresponding to Section 41-A of the Code of Criminal Procedure (Cr.P.C.), were complied with before effecting the arrest. - Whether the alleged offence involving fraudulent availment of Input Tax Credit (ITC) without actual receipt or supply of goods amounts to cognizable and non-bailable offence under the AGST Act. - Whether the investigation and assessment regarding tax evasion were properly conducted before initiating arrest proceedings. - Whether the petitioner is entitled to bail considering the facts and circumstances of the case, including the period of custody and the progress of investigation. 2. ISSUE-WISE DETAILED ANALYSIS Validity and Authorization of Arrest under AGST Act The legal framework under Section 132(1)(b) and (c) of the AGST Act criminalizes fraudulent availment or utilization of ITC without actual receipt or supply of goods. Sub-section (4) of Section 132 classifies offences involving tax evasion exceeding Rs. 5 crores as cognizable and non-bailable. The petitioner was arrested on the basis of allegations that his proprietorship firm availed ineligible ITC of approximately Rs. 4.6 crores and issued invoices facilitating ITC of Rs. 5.3 crores without actual supply of goods, aggregating to Rs. 9.9 crores. The Court examined whether the arrest authorization under Section 69 of the AGST Act was valid. It was contended by the petitioner that the authorization lacked recorded "reasons to believe" and was issued arbitrarily without disclosing the necessity or grounds, violating mandatory procedural safeguards. The respondent contended that the authorization was issued after proper assessment and consideration of reasons to believe. The Court noted that the "reasons to believe" must be objectively formed by the Commissioner based on relevant materials, including inspection and search records under Section 67(10) of the Act, and must be communicated to the person arrested. The absence of communication of such reasons to the petitioner vitiates the authorization and renders the arrest illegal. Compliance with Procedural Safeguards under BNSS and Cr.P.C. The petitioner argued non-compliance of Section 35(3) of BNSS, corresponding to Section 41-A of Cr.P.C., which mandates issuance of notice before arrest except in exceptional circumstances. Reliance was placed on the Supreme Court's decisions in Arnesh Kumar v. State of Bihar and Satender Kumar Antil v. CBI, emphasizing strict adherence to these provisions to prevent arbitrary arrests. The Court observed that the petitioner was arrested without any such notice and that the respondents failed to substantiate compliance with these mandatory procedural safeguards. The Hon'ble Supreme Court's ruling in Radhika Agarwal v. Union of India was cited, which held that GST law is not a complete code and Cr.P.C. provisions apply unless expressly excluded. The failure to comply with Section 41/41-A of Cr.P.C. thus rendered the arrest procedurally infirm. Nature of the Alleged Offence and Tax Liability The petitioner contended that tax under the AGST Act is leviable only upon actual supply of goods. Since the allegations themselves admitted no supply of goods, the question of tax evasion or liability does not arise. The petitioner relied on a Government of India Circular dated 06.07.2022 clarifying that no tax or demand arises where there is no taxable supply, and consequently, no recovery can be made for ITC availed fraudulently in such cases. The Court noted the contention that the inclusion of Rs. 5.3 crores as tax evasion was an artificial aggregation to exceed the Rs. 5 crore threshold for cognizable and non-bailable offences. Further, it was highlighted that no formal assessment had been completed by the competent authority before initiating arrest proceedings, which is contrary to settled legal principles that tax liability must be determined post-assessment. Application of Law to Facts and Treatment of Competing Arguments The Court examined the grounds of arrest and the statements made by the petitioner before the investigating authority. It was acknowledged that the petitioner admitted issuance of invoices without actual supply, but the legality of arrest was not solely dependent on admission but on compliance with procedural safeguards and proper authorization. The respondents argued that the authorization and grounds of arrest were duly issued and that the petitioner's statements supported the allegations. However, they admitted no police remand or custodial interrogation was sought during the petitioner's detention, indicating that further custodial detention was not necessary. The Court found that the respondents failed to produce material evidence of compliance with the mandatory procedural requirements, specifically the communication of "reasons to believe" and notice under Section 35(3) BNSS/Section 41-A Cr.P.C. The absence of such compliance undermined the legality of the arrest and subsequent proceedings. Entitlement to Bail Considering the petitioner's custodial detention since 10.06.2025, the absence of any request for custodial interrogation, the petitioner's permanent residence, and cooperation with the investigation, the Court found it appropriate to grant interim bail. The Court referred to the principles laid down in Arnab Manoranjan Goswami v. State of Maharashtra, emphasizing the constitutional value of human liberty and the High Court's inherent power under Section 482 Cr.P.C. to prevent abuse of process and secure ends of justice. The Court balanced the public interest in fair investigation with the protection of individual liberty, noting that the misuse of criminal law for selective harassment must be guarded against. The petitioner was thus granted interim bail subject to furnishing bond and surety, with conditions to ensure cooperation and prevent interference with the investigation. 3. SIGNIFICANT HOLDINGS "The requirement of furnishing the 'reasons to believe' to the arrestee is not a mere formality but a substantive safeguard, enabling the person concerned to challenge the legality of the arrest in accordance with law." "Though the GST Act is a special enactment, it cannot be considered a complete Code in itself as regards provisions of search, seizure and arrest. The provisions of the Code of Criminal Procedure would apply unless expressly or impliedly barred by the said Act." "Non-compliance of Section 41/41-A of Cr.P.C., corresponding to Section 35(3) of BNSS, which are mandatorily required to be followed, renders the arrest illegal and vitiates the subsequent proceedings." "Tax liability under the AGST Act arises only upon actual supply of goods or services. In the absence of such supply, no tax liability or evasion can be said to have occurred." "The High Court, exercising its inherent power under Section 482 Cr.P.C., must act with circumspection to prevent abuse of the process of law and to safeguard the constitutional value of liberty, balancing the need for fair investigation and protection against selective harassment." Final determinations:
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