Daulat Samirmal Mehta vs Union Of India Through The Secretary And ... on 15 February, 2021

1. Outcome

The Bombay High Court allowed the petitioner's interim prayer and granted him bail, subject to several conditions. The court directed the petitioner's release upon furnishing a cash surety of ₹5,00,000, to be followed by two solvent sureties. Other significant conditions included cooperating with the investigation, depositing his passport, and making a total deposit of ₹25 crores to the GST authorities in two tranches post-release.

2. Core Issue

The core issues before the court were:
1. Whether the arrest of the petitioner under Section 69 of the CGST Act was justified, especially when he had consistently cooperated with the investigation by appearing on summons over a period of more than two years.
2. Whether the "reasons to believe" recorded by the GST Commissioner for authorizing the arrest met the legal standard required for curtailing personal liberty.
3. Whether the High Court could exercise its writ jurisdiction under Article 226 of the Constitution to grant bail in a matter concerning a CGST offense.

3. Key Facts

• Petitioner: Daulat Samirmal Mehta, a 65-year-old Director of Twinstar Industries Limited and Originet Technologies Limited.
• Allegations: The GST department alleged that the petitioner's companies were involved in a cartel that fraudulently availed and passed on ineligible Input Tax Credit (ITC) through bogus invoices without the actual supply of goods or services. The total amount involved was approximately ₹314.25 crores (₹122.59 crores of ITC availed and ₹191.66 crores passed on).
• Investigation & Cooperation: The investigation began in 2018. The petitioner was issued summons under Section 70 of the CGST Act and his statements were recorded on five separate occasions between December 2018 and January 2021.
• Arrest: After recording his fifth statement on 21.01.2021, the petitioner was arrested under Section 69 of the CGST Act for offenses under Section 132(1)(b) and 132(1)(c). He was then remanded to judicial custody.
• Post-Arrest Action: The petitioner filed compounding applications under Section 138 of the CGST Act. He then filed a writ petition in the High Court challenging the validity of his arrest and seeking bail.

4. Arguments

Petitioner's Arguments (Represented by Mr. Ashish Batra):
* The petitioner consistently cooperated with the investigation by appearing whenever summoned over a period of more than two years.
* The arrest was arbitrary, punitive, and illegal as there was no justification or valid "reason to believe" that his arrest was necessary.
* No grounds existed to suggest he would tamper with evidence, influence witnesses, or flee from justice, especially given his past conduct.
* The petitioner had already filed applications for compounding the offenses, showing an intent to resolve the matter.

Respondents' Arguments (Represented by Mr. Pradeep S. Jetly & Mr. J. B. Mishra):
* The writ petition for bail was not maintainable as the petitioner had an effective alternative remedy of applying for bail under Section 437 of the Cr.P.C.
* The offenses are serious economic offenses that pose a threat to the nation's financial health and should be treated differently.
* The power to arrest under Section 69 of the CGST Act is valid and contains sufficient inbuilt safeguards.
* The case was similar to the P.V. Ramana Reddy case, where the Telangana High Court had denied pre-arrest bail in a similar matter, a decision which was not interfered with by the Supreme Court.
* Adjudication and prosecution for tax evasion can proceed simultaneously; determination of the final liability is not a prerequisite for arrest.

5. Court’s Reasoning

The High Court's reasoning for granting bail was multi-faceted:

• Scrutiny of "Reasons to Believe": The court emphasized that the power to arrest under Section 69 is conditional upon the Commissioner having "reasons to believe" not only that an offense has been committed, but also that an arrest is necessary.
• Inadequacy of Recorded Reasons: Upon examining the official record, the court found that the reasons recorded for the arrest were a mere "paraphrasing" of the conditions in Section 41 of the Cr.P.C. (e.g., to prevent tampering with evidence). They lacked any specific, concrete instance or material to show that the petitioner had actually attempted to tamper with evidence, influence witnesses, or was non-cooperative.
• Application of Arnesh Kumar Principles: The court applied the Supreme Court's guidelines in Arnesh Kumar vs. State of Bihar, which mandate that for offenses punishable with imprisonment up to seven years, arrest should not be a routine measure. The arresting officer must be satisfied that arrest is necessary for specific reasons, which were found lacking in this case.
• Petitioner's Consistent Cooperation: The court noted the long gap (almost two years) between the petitioner's fourth and fifth statements, during which there was no record of him avoiding investigation or tampering with evidence. His consistent appearance in response to summons demonstrated cooperation.
• Nature of CGST Act: The court observed that the CGST Act is primarily a fiscal statute for revenue collection. The provision for compounding offenses (Section 138) reinforces that the primary objective is securing revenue, with arrest being an incidental power.
• Distinction from P.V. Ramana Reddy: The court distinguished the facts from the P.V. Ramana Reddy case, noting that the latter was a case of pre-arrest bail where the petitioners had challenged the summons itself. In contrast, the current petitioner had already complied with the summons and cooperated.
• "Bail, not Jail" Principle: Citing the Supreme Court in Arnab Manoranjan Goswami, the court reiterated that 'bail, not jail' is the basic rule. Crucially, it noted that the case was at a "pre-trial stage" where no formal FIR or complaint had been filed against the petitioner, making the case for granting bail even stronger.
• Balancing Liberty and Investigation: The court concluded that a balance must be struck between the need for investigation and the fundamental right to personal liberty. Continuing the petitioner's detention was deemed unjustified.

6. Statutory References

• Constitution of India: Article 226
• Central Goods and Services Tax Act, 2017 (CGST Act): Sections 69 (Power to arrest), 70 (Power to summon), 132(1)(b), 132(1)(c), 132(5) (Punishment for offenses), 136 (Relevancy of statements), 138 (Compounding of offenses).
• Code of Criminal Procedure, 1973 (Cr.P.C.): Sections 41, 41-A (Procedures for arrest), 154 (FIR), 200 (Complaint to Magistrate), 437 (Bail for non-bailable offenses).
• Indian Penal Code, 1860: Sections 193, 228.

7. Precedents Cited

• P. V. Ramana Reddy Vs. Union of India (Telangana HC): Cited by the respondents to argue against bail. The Court distinguished it on facts, as it dealt with a prayer for pre-arrest bail where cooperation was not established.
• Union of India Vs. Sapna Jain (Supreme Court): Cited by the respondents. The Court noted the SC's observation but distinguished the present case on its specific facts.
• Arnesh Kumar Vs. State of Bihar (Supreme Court): Relied upon by the Court to hold that arrest for offenses punishable with less than seven years imprisonment cannot be made mechanically and requires specific justification.
• Makemytrip (India) Private Limited Vs. Union of India (Delhi HC): Cited to support the principle that the decision to arrest must be based on credible material and not on whimsical grounds.
• Arnab Manoranjan Goswami Vs. State of Maharashtra (Supreme Court): Relied upon by the Court to outline the factors for considering a bail application under Article 226 and to reiterate the "bail, not jail" principle.