M/S Jayachandran Alloys Pvt. Ltd. vs. Superintendent of Central Excise [2019 (5) TMI 895 (Madras High Court)]

M/S Jayachandran Alloys Pvt. Ltd. vs. Superintendent of Central Excise [2019 (5) TMI 895 (Madras High Court)] – Arrest Before Completion of Investigation Under GST

Background

M/s Jayachandran Alloys Pvt. Ltd., a company engaged in trading activities, came under the radar of the GST Department after intelligence reports suggested that the assessee was allegedly engaged in trading of fake invoices.

1. An investigation under Section 67 of the CGST Act, 2017 was initiated. Several documents were seized, and statements of company officials were recorded.
2. During the course of investigation, officials highlighted provisions relating to arrest under Section 69 and punishable offences under Section 132, which created pressure on the assessee.
3. The assessee later claimed through a retraction letter that it was coerced into admitting liabilities and signing statements under threat of arrest.
4. While the investigation proceedings were still ongoing and no assessment had been completed, the assessee approached the Madras High Court by filing a writ petition seeking relief from possible arrest and demanding copies of seized documents and statements.

Points of Dispute

1. Whether the assessee is entitled to copies of seized documents and statements recorded during the investigation process?
2. Whether arrest and prosecution under Sections 69 and 132 can be initiated even before completion of assessment and final determination of tax liability?

Submissions by the Assessee

• The Managing Director was threatened with arrest under Section 69 and was forced to sign statements admitting liabilities, which were later retracted.
• The Department cannot invoke the power of arrest or prosecution unless there is concrete evidence proving fraudulent intent.
• The provisions of Section 132 apply only after the offence is “committed”, i.e., after completion of adjudication and determination of demand under Sections 73 or 74.
• Past circulars and judicial precedents make it clear that the power of arrest is intended for habitual offenders and not for genuine taxpayers with a clean track record.

Submissions by the Revenue

• During investigation, incriminating documents were seized which prima facie showed huge tax evasion through invoice trading.
• Under Section 67(5), copies of seized documents can be provided only if the officer is satisfied that it will not prejudice the investigation.
• Since evidence of fraud was already collected, arrest proceedings under Section 69 read with Section 132 were justified.

Legal Principles and Scope of Decision

The Madras High Court examined the scope of Sections 67, 69, and 132 of the CGST Act and laid down the following principles:

1. Access to Seized Documents and Statements
   • Section 67(5) allows access to seized documents unless providing copies would prejudice the ongoing investigation.
   • Since the Department had not claimed that disclosure would harm the investigation, the Court directed that copies of seized records and statements must be supplied to the assessee.
2. Interpretation of Section 132 – “Commits an Offence”
   • Section 132 penalizes offences only after they are “committed”, which implies that a determination of liability must be made first through adjudication under Sections 73 or 74.
   • Thus, punishment cannot be imposed before assessment is completed.
3. Assessment Before Prosecution
   • Recovery of tax and penalty under GST is contingent upon quantification through assessment.
   • Only after determination of excess credit or fraudulent claim through assessment can Section 132 be invoked.
4. Exceptional Circumstances for Arrest
   • Arrest powers are drastic and can only be invoked if the taxpayer is a habitual offender or has a history of fraud, and reasons must be recorded in writing.
   • Routine or premature arrests would amount to abuse of statutory power.
5. Principle of Proportionality in Revenue Laws
   • Revenue authorities must act strictly within statutory boundaries.
   • Power to arrest should not be used to harass genuine taxpayers or to coerce admissions during investigation.

Conclusion of the Court

• The Court held that arrest and prosecution cannot precede adjudication and determination of tax liability.
• Protection from arrest may be granted in writ proceedings in appropriate cases where the taxpayer is not a habitual offender.
• The Department must first complete assessment under Sections 73 or 74 to establish liability before invoking Section 132.
• The assessee was entitled to copies of seized documents and recorded statements since the Department failed to show prejudice to its investigation.

Practical Impact and Key Takeaways

• No arrest before assessment: Taxpayers cannot be arrested merely on suspicion during investigation. Prosecution arises only after adjudication and determination of liability.
• Right to access documents: Assessees are entitled to copies of seized records and statements unless the Department proves that it would prejudice investigation.
• Arrest power limited to habitual offenders: Revenue must demonstrate that the taxpayer is a habitual defaulter or repeat offender to justify pre-assessment arrests.
• Protection under writ jurisdiction: High Courts can intervene and grant interim protection against arrest during ongoing investigations if statutory safeguards are not followed.

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Madras High Court in Jayachandran Alloys Pvt. Ltd. vs. Superintendent of Central Excise (2019) held that arrest under GST cannot precede assessment. Taxpayers are entitled to copies of seized documents, and arrest is permissible only after adjudication of liability.