Offence committed by firms with separate GSTN but controlled by one person can be clubbed

The Bombay High Court has clubbed the wrongful activities of four distinct legal entities registered under GST law as they were effectively controlled by one person, and has upheld action taken against the person by the tax department.

Section 132(1)(i) of the CGST Act specifies that in cases where the input tax credit (ITC) wrongly availed of exceeds ₹5 crore, such an offence would be punishable with imprisonment, which may extend to five years and with fine. The central requirement for this provision, however, is that the ITC wrongly availed of must exceed ₹5 crore.

The State Tax Department arrested a Mumbai-based businessman named Yogesh Jagdish Kanodia on December 30 on the charge that he had wrongly availed ITC exceeding ₹5 crore. The investigation wing of the department alleged that Kanodia was effectively operating four business establishments, which had used fake purchase and sale invoices, whereby bogus ITC to the tune of at least ₹11.54 crore was claimed and wrongful ITC passed on through fake sale invoices was not less than ₹9.29 crore.

However, the accused moved the High Court contending that the entire action of arresting him and remanding him to judicial custody was illegal as four specific distinct legal entities were wrongly treated as one, and thereupon it was wrongly concluded treated that the ITC illegally availed of exceeded the figure of ₹ 5 crore.

His petition also submitted that in the case of each of the four individual legal entities, the ITC allegedly wrongly availed did not exceed ₹ 5 crore and therefore, even if it was to be treated that offences under Section 132 of the CGST Act had been committed, these were non-cognizable and bailable offences. On this basis, he claimed that the arrest and continued custody of the petitioner was illegal.

After hearing both sides and going through all the facts, the Court held that it was the petitioner who was effectively running and controlling all the said four firms or business establishments - the petitioner is the sole proprietor and also the Karta of the HUF (Hindu Undivided Family).

The bench relied on Section 137 (3) of the CGST Act which states that where an offence under the said Act is committed by a Hindu Undivided Family, the Karta shall be deemed to be guilty of that offence and he shall be liable to be proceeded against and punished. Material available on record, certainly prima facie, indicates that there were sufficient reasons to believe that the petitioner was the person who committed the said offences, thereby, justifying the action of authorising an officer to arrest the petitioner, the bench held while dismissing the petition

According to Harpreet Singh, Partner (Indirect Taxes) at KPMG, another case law where the Court has gone beyond the corporate veil and looked at the substance of arrangement rather than its mere form. “As the same person was effectively running all the four establishments, the Court has clubbed the amounts to arrive at the threshold of ₹ 5 crore,” he said.

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