GST Fraud Accused Gets Bail After Paying ₹2.90 Cr of ₹9.33 Cr Disputed ITC

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Case Name

Dharmesh Kirtikumar Shah vs. Union of India

Court Name: High Court of Gujarat at Ahmedabad

Case No.: R/Criminal Misc. Application No. 7420 of 2022

Judge: Hon’ble Mr. Justice Ilesh J. Vora

Date of Order: 01st July 2022

Key Takeaways

1. Fake ITC Fraud is Serious — The accused allegedly claimed ITC of ₹9.33 crores using invoices from 4 non-existent firms (Vishnu Gold, Viram Jewelers, Neel Jewelers, and Kabir Enterprise) without actually receiving any goods.

2. Bail is the Rule, Jail is the Exception — The court reaffirmed the well-established principle that bail is the rule and denial is the exception, especially when the investigation is substantially complete.

3. Partial Payment Shows Bonafides — The fact that the applicant had deposited ₹2.90 crores (more than 10% of the disputed tax) demonstrated his good faith and willingness to cooperate.

4. Mere Apprehension is Not Enough — The department’s fear that the accused might flee or tamper with evidence was not backed by any material evidence, and the court rejected this argument.

5. Indefinite Detention Violates Article 21 — Keeping an accused in custody indefinitely, especially when trial is far away, violates the right to life and personal liberty under Article 21 of the Constitution.

6. 10% Pre-deposit Rule — Under Section 107(6) of the CGST Act, a pre-deposit of 10% of the disputed tax liability provides deemed stay against coercive recovery. The applicant had already crossed this threshold.

Issue

Was Dharmesh Kirtikumar Shah entitled to regular bail, given the serious allegations of GST fraud involving ₹9.33 crores of fake ITC, and considering that he had already deposited ₹2.90 crores towards the disputed liability?

In simpler terms — should the court grant bail to someone accused of a large-scale GST fraud, when they’ve shown some willingness to pay back and the investigation is mostly done?

Facts

Who is the Applicant?

Dharmesh Kirtikumar Shah is the Director of M/s. Dee Cubes Pvt. Ltd. and the Proprietor of M/s. Gloriana Jewels, both based in Ahmedabad. He deals in bullion and diamond products.

How Did the Case Start?

The GST Department (Respondent No. 1) raided the premises of one Bharat Bhagwandas Soni in connection with fake GST invoices. During this investigation, Dharmesh Shah’s name came up.

What Was He Accused Of?

• His firm M/s. Dee Cubes Pvt. Ltd. allegedly availed ineligible ITC of ₹7,80,80,991/- from 4 fake/non-existent firms.
• His other firm M/s. Gloriana Jewels allegedly availed ineligible ITC of ₹1,52,30,495/- from the same fake firms.
• Total fraudulent ITC claimed: ₹9.33 crores.
• He also allegedly passed on fake ITC to other parties by issuing invoices without actual supply of goods.

The 4 Fake Firms Named:

1. Vishnu Gold
2. Viram Jewelers
3. Neel Jewelers
4. Kabir Enterprise

What Happened Next?

• A summons was issued to him, but he did not comply.
• On 17.03.2022, the department visited his business premises, conducted an extensive search, seized documents, and recorded his statement.
• On 18.03.2022, he was arrested and produced before the Additional Chief Metropolitan Magistrate, Ahmedabad.

Bail Rejections:

• His bail application was rejected by the lower court on 22.03.2022.
• A second bail application was also rejected on 05.04.2022.

Payments Made:

• Before arrest: The company paid ₹50 lakhs through Form GST DRC-03.
• After arrest: The company deposited ₹2 crores through the Electronic Cash Ledger and reversed ITC worth ₹40 lakhs.
• Total paid: ₹2.90 crores.

Arguments

Applicant’s Arguments (Dharmesh Shah, through Sr. Advocate Mr. Manish Bhatt):

1. No Offence Committed — The applicant claimed he was falsely implicated without reasonable grounds.

2. Arrest Was Premature & Illegal — Under the scheme of the CGST Act, arrest should happen only after investigation is complete and a complaint is filed. No demand notice was issued before arrest, making it illegal.

3. Payments Show Good Faith — The company had already paid ₹50 lakhs before arrest and ₹2 crores + ₹40 lakhs after arrest, totaling ₹2.90 crores.

4. Actual Purchases Were Real — There was sufficient evidence of actual purchases, including tax invoices and payments through banking channels, as reflected in Form GST-RA-2A on the GST portal.

5. 10% Pre-deposit Rule — Under Section 107(6) of the CGST Act, since more than 10% of the disputed tax has been deposited, bail should be granted.

6. No Criminal Record — The applicant has no past criminal record, belongs to a respectable family, has deep roots in society, and is unlikely to flee.

7. Offence is Compoundable — The offence is compoundable (can be settled), the case is based on documentary evidence (already seized), and the investigation is substantially complete.

8. Relied on: Sanjay Chandra vs. CBI, 2012 (1) SCC 40 — Bail is the rule, denial is the exception.

Respondent’s Arguments (Union of India, through Standing Counsel Mr. Nikunt Raval):

1. Serious Economic Offence — The evasion involved is ₹9.33 crores, and the applicant was part of a larger conspiracy involving Bharat Soni and his associates.

2. Reversal of ITC Not Acceptable — The ITC was fraudulently obtained from fake/non-existent firms, so merely reversing it doesn’t reduce the gravity of the offence.

3. Investigation Still Ongoing — There are missing links in the chain of conspiracy yet to be uncovered, and the applicant, being the main person of the company, needs to remain in custody.

4. Risk of Flight & Witness Tampering — There are chances the applicant may flee from justice and influence witnesses.

5. Relied on: Y.S. Jaganmohan Reddy vs. CBI, 2013 (7) SCC 439 — Economic offences with deep-rooted conspiracies involving huge public fund losses must be viewed seriously and treated as grave offences.

Key Legal Precedents

1. Sanjay Chandra vs. CBI, AIR 2012 SC 830 / 2012 (1) SCC 40

• What it says: This landmark Supreme Court judgment establishes that bail is the rule and denial is the exception. It also holds that indefinite detention of an accused is a violation of Article 21 (Right to Life and Personal Liberty) of the Constitution of India.
• How it was applied here: The Gujarat High Court relied on this precedent to hold that since the investigation qua the applicant was substantially complete and trial would take considerable time, there was no justification to keep him in custody.

2. Y.S. Jaganmohan Reddy vs. CBI, 2013 (7) SCC 439

• What it says: Economic offences involving deep-rooted conspiracies and huge losses to public funds need to be viewed seriously and treated as grave offences.
• How it was applied here: This was cited by the Respondent (Union of India) to argue against bail, emphasizing the serious nature of GST fraud. However, the court ultimately did not find this argument sufficient to deny bail given the specific facts of the case.

3. Section 107(6) of the Central Goods and Service Tax Act, 2017

• What it says: On pre-deposit of 10% of the disputed tax liability, there is a deemed stay against coercive recovery of dues.
• How it was applied here: The applicant had deposited ₹2.90 crores against a total disputed amount of ₹9.33 crores — well above the 10% threshold — which the court considered as a factor in favour of granting bail.

4. Sections 132(1)(b), 132(1)©, and 132(1)(d) of the Central Goods and Service Tax Act, 2017

• What they say:
• Section 132(1)(b): Offence relating to fraudulent availment of ITC.
• Section 132(1)©: Offence of availing ITC using invoices without actual receipt of goods/services.
• Section 132(1)(d): Offence of issuing invoices without actual supply of goods, thereby facilitating wrongful availment of ITC by others.
• How they were applied here: These are the specific penal provisions under which the applicant was arrested and charged.

5. Section 439 of the Code of Criminal Procedure (Cr.P.C.)

• What it says: This provision gives the High Court and Sessions Court the power to grant bail to a person accused of any offence.
• How it was applied here: The applicant filed the present bail application before the Gujarat High Court under this section, after his bail was rejected by the lower courts.

Judgment

Who Won? — The Applicant (Dharmesh Kirtikumar Shah) won. The Gujarat High Court granted him regular bail.

The court carefully weighed both sides and concluded:

1. The applicant had deposited ₹2.90 crores (more than 10% of ₹9.33 crores), demonstrating bonafide intent.

2. The applicant had no past criminal record.

3. The department failed to substantiate with material evidence that the investigation was incomplete or that the applicant would flee. Merely raising a contention is not enough — it must be backed by acceptable material.

4. All documentary evidence had already been seized by the authorities, so there was no risk of tampering.

5. Relying on Sanjay Chandra vs. CBI, AIR 2012 SC 830, the court held that indefinite detention violates Article 21, especially when trial is far away.

Bail Conditions Imposed:

The applicant was ordered to be released on regular bail in connection with File No. IV/PI-I/35/DeeCubes/2020-21, subject to the following conditions:

(a) Must not take undue advantage of or misuse liberty

(b) Must not act in a manner injurious to the interest of the prosecution

(C) Must surrender passport (if any) to the lower court within one week

(d) Must not leave India without prior permission of the Sessions Judge

(e) Must furnish latest residential address to the Investigating Officer and the Court, and must not change residence without prior permission of the Trial Court

Personal Bond: ₹10,000/- with one surety of the like amount.

Important Note: The court clarified that nothing in this order should be taken as an expression of opinion on the merits of the case. The Sessions Judge can also modify, delete, or relax any of the above conditions.

FAQs

Q1. What exactly is ITC (Input Tax Credit) fraud?

ITC fraud involves claiming tax credits for purchases that were never actually made. In this case, the applicant allegedly used invoices from fake/non-existent firms to claim ₹9.33 crores in tax credits, which reduced his GST liability without any real business transactions backing it up.

Q2. Why was the arrest considered potentially illegal by the applicant?

The applicant argued that under the CGST Act, arrest should only happen after the investigation is complete and a complaint is filed. Also, no demand notice was issued before the arrest, which he claimed violated mandatory provisions of the Act.

Q3. Does getting bail mean the applicant is innocent?

Absolutely not! The court specifically stated that nothing in the bail order should be taken as an opinion on the merits of the case. Bail simply means the applicant is released from custody while the case continues. The trial will still proceed.

Q4. What is Form GST DRC-03?

It’s a form used under the GST system to make voluntary payments of tax, interest, or penalty. The applicant used this form to deposit ₹50 lakhs before his arrest as a gesture of good faith.

Q5. What is Form GST-RA-2A?

It’s a form on the GST portal that auto-populates details of purchases made by a taxpayer, based on the invoices uploaded by their suppliers. The applicant used this to argue that actual purchases were made and reflected in the system.

Q6. Why did the court not consider the ₹9.33 crore fraud amount as a reason to deny bail?

While the court acknowledged the seriousness of the offence, it found that: (a) the applicant had already paid ₹2.90 crores showing good faith, (b) all documentary evidence was already seized, © the department couldn’t prove the investigation was incomplete, and (d) indefinite detention violates Article 21. The amount alone was not sufficient to deny bail.

Q7. What happens if the applicant violates any bail condition?

If any bail condition is breached, the Sessions Judge concerned has the authority to take appropriate action or issue a warrant against the applicant.

Q8. What is the significance of the 10% pre-deposit under Section 107(6) of the CGST Act?

Under Section 107(6) of the CGST Act, paying 10% of the disputed tax amount provides a deemed stay against coercive recovery. The applicant had paid ₹2.90 crores, which is more than 10% of ₹9.33 crores, and this was considered a positive factor by the court in granting bail.

1. The applicant, presently in custody, has filed present bail application, under Section 439 of the Cr.P.C, in connection with File No. IV/PI-I/35/DeeCubes/2020-21 for the alleged offence punishable under Sections 132(1)(b) and 132(1)(c) of the Central Goods and Service Tax, 2017 (for short ‘Act’).

2. The issue in the present case is with respect to availment of

fraudulent credit. The Department in multiple cases found that

invoices are prepared in order to create of transactions with respect

to sale of goods and/or services. The respondent no.1 raided the

premises of one Bharat Bhagwandas Soni on the basis of fake GST

invoices issued by the Traders of Bullion and Diamond Products

without supply of corresponding goods. During the search

proceedings, it reveals that the present applicant Dharmesh Shah

being a Director of M/s. Dee Cubes Pvt. Ltd and Proprietor of M/s.

Gloriana Jewels having place of business at Ahmedabad, has availed

ineligible ITC of Rs.7,80,80,991/- from non-existing fake firms

namely Vishnu Gold, Viram Jewelers, Neel Jewelers and Kabir

Enterprise. The department noticed that the another firm of the

applicant M/s. Gloriana Jewels has also availed ineligible ITC of

Rs.1,52,30,495/- from the aforesaid firms. In short, total ITC credit

of Rs.9.33 crores on the strength of invoices issued by 4 non-

existence firm without receiving the goods have availed illicit input

tax credit and thereby, committed an offence under Section 132(1)

(c) of the Act. The investigation further reveal that the input test ITC

illegally passed by the applicant to other persons by issuing invoices

without actual supply of goods, thereby, he had facilitated to such

parties for wrongful availment of ITC, which is an offence under

Section 132(1)(d) of the Act.

3. In the aforesaid facts, it is the case of respondent no.1 that the

applicant has entered into a criminal conspiracy of well organized

bogus billing syndicate to create fake purchases for his 2 firms,

which resulted into monetary loss to the government exchequer to

the tune of Rs.9.33 crores.

4. The applicant herein served a summon, however, he did not

complied it. On 17.03.2022, the authority visited the business place

of the applicant, made extensive search of the place and seized

material documents and recorded statement of the applicant and

thereafter, on 18.03.2022, he was arrested for the alleged offence as

referred hereinabove. He was produced before the Additional Chief

Metropolitan Magistrate, Ahmedabad.

5. The applicant herein moved an applications for regular bail before

the Courts below and Courts below have rejected the bail application

vide its order dated 22.03.2022 and 05.04.2022 respectively.

6. This Court has heard learned Senior counsel Mr. Manish Bhatt

assisted by Mr. U.N. Sheth, learned advocate for and on behalf of

applicant, Mr. Nikunt Raval, learned Standing Counsel for the

respondent no. 1 and Mr. Manan Mehta, learned APP for the

respondent State.

7. Mr. Manish Bhatt, learned Senior Counsel for and on behalf of the

applicant has submitted that the applicant has not committed any

offence and has been falsely involved without any reasonable

ground. He urged that considering the object and scheme of the Act,

the arrest would arise only when the investigation is completed and

after filing the complaint. In the facts of present case, the officers of

the department, came at the business place of the applicant and

without any notice, he was arrested. The fact remains that no

demand notice was issued, therefore, the arrest was effected in utter

disregard to the mandatory provisions of the Act.

8. Mr. Bhatt, learned Senior Counsel further submitted that during the

investigation, the company made payment of Rs.50 lakhs through

Form GST DRC 03. The applicant had assured the department that if

at all, the ITC credit is not admissible, then, company would reverse

such ITC and still at this stage also, the applicant adhere to the

assurance given vide letter dated 29.12.2021.

9. Mr. Bhatt, learned Senior Counsel further submitted that after the

arrest of the applicant, the company made deposit of Rs.2 crores

through electronic cash ledger and same has been reflected in Forms

DRC-03 and in the interregnum the company further reverse the ITC

and made payment to the tune of Rs.40 lakhs.

10. In the aforesaid submissions, learned Senior Counsel urged that

there is sufficient evidence to show that the actual purchases

including tax invoices were being effected and payment to the

vendors through banking channels were made, which can be seen

from the GST portal, more particularly, reflected in Form GST-RA-

2A. In such circumstances, the learned Senior Counsel submitted

that no prim-facie case is made out for the alleged offence and

unless and until final adjudication, assessment, is not made out, the

arrest of the applicant is arbitrary and illegal.

11. Learned Senior Counsel submitted that Section 107(6) of the Act

provides for deemed stay against the coercive recovery of dues on

predeposit of 10% of the disputed tax liability. Here in the present

case, the company has already deposited more than 10% and

therefore, case is made out for exercising discretion, enlarging the

applicant on bail.

12. Lastly, it was submitted by learned Senior Counsel that the applicant

does not have any past criminal record and he belongs to respectable

family and has deep roots in the society and there is no any chances

to flee from the justice. In these background facts, he urged that

when the offence is compoundable and entire case is based on

documentary evidence and when substantial investigation qua the

applicant is over, the further custody of the applicant is not

necessary, more particularly when trial will not commenced in near

future.

13. In support of aforesaid contentions, Mr. Bhatt, learned Senior

Counsel relied upon the judgment of the Supreme Court in case of

Sanjay Chandra Vs. CBI, 2012 (1) SCC 40 to contend that the

grant of bail is a rule and denial is exceptional, as in the facts of

present case, the prosecution failed to point out that the further

detention is necessary.

14. In view of the aforesaid contentions, learned counsel submitted that

discretion may kindly be exercised by enlarging the applicant on

bail.

15. On the other hand, learned Standing Counsel Mr. Nikunt Raval for

respondent no. 1 opposed the contentions raised on behalf of the

learned senior counsel for the applicant and reiterating the facts of

the affidavit filed by the officer of the Department, contended that

the evasion of the duty is Rs.9.33 crores and considering the larger

conspiracy hatched by Mr. Bharat Soni and his associates and the

applicant being a part of the conspiracy and considering the nature

of offence, no case is made out for exercising the discretion granting

bail to the applicant.

16. On the issue of deposit of tax made by the applicant, the learned

Standing Counsel submitted that the reversal of ITC is not

acceptable as this amount fraudulently received from the fake non-

existence firm and therefore, even after making such payment, the

court has to consider the severity of the offence and its impact on the

society. Thus, therefore, he submitted that the offence alleged

committed in a planned manner with an object to gain personal

profit, regardless of the consequences of the community.

17. Learned Standing counsel submitted that still matter is under

investigation and there are missing link of chain which are yet to be

joined and applicant being a main person of the company, his further

custody is necessary and there are also chances of him to flee from

the justice and he may influence the witnesses.

18. In support of aforesaid contentions, the learned Standing Counsel

relied on the case laws i.e. Y.S. Jaganmohan Reddy Vs. CBI, 2013

(7) SCC 439, to submit that the offence alleged is fall under the

category of economic offence and such kind of offences having deep

rooted conspiracies, involving huge loss of public funds, needs to be

viewed seriously and considered as grave offences.

19. In the aforesaid contentions, learned Standing Counsel submitted

that no case is made out for exercising power to release the applicant

on bail and therefore, application may be rejected.

20. Heard learned counsel for the respective parties at length and

perused the material placed on record.

21. On perusal of the material placed on record, it appears that so far

case of present applicant is concerned, his role and modus operandi,

unearth, while the authority was investigating the case of Bharat

Soni and others. In the present case, the applicant herein being a

Director and Proprietor of both the firms have categorically stated

that his company made deposit of Rs. 2 crores to Electronic Cash

Ledger and also had made payment totaling Rs.90 lakhs by reversing

the alleged ITC. Record indicates that while making request for

removal of the seal duly affixed on safe vault, the applicant in

writing stated as under :

“we have already paid Rs.50,00,.000/- through DRC-

03 and further convey the confirm and genuine

demand, we will pay immediately. We are checking

with our other supplier and if we find some other non-

genuine supplier, we will present the concerned

supplier or we will pay the ITC disputed and I assured

that I will pay the disputed ITC through DRC.....”

22. In view of the aforesaid facts, it is evident that the applicant has paid Rs.2,90,00,000/- through Electronic Cash Ledger as well cash. The

amount involved is Rs.9.33 crores. In such circumstances, more than

10% amount has been deposited. It is settled law that there is no

straight jacket formula for consideration of grant of bail to an

accused. It all depends upon the facts and circumstances of each

case. Here in the present case, after the arrest, the applicant has

shown his bonafideness as discussed hereinabove. The applicant

does not have any past record. The authority has expressed the

apprehension that if bail is granted, the applicant will flee from

justice and considering the pending investigation, his custody is

necessary. This contention having no any merits, as merely raising

the contention is not enough but it should be substantiate by

acceptable material. In the present case, nothing on record to show

that the investigation qua applicant is incomplete and he having

tendency to flee away from justice. The entire documentary

evidence seized by the authority. In such circumstances, when the

authority failed to point out that the further custody of the applicant

is necessary, and considering the particular facts and circumstances

of the present case and keeping in mind the settled law laid down in

the case of Sanjay Chandra Vs. CBI, AIR, 2012 SC 830, wherein,

it was observed that detention of the accused for an indefinite period

is in violation of Article 21. Since trial of the case may have take

considerable time and therefore, there is no reason to detain the

accused in custody after completion of investigation, this court is of

considered view that the application deserves consideration and I

inclined to release the applicant on regular bail.

23. Hence, the applicant is ordered to be released on regular bail in

connection with the File No. IV/PI-I/35/DeeCubes/2020-21, on

executing a personal bond of Rs.10,000/- (Rupees Ten thousands

only), with one surety of the like amount to the satisfaction of the

learned Trial Court and subject to the conditions that he shall:

24. The authorities shall release the applicant if he is not required in

connection with the any other offence. If breach of any above

condition is committed, the Sessions Judge concerned shall take

appropriate action or issue warrant against the applicant. The bail

bond to be executed before the learned trial Court having

jurisdiction to try the case. It will be open for the sessions judge

concerned to delete, modify and/or relax any of the above

conditions, in accordance with law. Nothing stated hereinabove,

shall tantamount to the expression of any opinion on the merits of

this case. Rule is made absolute to the aforesaid extent. Direct

service permitted.

(ILESH J. VORA,J)

P.S. JOSHI