GST Fraud Accused Get Bail Despite ₹42.53 Crore ITC Scam — With Conditions

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Case Name

Avesh Afroz Lokhandwala & Others vs. State of Gujarat

Court Name: High Court of Gujarat at Ahmedabad

Case No.: R/Criminal Misc. Application No. 6221, 6268, 8660 and 8722 of 2022

Date of Order: 15th July 2022

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

Key Takeaways

1. Bail is not automatically denied in economic offence cases — The court reaffirmed that even in serious economic offences, bail must be considered on a case-by-case basis, not as a blanket rule of denial.

2. Article 21 protection applies even to fraud accused — Indefinite detention without a foreseeable trial date violates the fundamental right to life and personal liberty under Article 21 of the Constitution of India.

3. Investigation completion is a key factor — Since the investigation was virtually over and all documentary evidence and computer gadgets had already been seized, there was no strong reason to keep the accused in custody.

4. Financial conditions can be imposed on bail — The court imposed a condition of depositing ₹1 crore each as a meaningful safeguard, balancing the accused’s liberty with the seriousness of the alleged fraud.

5. Adjudication proceedings had not even started — The court noted that no show-cause notice had been issued yet, meaning the legal process was still at a very early stage, making prolonged custody unjustifiable.

6. Compoundable offences with max 5-year punishment — The offences under the GST Act are compoundable and carry a maximum punishment of 5 years, which weighed in favour of bail.

Issue

The central legal question was:

Should the accused persons, arrested for alleged GST fraud involving fraudulent ITC claims of ₹42.53 crore and fraudulent refunds of ₹29 crore, be granted regular bail under Section 439 of the Code of Criminal Procedure?

More specifically:

• Was the arrest itself legally valid?
• Does the gravity of an economic offence automatically bar bail?
• Does continued detention serve any purpose when the investigation is virtually complete?

Facts

Who are the accused?

• Arfanabanu Shaikh — Director of Expifit Impex Pvt. Ltd and Seam Globus Pvt. Ltd
• Janak Panchal — Director of Profusion Traders Pvt. Ltd
• Amit Devani — Associated with the group
• Avesh Afroz Lokhandwala — Claimed to be an agent (not an importer/exporter directly)

What did they allegedly do?

The accused were in the business of export-import of ready-made clothes. Here’s the alleged fraud in simple terms:

• They created 9 bogus/non-existing companies — registered in the names of office boys or third parties using their Aadhaar cards and other identity proofs.
• Goods were procured without invoices and then supplied as exports or to Special Economic Zones (SEZ) as zero-rated supply.
• To support these fake exports, fake inward supply invoices were obtained — without actually receiving any goods.
• Through this scheme, they allegedly claimed fraudulent ITC of ₹19,80,26,020 (approximately ₹19.80 crore) and total fraudulent ITC of ₹42.53 crore, plus fraudulent refunds of ₹29 crore.

How was the fraud discovered?

The whole scam came to light when the department scrutinized a refund application of Expift Impex Pvt. Ltd and its suppliers M/s. Saifee Enterprise and Kanchan Global. Officers searched business premises, seized large amounts of documentary evidence and computer gadgets.

When were they arrested?

• Janak Panchal & Arfanabanu Shaikh — 27th December 2021
• Amit Devani — 31st December 2021
• Avesh Afroz Lokhandwala — 4th January 2022

Their bail applications before the Judicial Magistrate Court and Sessions Court were rejected, which is why they came to the High Court.

Arguments

Arguments by the Applicants (Accused)

Presented by Senior Counsel N.D. Nanavaty, assisted by Mr. Rahul Dholakia and Mr. Chetan Pandya

1. Illegal arrest authorization — The arrest was authorized by the Additional Commissioner of State Tax, but under Section 69(1) of the GST Act, this power must be exercised by the Commissioner himself. So the arrest was allegedly illegal on its face.

2. No show-cause notice before arrest — The department directly arrested the applicants without first serving a show-cause notice under Section 61, Section 73, or Section 74 of the Act. The arrest was based solely on statements recorded under Section 70 of the Act, which the applicants argued is inadmissible and violates Article 20(3) of the Constitution of India (right against self-incrimination) and Sections 25 and 26 of the Evidence Act.

3. No proper reasons for arrest — The arresting authority did not assign sufficient reasons for subjective satisfaction, making the use of power under Section 69 of the Act mechanical and arbitrary.

4. Prosecution before adjudication — Prosecution should normally be launched only after adjudication is completed. Arrest should follow prosecution, not precede it.

5. Investigation is virtually over — The complaint has already been filed before the court, so there’s no need to keep the accused in custody.

6. No criminal history — The applicants have no prior criminal record and have deep roots in society.

7. Long custody + triable by Magistrate — The applicants have been in custody since December 2021, the case is triable by a Magistrate, and the maximum punishment is only up to 5 years.

8. Willingness to deposit ₹1 crore each — As a goodwill gesture (without prejudice to their rights), each applicant was willing to deposit ₹1 crore within one month of release.

9. Special argument for Avesh Afroz — Mr. Chetan Pandya specifically argued that Avesh Afroz was neither an importer nor an exporter under the EPCG scheme — he merely acted as an agent between the importer-manufacturer and others. Therefore, there was no prima facie evidence directly involving him in the offence.

Arguments by the State (Prosecution)

Presented by APP Mr. Manan Mehta

1. Vital role in fraud — The applicants played a vital role in availing ineligible ITC and fraudulently obtaining refunds by creating 9 bogus firms, wrongfully availing ITC of ₹42.53 crore and claiming fraudulent refunds of ₹29 crore.

2. Economic offence = serious offence — The alleged offence is an economic offence, and the Apex Court has repeatedly held that socio-economic offences constitute a class apart and need to be treated differently in bail matters. Such offences have deep-rooted conspiracies that affect the moral fabric of society and cause irreparable harm.

3. Investigation still ongoing — The investigation is still underway, and granting bail may allow the applicants to manipulate or destroy evidence and derail the investigation.

4. Gravity of offence — Considering the gravity of the offence and its impact on society, no case is made out for granting bail.

Key Legal Precedents

1. P. Chidambaram vs. Director of Enforcement, (2020) 13 SCC 791

This is the most significant case cited by the court. The Supreme Court (Apex Court) in this case observed that:

“Even if the allegation is of a grave economic offence, it is not a rule that bail should be denied in every case, since there is no such bar created in the relevant enactment passed by the legislature nor does the bail jurisprudence provide so.”

The court used this precedent to counter the State’s argument that economic offences should automatically result to denial of bail. The Gujarat High Court applied this principle to hold that bail must be considered on a case-to-case basis, looking at the specific facts of each case and whether the accused’s presence can be secured for trial — regardless of the nature or gravity of the charge.

Key Statutory Provisions Referenced:

Section 439, CrPC: Power of High Court to grant regular bail

Section 69(1), GST Act: Power of Commissioner to authorize arrest

Section 61, GST Act: Scrutiny of returns

Section 73, GST Act: Show-cause notice for non-fraud cases

Section 74, GST Act: Show-cause notice for fraud cases

Section 70, GST Act: Power to summon persons for evidence

Section 132(1)(b) & 132(1)(C), GGST/CGST Act: Offences and penalties under GST

Section 120B, IPC: Criminal conspiracy

Article 20(3), Constitution of India: Right against self-incrimination

Article 21, Constitution of India: Right to life and personal liberty

Sections 25 & 26, Evidence Act: Confessions to police/in custody inadmissible

Judgement

The applicants WON — Bail was GRANTED.

Reasoning of the Court:

The Hon’ble Justice Ilesh J. Vora granted bail for the following five reasons:

1. No straitjacket formula for bail — Bail depends on facts of each case. The offences are compoundable with a maximum punishment of 5 years. The applicants had been in custody since December 2021 and the investigation was virtually over.

2. No adjudication proceedings started yet — No show-cause notice had been issued. Even after adjudication, the applicants could challenge the liability before the appellate authority by depositing just 10% (maximum ₹2 crore). The applicants’ willingness to deposit ₹1 crore each was a significant factor.

3. Evidence already secured — All documentary evidence and computer gadgets had been seized and were in the department’s custody. There was no risk of evidence tampering.

4. No further custody needed — The department failed to demonstrate why further custody of the applicants was necessary.

5. No criminal record — The applicants had no prior criminal history.

6. Article 21 protection — Since there was no foreseeable chance of concluding the case proceedings in the near future, detaining the applicants indefinitely would violate their fundamental rights under Article 21 of the Constitution of India.

7. Economic offence not an automatic bar — Relying on P. Chidambaram vs. Director of Enforcement, (2020) 13 SCC 791, the court held that even grave economic offences do not automatically bar bail.

Bail Conditions:

Each applicant was ordered to be released on the following conditions:

• Deposit ₹1 crore individually before the respondent office at Ahmedabad within one month of release
• Execute a personal bond of ₹25,000 with one surety of the same amount
• Not misuse liberty or act against the prosecution’s interest
• Surrender passport (if any) to the lower court within one week
• Not leave India without prior permission of the Sessions Judge
• Furnish current residential address to the Investigating Officer and court; not change residence without prior permission of the Trial Court

FAQs

Q1: Why were the accused granted bail despite such a large fraud?

The court found that the investigation was virtually complete, all evidence was already seized, and there was no foreseeable trial date. Keeping them in jail indefinitely would violate their fundamental right to liberty under Article 21 of the Constitution. The court also relied on the Supreme Court’s ruling in P. Chidambaram vs. Director of Enforcement that economic offences don’t automatically bar bail.

Q2: What is the significance of the ₹1 crore deposit condition?

It’s a financial safeguard. Since the alleged fraud involves crores of rupees, the court wanted to ensure some accountability. The deposit also shows the accused’s good faith and willingness to cooperate. It was offered voluntarily by the applicants themselves “without prejudice to their rights.”

Q3: Does this mean the accused are acquitted or off the hook?

Absolutely not! This is only a bail order — it just means they don’t have to stay in jail while the case proceeds. The trial will continue, and if found guilty, they will face punishment. The court specifically said the Trial Court should not be influenced by any observations made in this bail order.

Q4: What happens if the accused violate any bail conditions?

If any bail condition is breached, the Sessions Judge concerned is free to issue a warrant or take appropriate action. The bail can be cancelled.

Q5: What was Avesh Afroz’s specific defence?

Avesh Afroz’s lawyer argued that he was neither an importer nor an exporter under the EPCG scheme — he was merely an agent between the importer-manufacturer and others. Therefore, there was allegedly no prima facie evidence directly linking him to the offence.

Q6: What are the offences the accused were charged with?

They were charged under:

• Section 132(1)(b) and 132(1)© of the Gujarat GST Act, 2017 and Central GST Act, 2017 — for GST-related offences
• Section 120B of the Indian Penal Code — for criminal conspiracy

Q7: Can the bail conditions be modified later?

Yes! The court specifically said it will be open for the concerned Trial Court to delete, modify, and/or relax any of the above conditions in accordance with law.

1. All the above bail applications arise out of one and same proceedings, they were heard together and are hereby decided by this common order.

2. The applicants have filed present applications under Section 439 of the Code of Criminal Procedure seeking regular bail in connection with the File No.ACST/U-10/EXPIFT IMPEX/2021-22, for the offences punishable under Sections 132(1)(b), 132(1)(c) of the Gujarat Goods and Service Tax Act, 2017 and Central Goods and Services Tax Act, 2017 read with Section 120B of the Indian Penal Code. The applicants Janak Panchal and Arfanabanu Shaikh have been arrested on 27.12.2021, whereas, applicant Amit Devani arrested on

31.12.2021 and applicant Avesh Afroz arrested on 04.01.2022. The regular bail applications filed before the concerned Judicial Magistrate Court and Sessions Court concerned came to be rejected.

3. Aggrieved by the order of the Courts below, present applications have been preferred before this Court.

4. Heard learned Senior Counsel N.D.Nanavaty assisted by Mr. Rahul Dholakia and Mr. Chetan Pandya, learned counsel for and on behalf of the applicants and Mr.Manan Mehta, learned APP for the State respondent.

5. Mr. N.D.Nanavaty, learned Senior Counsel and Mr. Chetan Pandya, learned counsel for the applicants urged the following contentions:-

(i) Authorization of arrest by the Addl. Commissioner of State

Tax is ex facie illegal, and therefore, arrest of the applicants

are otiose. It is in this context, it was submitted that, the

arrest is ex facie illegal for want of exercise of powers by the

Commissioner as mandatory under Section 69(1) of the Act.

(ii) The department without serving show-cause notice either

under Section 61 or Section 73 or under section 74 of the Act

straightway arrested the applicants on the basis of statement

recorded under Section 70 of the Act, which is inadmissible

and is hit by Article 20(3) of the Constitution of India and

Sections 25 and 26 of the Evidence Act.

(iii) While arresting the applicants, no sufficient reasons for

subjective satisfaction were being assigned by the authority

and therefore, the power under Section 69 of the Act used in

mechanical and arbitrary manner;

(iv) Prosecution should normally be launched only after the

adjudication is completed and therefore, arrest would arise on

launching the prosecution;

(v) Complaint for the alleged offence has already been filed

before the Court concerned and therefore, when investigation

is virtually over, detaining the applicants for further period is

unwarranted.

(vi) the applicants do not have criminal history and having

deep roots in the society.

(vii) The applicants are in custody since long and the case is

triable by magistrate and maximum punishment for the

offence is upto 5 years.

(viii) on instructions, it was submitted that, the applicants are

individually willing to deposit Rs.1 crore without prejudice to

their rights and contentions, within one month from their

release;

(ix) Ld. Counsel Mr. Chetan Pandya, for and on behalf of the

applicant Avesh Afroz Lokhandwala submitted that, the

applicant is neither an importer nor an exporter under the

Scheme of EPCG and had acted as an agent between the

importer – manufacturer defined under the scheme and

therefore, considering the role attributed to the applicants

herein, there is no prima facie evidence involving the

applicant herein in the alleged offence.

6. In view of the aforesaid contentions, learned counsels for the

applicants submitted that, discretion may kindly be exercised

by enlarging the applicants on bail.

7. Countering to the contentions raised by learned counsel for

the applicants, learned APP Mr. Manan Mehta, reiterating the

facts of the affidavit filed by the officer of the department

contended that, the applicants have played vital role to avail

ineligible input tax credit and also fraudulently obtained

refund amount by creating 9 bogus firms and thereby, availed

input tax credit of Rs.42.53 crore wrongfully and claimed

fraudulent refund to the tune of Rs.29 crore. It is in this

context, learned APP submitted that, the offence alleged is

economic offence and considering the law laid down time and

again by the Apex Court in its various judgments that socio

economic offences constitute class apart and need to be

visited with a different approach in matter of bail as the

economic offence has deep rooted conspiracies affecting the

moral fibar of the society and causing irreparable harm which

needs to be considered seriously.

8. Learned APP further submitted that, the alleged offence is a

part of organized tax fraud which needs proper investigation

which still underway and therefore, if bail is granted, it may

hamper the investigation and the applicants may manipulate

or destroy the evidences to derail the investigation. Thus,

therefore, learned APP submitted that, considering the gravity

of the offence and its impact on the society, no case is made

out for exercising discretion in favour of the applicants.

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

perused the material placed on record.

10. In order to appreciate the rival submissions, following facts of

the case are required to be recorded:-

The applicant Arfanabanu Shaikh is a Director of Expifit

Impex Pvt. Ltd and Seam Globus Pvt. Ltd, whereas, the

applicant Janak Panchal is a Director of Profusion Traders

Pvt. Ltd. Applicant Nos.1 to 3 have created 9 different non-

existing companies either in the name of office boy or in the

name of third party by obtaining their necessary proofs like

Aadhar Card etc. The applicants are engaged in the

business of export – import ready made clothes. In order to

avail fraudulent credit, goods were procured without

invoices and supplied as export or to SEZ as zero rated

supply and to substantiate such export and zero rated

supply, fake invoices inward supply have been obtained

without receiving goods and as claimed fraudulent ITC to

the tune of Rs.19,80,26,020/-. The whole scam came into

light when the respondent department scrutinized a refund

application of Expift Impax Pvt. Ltd and the supplier M/s.

Saifee Enterprise and Kanchan Global. The officers searched

the business premises of the applicants and large number

of documentary evidence were seized and recovered and

during the investigation, it was revealed that, 9 bogus

companies registered in Gujarat have shown inward supply

on the basis of fake invoices without receiving actual supply

of goods and have claimed input tax credit and also claimed

refunds of either tax paid through ITC or accumulated ITC

for their export and zero rated supply.

In the aforesaid facts, after following mandatory provisions

of the Act, the applicants have been arrested and

thereafter, the complaint as contemplated under the Act

has been filed before the Court concerned.

11. Having considered the facts and circumstances of the present

case, this is a case where the applicants need to be enlarged

on bail for the following reasons:-

(i) In the matter of bail, there is no straitjacket formula for

consideration of bail to an accused as it all depends upon the

facts and circumstances of each case. In the facts of present

case, the offence under the Act are compoundable and

maximum punishment is upto 5 years. The applicants are in

custody since December, 2021 and investigation part is

concerned, it is virtually over. It is an admitted fact that, still

adjudication proceedings is not commenced and no notice as

provided under the Act is issued. Even after adjudication of

liability, the applicants can challenge it before the appellate

authority subject to deposit of 10 % and the maximum

amount of deposit is upto Rs.2 crore. Considering the alleged

fraudulent ITC, the applicants herein willing to deposit Rs.1

crore individually before the authority concerned within

stipulated time. In such circumstances, this Court is of view

that, when in near future, there is no chance to conclude the

case proceedings, detaining the applicants for an indefinite

period would certainly violate their fundamental rights as

enshrined under Article 21 of the Constitution of India and

therefore, applications require consideration;

(ii) Entire documentary evidence and computer gadgets have

been seized and they are in custody of the department;

(iii) Department failed to point out that, further custody of

the applicants is necessary.

(iv) Applicants do not have criminal record.

(v) The contention about economic offence raised, has been

dealt with by the Apex Court in case of P. Chidambaram Vs.

Director of Enforcement,(2020) 13 SCC 791, wherein the

Apex Court, observed that even if the allegation of grave

economic offence, it is not a rule that bail should be denied in

every case, since there is no such bar created in the relevant

enactment passed by the legislature nor does the bail

jurisprudence provide so. Therefore, irrespective of nature

and gravity of charge, whether bail is granted or not, the

consideration will have to be on case to case basis on the

facts involved therein and securing the presence of the

accused to stand trial. In the facts of present case and

reasons as discussed, (i) to (v), the applications deserve

consideration.

12. For the foregoing reasons, applications are allowed on a

condition that the applicants shall deposit Rs.1 crore individually

before the respondent office at Ahmedabad, within a period of

one month from their release. Accordingly, the applicants are

ordered to be released on regular bail in connection with the

File No.ACST/U-10/EXPIFT IMPEX/2021-22, on executing a

personal bond of Rs.25,000/- (Rupees Twenty Five Thousands

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

of the learned Trial Court and subject to the conditions that they

shall;

13. The Authorities will release the applicants only if they are not

required in connection with any other offence for the time being. If

breach of any of the above conditions is committed, the Sessions

Judge concerned will be free to issue warrant or take appropriate

action in the matter. Bail bond to be executed before the learned

Lower Court having jurisdiction to try the case. It will be open for

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

above conditions, in accordance with law. At the trial, learned Trial

Court shall not be influenced by the observations of preliminary

nature, qua the evidence at this stage, made by this Court while

enlarging the applicants on bail. Rule is made absolute to the

aforesaid extent. Direct service is permitted.

(ILESH J. VORA,J)