The Supreme Court, while considering a series of petitions that question the penal provisions of the CGST Act and their compatibility with the CrPC and the Constitution, stated yesterday that it is essential to have safeguards against arrest. The court also observed that the CGST Act does not provide for pre-payment before adjudication.
Justices Sanjiv Khanna, MM Sundresh, and Bela M Trivedi, who formed the bench, asked Additional Solicitor General SV Raju (representing the Revenue) to clarify various matters, including the cases where arrests are not planned or are non-cognizable.
Here are the key points from the hearing:
Magistrate’s Prior Sanction/Permission Needed for Cognizance Under GST Act: Sr Adv S. Nagamuthu
Senior Advocate Nagamuthu, arguing for the petitioner(s), stated that the procedure under the Customs Act cannot be applied to the GST Act. He differentiated between the two laws, saying:
“In the Customs Act, only a Special Court, which is considered a Sessions Court, can try the offenses…In the case of GST, it is only a Magistrate. There is no Special Court…Under the Customs Act, cognizance can only be taken on a complaint…But in the case of GST, that is not the case. [Section 190 (1) CrPC] has not been dispensed with…cognizance can be taken on a police report as well”.
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He further argued that all offenses under the Customs Act are now cognizable. However, under the GST Act, some are bailable, some are non-bailable, some are cognizable, and some are non-cognizable.
Referring to Section 134 of the GST Act, the senior counsel emphasized that “previous sanction” from the “Commissioner” is needed to take cognizance of an offense, and only a First Class Magistrate can try the offense. Based on Section 132(6), he argued that the sanction is needed before the police register the case, thereby limiting the powers under Section 134.
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Upon hearing Nagamuthu’s argument, Justice Khanna noted that Section 132(6) does not distinguish between “cognizable” and “non-cognizable”. The judge also commented that if Section 132(6) of the GST Act and Sections 2(d) (defining complaint) and 155 of CrPC (requiring Magistrate’s permission for investigation of a non-cognizable case) are read together and harmoniously, the application of Section 155 CrPC is implicitly excluded.
“Previous sanction is required from the Commissioner…the Magistrate’s permission is not needed”, said Justice Khanna.
However, the senior counsel insisted that Section 132(6), GST Act does not exclude the application of Section 155, CrPC and even the judgement in Om Prakash v. Union of India (2011) addresses it.
At this juncture, Justice Khanna asked ASG Raju for the Revenue’s position on the matter, clarifying that the question does not necessarily arise in the current case: “are you taking sanction/permission of Magistrate under Section 155?”. Raju responded, “Magistrate…we are not required, I’ll point out that there are basic fundamental flaws even so far as Om Prakash is concerned…”.
Justice Khanna quickly noted that the bench is not going to re-examine Om Prakash at first glance. Nagamuthu then made arguments on the aspect of an accused being given access to documents and statements relied upon by the prosecution (both pre-cognizance and post-cognizance).
Arrests Made Hastily, Threat and Coercion Part of Department’s Modus Operandi: Sr Adv Sujit Ghosh
Senior Advocate Ghosh, focusing solely on the legal aspects of the issue, highlighted the phrase “with respect to” in Article 246A of the Constitution to the court. He cited a decision by a two-Judge bench in Mohit Minerals, 2019 (2) SCC 599, arguing that the court has determined: (i) it is not a general power/entry, (ii) it can result in incidental encroachment, but cannot be self-governing laws (pertinent to whether offenses are a standalone subject or incidental to tax collection), and (iii) “with respect to” should be interpreted broadly.
Ghosh revisited the era before the 101st Constitutional Amendment, noting that Entry 93 of the Central List used to grant legislative power over offenses. He argued that if the subject of arrest is incidental, there was no need for Entry 93 or Entry 64 in the State List. Ghosh stated, “If Entry 93 was necessary, the Constitution’s structure dictates that offenses must be treated as a separate subject matter, not incidental…one should not presume that Article 246A is broad enough to encompass offense-related matters simply because the phrase ‘with respect to’ is used”.
The senior counsel also claimed that the “chaos in the industry” was due to the frequent initiation of arrests. He argued that Section 70 summons are being issued for inquiries, and immediate arrests are being made at night. “Intimidation and coercion are integral to their entire process…numerous petitions are pending before courts where they extract taxes under the guise of coercion threats…to avoid arrests, people pay taxes under protest…then there are refund claims before the High Courts, and the High Court informs them that you could not have extracted money without adjudication”.
He also pointed out that most issues are related to input tax credit, not tax violations. In this context, he noted that the government did not implement the safeguard provisions (Sections 42 and 43) of the CGST Act, which balanced Section 69 and allowed buyers to verify that the correct credits were passed on to them. “Instead, a temporary measure of 3-B was hastily introduced, and this temporary measure is so vague or oversimplified that buyers are now left stranded”, Ghosh argued, emphasizing that Section 69 becomes unreasonable without the protection of Sections 42-43.
The senior counsel also underscored that arrest pertains to Article 21 of the Constitution and infringes on liberty. Therefore, the structure of the CGST Act must include safeguards.
Ghosh’s third argument was that “reasons to believe” in Section 69 should be replaced with “reasons to be recorded in writing”, as judicial review of the former is limited. The courts can only examine whether there was relevant material and a causal link with the formation of belief. If the provision contained “reasons to be recorded in writing”, a safety mechanism would have been in place as the opinion would be subject to judicial review.
“Otherwise, the entire basis of arrest on suspicion…becomes disproportionate. If it is the case that you were arrested after adjudication, then the test of proportionality would have been met…Section 69 per se is affected by the doctrine of proportionality insofar as there are less intrusive methods by which they could have enforced tax payment”.
Upon hearing Ghosh’s arguments, Justice Khanna stated that the order under Section 69 (recording reasons to believe) must be in writing. Ghosh responded, “that would imply that the order must also be shared”. Concurring, Justice Khanna said, “yes, it must be shared”.
Reflecting on the court’s comments, the senior counsel clarified that the order in question is an internal directive to a subordinate officer, instructing them to execute an arrest; it does not specify “reasons to believe”. Justice Khanna expressed surprise, stating, “if that’s the case…no, it certainly can’t be. Any action taken by an official must be documented in the file. It can’t be…and then it must be shared”.
“File notes are not subject to judicial review, that’s the problem…we are in the dark because we don’t know what is written in the file note…because they are provided in sealed envelopes”, Ghosh responded.
When Justice Khanna inquired if reasons to believe/file notes are given to the accused, Ghosh denied it. “What is provided are the grounds for his arrest”, he explained.
Safeguards against arrest must be in place: Justice Sanjiv Khanna
During the hearing, Justice Khanna asked ASG Raju several questions and requested him to seek instructions. The conversation is summarized below.
J Khanna: (They are saying) that under the threat and coercion of arrest, you make us sign the statements…when we retract, we have to rush to the court, get anticipatory bail…so when you look at these provisions, please incorporate certain checks and balances so that abuse of power does not take place
Raju: but the person goes…a seasoned employee…goes and gives the statement
J Khanna: Now considering the CrPC, there is a provision that you will be entitled to have your counsel, interact with your counsel during interrogation…shouldn’t that be read into it? when you interrogate…when you call a person at 7’o clock and you don’t release him till 8’o clock…shouldn’t he have the right to access to counsel? We have to examine it. Sitting on this side, it’s not unusual to get maybe once in 4-5 months a case wherein person comes in and says I was threatened with arrest and they asked me to fill up the cheque, and took away the cheque, and they took away the money, and later on I want to retract…this money should be repaid to me because no assessment has been done
Raju: I know of a case in a Customs matter…when the raid was going on, one of the employees took a cigarette butt, put 2 holes on his body and he said I was burned by the…
J Khanna: Correct, may be possible. There can be cases on both the sides…the stand taken (by the Dept) is this money is being kept in Commissioner’s account, it will be non-interest bearing. I think there were some instructions issued by the Board saying do not without assessment ask for money. Is that correct?
Raju: I will find out
J Khanna: Please take instructions on this…we are not going into facts, we are checking up what are the safeguards provided against any arrest. We have to ensure that the safeguards which are there must be there
J Sundresh: (Section) 70 is after 69…that is why you have to really apply your mind, show the copies, subjective satisfaction…put it in the order. 70…you can’t arrest somebody. Very difficult for you to do this
Raju: There are cases where adjudication is not required
J Khanna: Just also take instructions, when the legislature has enacted Section 42-43, what steps have been taken to impose those sections…number two, there is no provision in the Act for asking for pre-payment before assessment…there is no question of pre-payment. It’s not there. It’s self-assessment. Self-assessment has to be done by him, not coerced into. Give him 4-5 days’ time. Let him talk to his lawyers, why not? If you want to arrest him, please follow the procedure
Other counsels also made submissions. The matter will be resumed today, with ASG Raju leading the arguments.
Case Title: Radhika Agarwal v. Union of India and Ors., W.P.(Crl.) No. 336/2018 (and connected matters)
