Safeguards Against Arrest Necessary, No Provision For Pre-Payment Before Adjudication: Supreme Court On Challenge To GST Penal Provisions

While hearing the batch of petitions challenging penal provisions of CGST Act, etc. as non-compatible with CrPC and the Constitution, the Supreme Court yesterday expressed that safeguards against arrest are necessary. It also noted that there is no provision under the CGST Act for pre-payment prior to adjudication.

The Bench of Justices Sanjiv Khanna, MM Sundresh and Bela M Trivedi asked Additional Solicitor General SV Raju (appearing for Revenue) to take instructions on various aspects, including which are the cases where arrests are not intended to be made and/or are non-cognizable.

Key aspects of the hearing are reproduced hereunder.

Previous sanction/permission for cognizance under GST Act required from Magistrate : Sr Adv S. Nagamuthu

Leading arguments for petitioner(s), Senior Advocate Nagamuthu submitted that the procedure contemplated under Customs Act cannot be imported in the GST Act. Distinguishing the two legislations, he said:

"[In Customs Act], the offences are triable only by a Special Court, which is deemed to be a Sessions Court...insofar as GST is concerned, [...] only by a Magistrate. There is no Special Court...Under Customs Act, cognizance can be taken only on a complaint...insofar as GST is concerned, that is not the position. [Section 190 (1) CrPC] has not been dispensed with...cognizance can be taken on a police report as well".

He also argued that under the Customs Act, all offenses are now cognizable. However, under GST Act, some are bailable, some are non-bailable, some are cognizable, and some are non-cognizable.

Referring to Section 134 of GST Act, the senior counsel highlighted that for taking cognizance of an offense, "previous sanction" is required from the "Commissioner" and only a Magistrate of the First Class can try the offence. Relying on Section 132(6), it was pressed that the sanction is required prior to registration of the case by the police, and in that sense, the powers under Section 134 are restricted.

Hearing Nagamuthu's submission, Justice Khanna pointed out that Section 132(6) does not make out a distinction between "cognizable" and "non-cognizable". The judge also remarked that if Section 132(6) of the GST Act and Sections 2(d) (defining complaint) and 155 of CrPC (requiring permission of Magistrate for investigation of a non-cognizable case) are read jointly and harmoniously, application of Section 155 CrPC is excluded by implication.

"Previous sanction is required from the Commissioner...permission of the Magistrate is done away with", said Khanna J.

The senior counsel however maintained that Section 132(6), GST Act does not preclude the application of Section 155, CrPC and even the judgement in Om Prakash v. Union of India (2011) deals with it.

At this point, Justice Khanna asked the Revenue's stance on the aspect from ASG Raju, while clarifying that the question does not necessarily arise in the present case: "are you taking sanction/permission of Magistrate under Section 155?". Raju replied, "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, however, was quick to observe that prima facie, the bench is not going to re-examine Om Prakash. Nagamuthu thereafter made submissions 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 being made at the drop of a hat, threat and coercion part of Dept's modus operandi : Sr Adv Sujit Ghosh

Addressing arguments only on legal aspects of the matter, Senior Advocate Ghosh drew attention of the court to the words "with respect to" in Article 246A of the Constitution. He referred to a two-Judge bench decision in Mohit Minerals, 2019 (2) SCC 599 to submit that the court has held: (i) that it is not a general power/entry, (ii) it can lead to an incidental encroachment, but cannot be a law onto themselves (relevant to the question as to whether offenses are a subject by themselves or incidental to tax collection) and (iii) that "with respect to" has to be read in an expansive manner.

Referring to the pre-101st Constitutional Amendment era, Ghosh recapitulated that Entry 93 of Central List used to provide the power to legislative on offenses. He contended that if subject of arrest is incidental in nature, then there was no reason to provide Entry 93 or Entry 64 in State List. "If there was any need for Entry 93, the construct of the Constitution is, offenses will have to be dealt with as a separate subject matter, not incidental...one should not assume that Article 246A itself is wide enough to subsume matters relating to offenses merely because the word 'with respect to' have been used", said Ghosh.

The senior counsel further alleged that the "mayhem in the industry" was owed to arrests being initiated at the drop of a hat. He contended that Section 70 summons are being issued for carrying out enquiry, and on the spot, arrests are carried out in the night. "Threat and coercion is part of the entire process that they adopt...umpteen number of petitions are pending before courts where in the name of threat of coercion, they extract taxes...to avoid arrests, people end up paying taxes under protest...then there are refund claims before High Courts and High Court tells them without adjudication you could not have extracted monies".

It was also urged that mostly issues relate to input tax credit, and not tax violations. In this regard, it was mentioned 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 ensure that correct credits were passed to them. "Instead, a stop-gap mechanism of 3-B was brought out in the most summary manner and that stop-gap mechanism is so vague or so simplistic that buyers are now left in the lurch", Ghosh said, while pressing that Section 69 becomes unreasonable without the safeguard of Sections 42-43.

The senior counsel also highlighted that arrest relates to Article 21 of Constitution and takes away liberty. As such, the architecture of CGST Act must provide for safeguards.

A third contention raised by Ghosh was that "reasons to believe" in Section 69 should be substituted by "reasons to be recorded in writing", as judicial review of the former is limited. The courts can only see whether there was relevant material and causal link with the formation of belief. If the provision contained "reasons to be recorded in writing", a safety-valve would have been there as opinion would be subject to judicial review.

"Otherwise what happens is the whole arrest at suspicion basis...becomes disproportionate. If it is the case that after adjudication, you were arrested, then the proportionality test would have been met...69 per se is hit by doctrine of proportionality inasmuch as there are lesser ways in which they could have enforced payment of tax".

Hearing Ghosh's submissions, Justice Khanna said that the order under Section 69 (recording reasons to believe) has to be in writing only. Ghosh responded: "that would mean that the order has to be also shared". Agreeing, Justice Khanna said, "yes, it has to be shared".

Considering what was falling from the bench, the senior counsel informed that the order in question is an internal order to a lower officer, asking to carry out arrest; it does not mention "reasons to believe". Surprised, Justice Khanna said, "if that is so...no, obviously it cannot be. Anything which the official does has to be recorded in the file. It cannot be...and then it has to be shared".

"File notes cannot be subject to judicial review, that's the difficulty...we are in the blind because (we don't know) what is written in the file note...because those are given in sealed envelopes", Ghosh said in reply.

When Justice Khanna asked if reasons to believe/files notes are given to the accused, Ghosh replied in the negative. "What is given is the grounds on which he is arrested", he said.

Safeguards against arrest have to be there : Justice Sanjiv Khanna

During the hearing, Justice Khanna posed certain queries to ASG Raju and asked him to take instructions. The exchange is extracted hereunder.

J Khanna: (what they are saying is) 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 in view of 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

Certain other counsels made submissions. The matter will again be taken up today. ASG Raju will be leading arguments.

Case Title: Radhika Agarwal v. Union of India and Ors., W.P.(Crl.) No. 336/2018 (and connected matters)