Shreyash and Sushant write on an area that is fraught with great confusion : the power and procedure of arrest under the GST laws and the permissibility of Bail/Anticipatory Bail.
POWER TO ARREST UNDER GST
Let’s say a businessman, Mr X, gets arrested for flouting taxation laws by allegedly issuing fake invoices in order to avail Input Tax Credit (“ITC”). He is arrested by an official who has reasons to believe that Mr X is guilty of the alleged offences. Mr X argues that his arrest has no basis in law because of three reasons:
- He was arrested even before the assessment proceedings were completed
- The reasons to believe were not disclosed to him
- The reasons to believe for his arrest were formed by someone other than the Commissioner of Central Tax who had delegated only his power to arrest and not the ability to form the reasons to believe.
At the same time, Mr Y, a business associate of Mr X suspects that proceedings will also be initiated against him and he is liable to be arrested. Thus, he approaches the concerned court for grant of anticipatory bail under Section 438 of the Code of Criminal Procedure, 1973 (“CrPC”).
However, before we discuss each of these contentions in detail, we must first discuss the applicable law.
Background: The Power to arrest under the Central Goods and Services Act, 2017
The pre-2017 taxation regime suffered from various infirmities such as cascading of taxes, tariff and non-tariff barriers and a large number of taxation compliances to name a few. With an aim to overhaul taxation in India, Central Goods and Services Act, 2017 (“CGST Act”), Integrated Goods and Services Act, 2017 and the respective state laws were enacted.
To briefly summarise, the CGST Act contains inter alia, provisions for:
- Assessment including self-assessment, provisional assessment
- Audit of registered persons
- Recovery of arrears
- Establishment of Goods and Services Tax Appellate Tribunal
- Power to authorized personnel for inspection, search, seizure and arrest
The power to arrest is prescribed under Section 69 of the CGST Act. Section 69(1) provides:
Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person
Here, the word ‘Commissioner’ refers to the Commissioner of Central Tax as defined under Section 2(24), (“Commissioner”).
Given that the CGST Act prescribes a procedure for assessment, for instance, self-assessment (Section 59), provisional assessment (Section 60), scrutiny of returns (Section 61) etc., Mr X argues that a person cannot be arrested before the adjudication of assessment proceedings.
Arrest before assessment:
The High Court of Delhi in Makemytrip (India) Pvt Ltd vs Union Of India & Ors 2016 SCC OnLine Del 4951 while examining the powers of Directorate General of Central Excise Intelligence of arrest, investigation and assessment of service tax under the provisions of the Finance Act, 1994 equated arresting before the completion of adjudication proceedings to putting the cart before the horse. The Court held that normally prosecution should only be launched after the completion of adjudication proceedings.
The findings of the Delhi High Court were later affirmed by the Supreme Court in Union Of India & Ors vs Makemytrip (India) Pvt Ltd (2019) 11 SCC 765.
One must keep in mind that the High Court’s verdict was in the context of the erstwhile service tax laws and not the current CGST Act.
Notwithstanding the above, relying on the judgment in Makemytrip, the Madras High Court in Jayachandran Alloys (P.) Ltd. vs Superintendent of GST & Central Excise 2019 SCC OnLine Mad 31224 held that determination of excess credit as provided under Section 73, 74 of CGST is a pre-requisite for recovery and this recovery can only be initiated once the amount of excess credit has been quantified and determined in an assessment. The Court then concluded that “the power to punish set out in Section 132 of the Act would stand triggered only once it is established that an assessee has ‘committed’ an offence that has to necessarily be post-determination of the demand due from an assessee, that itself has to necessarily follow the process of an assessment.”
The Telangana High Court expressed a different view in P.V. Ramana Reddy vs Union of India 2020 SCC OnLine TS 472. In this case, the Court came to a different conclusion compared to the two decisions discussed above. It opined that the list of offences included in Section 132(1) of CGST Act, such as issuing fake invoices to avail input tax credit, did not correlate with assessment. Therefore, in the Court’s opinion, there was no merit in the argument that there can be no arrest before adjudication.
The judgment of the Telangana High Court was challenged before the Supreme Court in SLP (Crl.) No. 4430/2019. However, the Apex Court declined to interfere with the view of the Telangana High Court.
Further, in an order dt. 29.05.2019 passed in Union of India vs Sapna Jain SLP (Crl.) 4322-4344/2019, the Supreme Court taking note that different High Courts have taken different views, set up a three-judge bench to decide on this issue. In the same order, it also noted that:
“… we make it clear that the High Courts while entertaining such request in future, will keep in mind that this Court in P.V. Ramana Reddy vs Union of India by order dated 27.5.2019 passed in SLP(Crl.) No. 4430/2019 had dismissed the special leave petition filed against the judgment and order of the Telangana High Court in a similar matter, wherein the High Court of Telangana had taken a view contrary to what has been held by the High Court in the present case.
Beyond the above, we do not consider it necessary to observe anything further”
Interestingly, the Gujarat High Court in Vimal Yashwantgiri Goswami vs State of Gujarat Special Civil Application No. 13679 of 2019 disagreed with the Madras High Court’s judgment in Jayachandran Alloys (supra). The Gujarat High Court noted that Sections 69 and 132 of the CGST Act operate in different fields and observed:
“The power to arrest as provided under section 69 of the CGST Act is a measure taken during the course of inspection, investigation, search or seizure as explained in detail by the Telangana High Court and therefore, it cannot be said that by invoking the power under section 69 of the CGST Act punishment prescribed under the section 132 is inflicted.”
While the verdict of the three-judge bench is awaited, the Apex Court appears to agree with the Telangana High Court’s ruling. It also remains to be seen whether an interpretation similar to the Makemytrip (supra) verdict would be applicable on the CGST Act as held in Jayachandran Alloys (supra) or not.
Reason to believe:
Our enterprising businessman’s second contention is that the reasons to believe were not disclosed to him. Mr X relying on the meaning of the phrase “reason to believe” as pronounced by the Apex Court in Joti Parshad vs State Of HaryanaAIR 1993 SC 1167 argues that as the authorization for his arrest only mentioned that the designated officer had “reason to believe” but did not disclose those reasons, the said authorization as well as the consequent arrest, were bad.
Similar contentions were also raised before the Calcutta High Court in Sanjay Kumar Bhuwalka and Ors. vs Union of India MANU/WB/1449/2018. The Court took note of its earlier verdict in Tirupati Trading Corporation vs Collector of Customs 1998 SCC OnLine Cal 642 wherein it was held “whether the seizure under Section 110 of the Customs Act, 1962 was under a reasonable belief or not is a justiceable one, but once it is held that there was material, relevant and germane, the sufficiency of the material is not open to judicial review.”
Thus, the Calcutta High Court in Sanjay Kumar held that:
“… ‘reasonable belief’ or reason to believe as a standard to arrest requires that arresting officer subjectively believe that the suspect has committed the offence and that objectively reasonable person would reach the same conclusion.
Reasonable grounds do not require as much evidence as a prima facie case but do require that thing believed to be more likely than not.” (emphasis supplied)
The Telangana High Court in PV Ramana Reddy (supra) also dealt with this issue. The Court therein held that the safeguards before arresting a person as provided under Section 41 and 41A of CrPC would have to be kept in mind from the moment that the Commissioner has reasons to believe that a cognizable and non-bailable offence warranting the arrest has been committed. However, drawing a distinction between the wordings of Section 41A(3) of CrPC and Section 69 of CGST Act, the Court observed that while the former provided for “recording of a reason”, the latter required only “reasons to believe”. Therefore, the Court held that if the reasons to believe were recorded in the files, it was not necessary to record those reasons in the authorization for arrest under Section 69(1) of the CGST Act.
Thus, the second contention advanced by Mr X may not succeed.
Delegation of the power to arrest and reason to believe
The last contention advanced by Mr X is that as per Sections 5 and 69 of the CGST Act, the Commissioner may delegate his power to arrest to any other officer. However, he contends that in his case only the Commissioner could form the reasons to believe as the same had not been delegated to another official.
First, we must examine whether the Commissioner can delegate his powers under the CGST Act or not. As a general rule, a delegated authority cannot be re-delegated, the same is also contained in the legal maxim – delegatus non-potest delegare. However, the Supreme Court in Barium Chemicals Ltd. v. Company Law Board, observed “the maxim “delegatus non-potest delegare” must not be pushed too far. The maxim does not embody a rule of law. It indicates a rule of construction of a statute or other instrument conferring an authority. Prima facie, a discretion conferred by a statute, on any authority is intended to be exercised by that authority, and. by no other. But the intention may be negatived by any contrary indications in the language, scope or object of the statute. The construction that would best achieve the purpose and object of the statute should be adopted.”
Taking note of the above verdict of the Apex Court, and the exceptions to the legal maxim, i.e. expressed power to delegate in the legislation or implied power to delegate (the Carltona doctrine), the Gujarat High Court in Nathalal Maganlal Chauhan vs State of Gujarat 2020 SCC OnLine Guj 1811 observed, “be it quasi-judicial or administrative power, the same can be delegated provided the law expressly or by clear implication permits it to be delegated.”
Under Section 5 of the CGST Act, the Commissioner is authorized to delegate his powers to any officer subordinate to him. The same aligns with Section 69(1) of the CGST Act which allows the Commissioner to authorize any officer of central tax to arrest any person who has committed the offences detailed under that provision. Thus, the Commissioner can delegate his power to arrest.
However, Mr X argues that even the ability to form the reasons to believe should have been delegated separately.
A Division Bench of the Gujarat High Court in Deep Suresh Gadecha vs State of Gujarat SCRLA No. 10436/2019 held that there are two requirements under Section 69. First, that of forming the reason to believe which is cast upon the Commissioner and the second, the power to order the arrest. In the case before the Gujarat High Court, the arresting official was authorized only to arrest and not to form reasons to believe. The respondent Authorities contended that forming the reasons to believe was neither a separate requirement nor required to be separately delegated and the same should not be read by putting a disjunction in Section 69(1) of the Act. The Court rejected this argument holding that since the power to arrest and the power to form the reason to believe are separate, the latter should have been delegated separately.
The Gujarat High Court’s judgment is currently stayed by and pending in appeal before the Supreme Court in SLP (Crl.) 984/2020.
Contrarily, in Nathalal (supra), the Court held that since the verdict in Deep Suresh was in a habeas corpus petition, the same did not apply to the present case and expressed a view contrary to the verdict of the coordinate bench cited above. It observed that no distinction could be drawn between a particular power to be exercised and a power to be exercised based on the reasonable belief of the authority. Thus, the Court held, “The very same reasonable belief will be that of the authority upon whom the power is delegated. The power under Section 69 of the Act can be exercised by the authority upon whom the power is delegated provided the delegatee has reasons to believe that the assessee has committed offence under Section 132 of the Act.” (emphasis supplied)
While no adverse order appears to have been passed against the judgment rendered in Nathalal (supra), as the operation of the verdict in Deep Suresh (supra) has been stayed by the Apex Court, it is as yet uncertain whether Mr Ramsay’s final contention would pass muster or not.
Grant of anticipatory bail
It is settled law that grant of anticipatory bail is a statutory right under Section 438, CrPC. Although, the same is not applicable in those states where this provision has been omitted or for those offences where some special enactment under which a person is prosecuted ousts the application of this provision (e.g. –Section 18 of the Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act, 1989).
Nevertheless, even if a person resides in a state where Section 438, CrPC is applicable, the Telangana High Court’s findings in PV Ramana Reddy (supra) pose a significant challenge to the prayer for grant of anticipatory bail. The High Court observed that as the power of arrest under Section 69, CGST Act is exercised before a First Information Report (“FIR”) is registered, in such cases, Section 438 of CRPC cannot be invoked. The Court also observed that “until a prosecution is launched, by way of a private complaint with the previous sanction of the Commissioner, no criminal proceedings can be taken to commence”. Since arrest under Section 69 of the CGST Act is done before prosecution, it would not come within the purview of the expression “criminal proceedings”. Consequently, Section 438 will not apply and no anticipatory bail can be granted thereunder.
However, the Karnataka High Court in Sri Hanumanthappa Pathrera vs State MANU/KA/2222/2020 observed that it was not held in PV Ramana Reddy (supra) that Section 438 of CrPC is not maintainable in the case of an offence punishable under the CGST Act. Further, the Karnataka High Court held that as there is no statutory bar to Section 438 of CrPC under the CGST Act, “once a person apprehends his arrest in the hands of the Commissioner under Section 69 of the CGST Act, the assessee has statutory right to seek anticipatory bail under Section 438 of the Cr.P.C.”.
Similarly, anticipatory bail was also granted by the Karnataka High Court in Shravan A. Mehra and Ors. vs Superintendent of Central Tax, Anti-evasion, GST Commissionerate MANU/KA/0875/2019 by imposing stringent conditions and it was held that, “The only consideration which the Court has to consider while releasing the petitioners on anticipatory bail is, that whether the petitioners can be secured for the purpose of investigation or for the purpose of trial. Under such circumstances, I feel that by imposing stringent conditions if the petitioners are ordered to be released on anticipatory bail, it would meet the ends of justice.”
At this stage, it is prudent to briefly discuss Section 438 of CrPC. Under this provision, if a person has “reason to believe”, provided these grounds can be objectively examined by the Court as held in Gurbaksh Singh Sibbia Etc vs State Of Punjab 1980 AIR 1632, that they may be arrested for having committed a non-bailable offence, they may apply for anticipatory bail. In Gurbaksh Singh, the Court also held that filing of an FIR is not a condition precedent to the exercise of power under this provision and “the imminence of a likely arrest founded on a reasonable belief can be shown to exist even if an F.I.R. is not yet filed”. Further, the Madras High Court in Natturasu and Ors. vs The State 1998 SCC OnLine Mad 18 held “if the applicant entertains the apprehension of arrest at the hands of the police at the petition enquiry before registering F.I.R., the High Court or the Court of Session could invoke Section 438, provided the imminence of a likely arrest is shown to exist to the Court.” In any case, provisions such as Section 438, CrPC should be given a wide amplitude in the interests of personal liberty.
Notwithstanding that an enquiry under Section 70 is conducted as per the Code of Civil Procedure, 1908 or that an arrest under Section 69 of CGST Act occurs before criminal proceedings are initiated, considering that either of those actions can (and often do) lead to criminal prosecution and filing of an FIR is not a condition precedent for invoking the protection under Section 438 of CrPC, in the authors’ view, the verdict of the Madras High Court does not appear to be correct. Further, since an arrest under Section 69 of CGST Act can only be initiated if there are reasons to believe that an offence has been committed, a similar degree of latitude should also be extended to the arrestee to believe that criminal proceedings will be initiated against him. Therefore, pre-arrest protection should not be denied. Needless to state that objective grounds would need to be established before pre-arrest protection can be granted under the stated provision, however, the application of Section 438 cannot be expressly ruled out.
Although the Apex Court appears to agree with the findings of the Madras High Court, it is hoped that the three-judge bench will clarify the legal position on this issue.
Nevertheless, even if Section 438, CrPC is ruled out, a remedy can be availed under Article 226 of the Constitution as held in PV Ramana Reddy (supra). In that case, the petitioners approached the High Court under Article 226 seeking directions to be issued to the respondent Authorities therein not to arrest the petitioners as provided under Section 69(1) of CGST Act. In essence, the petitioners indirectly prayed for grant of anticipatory bail. The learned Additional Solicitor General contended that writ proceedings could not be converted into proceedings for grant of anticipatory bail but the Court rejected this argument in light of the principles of laid down by the Apex Court in Kartar Singh vs State of Punjab (1994) 3 SCC 569 and Km. Hema Mishra vs State of Uttar Pradesh (2014) 4 SCC 453 wherein it was held that though there is no bar for the High Court to entertain an application for pre-arrest protection, this power should be exercised sparingly.
However, the Court refused to grant protection against arrest because of the nature of the offence involved. In its view, in offences such as fraudulent ITC claims, a huge liability is created for the Government and such acts “constitute a threat to the very implementation of a law within a short duration of its inception”.
The Court also observed that while offences under the CGST Act are compoundable, as per the proviso to Section 138(1), compounding can be allowed only after making payment of tax, interest and penalty involved in such cases. In its view, since the wrongful ITC allegedly passed on was to the tune of Rs 225 Crores, even if compounding was allowed, the petitioners would not be to satisfy the requirements under the provision to Section 138(1) because the resultant liability was so huge. Rejecting the contention of compounding the offence, it held, “Therefore, the argument that there cannot be any arrest as long as the offences are compoundable, is an argument of convenience and cannot be accepted in cases of this nature.”
The observations regarding the nature of offences also find mention in other proceedings of similar nature where Courts have refused to grant anticipatory bail because of the serious economic offence involved. For instance, the Madras High Court in Vimal Nayan and Ors. vs The Principal Commissioner of GST and Central Excise and Ors.MANU/TN/1533/2019 rejected the anticipatory bail application filed before it and held that “in matters of this nature, the department must be given the complete independence to investigate the cases since it involves the national interest. This Court by entertaining an Anticipatory Bail Petition and by imposing certain conditions, should not tie the hands of the department in proceeding further with the investigation since what has been unearthed till now is only the tip of the iceberg and there is a long way to go for the department to find out how long this fake invoices have extended their tentacles.”
The following legal principles emerge from the above discussion:
- A person can be arrested under Section 69 of the CGST Act even before the completion of the assessment proceedings.
Since the Supreme Court has affirmed the view of both the Delhi and Telangana High Courts in Makemytrip (supra) and PV Ramana Reddy (supra) respectively, the judgment of the Madras High Court in Jayachandran Alloys (supra) appears to be bad in law. However, as stated earlier, it remains to be seen if the Apex Court would accept an interpretation similar to that of the Madras High Court in Jayachandran Alloys (supra).
- Such an arrest can be carried out only if there are reasonable grounds to believe that one of the offences detailed under Section 69 has been committed. However, the reasons to believe need not be stated on the authorization for the arrest itself. It is sufficient if these reasons have been recorded separately in a file.
- The Supreme Court’s findings in the appeal against Deep Suresh (supra) should also clear the law on whether forming reasons to believe should be delegated separately or not. The outcome will be especially interesting because a judgment favouring the former position, i.e. – separate delegation of the reasons to believe, might invalidate arrests under those cases wherever only the power to arrest was delegated and it was the arresting officer and not the Commissioner who formed the reasons to believe.
- The Madras High Court has held that arrest under Section 69(1) of CGST Act is not a criminal proceeding, therefore Section 438 of CrPC will not apply. However, as the operation of Section 438 does not depend on the filing of an FIR but only on the apprehension of arrest, this view does not appear to be correct. Nevertheless, pre-arrest protection can also be availed under Article 226 of the Constitution. In any event, given the magnitude of the offences, the Courts are not likely to grant anticipatory bail.
Although, the final say on the application of Section 438, CrPC on arrest under CGST Act is subject to the verdict of the three-judge bench of the Apex Court.
Ever since their enactment, the GST laws have received criticism because of technical difficulties and administrative hurdles. While efforts have been made to streamline their implementation, the provisions for arrest have seen little change. It is hoped that the Apex Court will provide much-needed clarity with regards to the provisions for arrest and pre-arrest protection under the CGST Act.
Written by Shreyash Sharma and Sushant Kumar. The views of the author are entirely personal.