GST Fake invoicing Allegations: High Court refuses GST Refund

The writ petitioner (M/s. MNS Enterprises) is a proprietary concern and is represented by its proprietor Sheik Dawood. This writ petition has been filed for a Mandamus to direct the respondent to GST refund Rs. 88,17,754/- lying in the petitioner’s Electronic Ledger under Chapter IX of CGST Rules, 2017. The aforesaid Electronic Ledger of the petitioner has been frozen and therefore, the petitioner is unable to utilize the above amount.

The case of the petitioner is that the respondent had issued a summons to the petitioner’s proprietor Sheik Dawood. Thereafter, the petitioner’s proprietor was also arrested on 01.09.2021 and remanded to judicial custody. It is the further case of the petitioner that Statements were obtained from the proprietor of the petitioner and during interrogation a letter dated 31.08.2021 was extracted from the petitioner’s proprietor on 01.09.2021 to make it seem as if on the petitioner’s request, one of the customers namely, Nobal Tech Industries Pvt. Ltd., was to remit amounts due to the petitioner as outstanding to be directly paid into the petitioner’s aforesaid GSTN Account bearing No. GSTN: 33ASMPS4462L1Z6.

It is the case of the petitioner that this letter was obtained under coercion and therefore, the amounts which is lying in the electronic ledger of the petitioner has hampered with day-to-day business of the petitioner inasmuch as it has resulted in a liquidity crunch and the petitioner is unable to pay either to the suppliers or pay salary to the employees.

It is further submitted that after the proprietor of the petitioner was arrested on 01.09.2021, this writ petition was prepared on 07.09.2021 and filed on 09.09.2021 and thus, the petitioner has withdrawn the statement immediately. It is the case of the petitioner that as per letter dated 01.09.2021, the amount which the said customer was to pay the amount W.P..No. 20067 of 2021 directly into the GSTN Account of the petitioner has been resiled/retracted in the affidavit filed in support of the present writ petition.

It is further submitted that the petitioner was under judicial custody till 31.10.2021 and was released only after the expiry of the statutory period of remand under Section 167 (2) of Cr.P.C.

The learned counsel for the petitioner submits that by forcing the customer to directly remit the amount into the petitioner’s GSTN account without issue of Show Cause Notice was without authority of law, the respondent has practically crippled the business of the petitioner apart from placing the proprietor of the petitioner under judicial custody for a period of two months and contrary to safeguards prescribed under the Act.

The learned counsel for the petitioner further submits that when the law requires a particular thing to be done in a particular manner then it has to be done in that manner. The learned counsel for petitioner further submits that Section 79 of the CGST Act is similar to a recovery mechanism prescribed under Section 11 of the Central Excise Act, 1944, Section 87 of the Finance Act, 1994 under Chapter V of the Finance Act, 1994. The learned counsel for the petitioner further states that the proper method under the CGST Act for the Department is to first throughly investigate and thereafter issue a proper show cause notice under Sections 73 and 74 of CGST Act, 2017 and adjudicate to same in the manner prescribed under the said Act. He further submits that this provision is similar to 11 A of the Central Excise Act, W.P..No. 20067 of 2021 1944 and 73 of Finance Act, 1994. He therefore submits that recovery of tax can be only in the manner known to law and therefore recovery of the amount as tax would be contrary to Article 265 of the Constitution of India.

The learned counsel for the respondent submits that the department has unearth fraud of approximately Rs.11.80 Crores fraud committed by the petitioner on the strength of fictitious invoices to discharge the tax liability and the amount which is lying in the GSTN account for a sum of Rs. 88,17,754/- is a mere 7% of the estimated tax liability, which is pegged at Rs.11.80 Crores.

The learned counsel for the respondent further submits that the investigation will take some more time and therefore, there should not be any concession given to the petitioner as the petitioner has admittedly indulged in W.P..No. 20067 of 2021 large scale fraudulent availing of credit on the strength of fake and fictitious invoices.

Order of Court:

30. The figures given in the counter affidavit regarding the alleged evasion of tax liability on the strength of bogus invoice is mind-boggling and shows inherent weakness in the system and how the system is capable of being manipulated and systematically abused by unscrupulous person. The respondent has to strengthen Rules and plug the loop holes so that, such evasion and leakage of tax do not take place in future. The case laws cited by the learned counsel for the petitioner are irrelevant.

31. Even if the respondent has forced the petitioner’s client to pay the tax directly into the petitioner’s Electronic Liability Register, the amount has not been appropriated or debited towards tax, interest, penalty, late fee or any other amount. The amount is to be debited at a future date towards tax liability of the petitioner. Even, if the petitioner’s client was asked to pay the amount into the aforesaid Electronic Liability Register, the amount has not been debited towards any tax liability or penalty under the Act. If the amount has to be refunded, it has to be refunded in accordance with provisions of the Act.

32. Considering the fact that the respondent is investigating, the case, which commenced during the month of August-September, 2021, respondent is directed to complete investigation within a period within a period of 3 months from today and issue appropriate Show Cause Notice under Section 73 or 74 of CGST Act, 2017.

33. The amount lying in the Electronic Liability Register of the petitioner can be refunded only the manner in the law. It cannot be ordered to be refunded. It can however be utilised by the petitioner for discharging tax liability against future supplies to be made/effected by the petitioner provided of course prior to such supply, the tax to be paid by the petitioner is adjudicated and determined and appropriated in the proposed proceedings under Section 73/74 of the CGST Act, 2017, in which case, Section 79 of the CGST Act, 2017 can be pressed into service.

34. Though, it is quite possible for the petitioner to establish that the letter was obtained from the petitioner under coercion to ensure that the petitioner’s client to pay the amount into the aforesaid Electronic Liability Register, it is to be decided elsewhere and not here. As the amount has not been debited and since it has not been appropriated so far, there is no scope for granting any relief to the petitioner in this writ petition. I therefore do not find any merits in the present Writ Petition. Therefore, the present Writ Petition is liable to be dismissed. I however, give liberty to the petitioner to work out an appropriate remedy under Section 54 of the CGST Act read with Chapter X of the CGST Rules.

35. In fine, the respondent is directed to issue proper Show Cause Notice to the petitioner preferably within a period of three months from the date of receipt of a copy of this order considering the fact that the present Writ Petition was filed during September, 2021.

36. The petitioner shall thereafter reply to the Show Cause Notice within a period of three months days from the date receipt of the Show Cause Notice. This is without prejudice to the rights of the petitioner to seek for refund in accordance with law.

37. Refund of amount will be subject to the final outcome of the show cause proceedings and in accordance with Section 54 of the CGST Act read with Chapter X of the CGST Rules.

38. This Writ Petition stands dismissed with the above observations.

No cost. Consequently, connected Miscellaneous Petition is closed.