GST Fraud Accused Gets Bail After Agreeing to Deposit ₹2 Crore of ₹21.59 Crore Evaded Tax

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Case Name

Mohmed Hasan Aslam Kaliwala vs State of Gujarat

Court Name: High Court of Gujarat at Ahmedabad

Case No.: R/Criminal Misc. Application No. 9674 of 2022

Decided on: 29th July, 2022

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

Key Takeaways

1. Fake Invoice Fraud is Serious — The applicant was accused of creating fictitious entities and issuing fake invoices to pass ineligible Input Tax Credit (ITC) without any actual movement of goods.

2. Bail is Not Automatic in Economic Offences — The State strongly argued that economic offences are a “class apart” and should be treated differently when considering bail.

3. Constitutional Liberty Matters — The court balanced the seriousness of the offence against the applicant’s fundamental right to liberty, especially since the investigation was nearly complete and a complaint had already been filed.

4. Partial Deposit as a Condition — The court innovatively used the applicant’s willingness to deposit ₹2 crore (approximately 10% of the alleged fraud amount) as a sign of good faith (bonafide) to justify granting bail.

5. Automatic Bail Cancellation Clause — If the applicant fails to deposit the money in time, the bail stands automatically cancelled — no separate court order needed.

6. Trial Will Take Time — The court acknowledged that the trial was unlikely to conclude in the near future, making prolonged detention without trial unjustifiable.

Issue

Should the Gujarat High Court grant regular bail to an accused person charged with GST fraud involving ₹21.59 crores in tax evasion, who had already been denied bail by two lower courts?

Facts

• The Accused: Mohmed Hasan Aslam Kaliwala was the authorized representative of two firms — HK Metal and Blue Star Trading Company — both registered as proprietorship concerns doing scrap business in Bhavnagar. These firms were registered in the names of his father (Kalawala Haji) and mother (Mrs. Sabana Aslam).

• The Discovery: The GST department noticed suspicious activity and conducted search proceedings at the registered business places of both firms. When they arrived, they found that neither firm was actually operating at those locations. Instead, a new firm called M/s. Ashiya Enterprise was found there.

• The Fraud: Investigation revealed that these firms were issuing fake invoices — meaning they were creating paper transactions without any actual goods being moved. This allowed other businesses (called “beneficiary firms”) to wrongfully claim Input Tax Credit (ITC). The total tax loss to the government was estimated at ₹21.59 crores.

• The Arrest: The applicant had been evading the investigation for a long time. He was finally caught and arrested on 17th April, 2022. He was produced before the Metropolitan Magistrate Court, Ahmedabad, and was given 4 days of custodial interrogation.

• Lower Court Rejections: He applied for bail before the Metropolitan Magistrate, Ahmedabad and the City Sessions Court, Ahmedabad — both rejected his bail applications.

• Complaint Filed: During the pendency of this High Court petition, the department filed a formal complaint under the CGST Act, which was registered as CC No. 57059 of 2022.

Arguments

Applicant’s Side (Mr. N.D. Nanavati, Senior Advocate, with Mr. Chetan Pandya)

1. Investigation is Over: The department had already recovered all necessary documents during the interrogation of the applicant’s parents (the proprietors) and during the applicant’s own remand period. There was no need for further custody.

2. Complaint Already Filed: Since the complaint had already been filed before the court, keeping the applicant in jail served no further investigative purpose.

3. Trial Will Take Long: There was no realistic possibility of the trial concluding in the near future, so keeping him behind bars indefinitely would be unjust.

4. Willingness to Pay: The applicant, on instructions from his counsel, expressed willingness to deposit ₹2 crore within 2 months of release, without prejudice to his legal rights.

5. Returns Were Filed: Both firms had filed regular GST returns (GSTR-1), and the sales were reflected in GSTR-2A of the buyers. No show cause notice had been issued to the firms regarding fake invoices. Therefore, the question of wrongful ITC availing did not arise, according to the defence.

State’s Side (Mr. Manan Mehta, APP)

1. Massive Fraud: The applicant defrauded the state exchequer to the tune of ₹21.59 crores, and the investigation was still ongoing — the amount could increase further.

2. Risk of Evidence Tampering: If released, the applicant might manipulate or destroy evidence, adversely affecting the investigation.

3. Economic Offences are Different: The State argued that economic offences constitute a “class apart” and must be viewed with a stricter approach when it comes to bail. Granting bail in such cases could be detrimental to the national economy.

Key Legal Precedents

Sanjay Chandra vs. CBI, reported in 2012 (2) SCC 40

This was the only case law cited by the court in its reasoning. The Supreme Court in this landmark case observed:

“Constitutionally protected liberty must be respected unless the detention becomes necessary. The balance approach is to grant bail subject to certain conditions rather than to keep the individual under detention for an indefinite period.”

How it was applied here: The Gujarat High Court used this principle to justify granting bail to the applicant. Since the investigation was virtually over, the complaint had been filed, and the trial was unlikely to conclude soon, keeping the applicant in indefinite detention was not justified. The court balanced the seriousness of the offence with the applicant’s right to liberty by imposing strict conditions.

Key Statutory Provisions Referenced:

Section 132(1)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act)

Offence of issuing invoices without actual supply of goods/services

Section 132(1)(b) of the Gujarat Goods and Services Tax Act, 2017 (GGST Act)

State-level equivalent of the above offence

Section 70 of the CGST/GGST Act

Power to summon persons to give evidence and produce documents

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

Power of the High Court to grant regular bail

Judgment

The applicant WON — Bail was GRANTED.

1. Investigation Virtually Complete: For both firms (HK Metal and Blue Star Trading Company), the investigation was essentially over. Documents had been recovered, the applicant had been interrogated during remand, and a formal complaint had already been filed.

2. Bonafide Gesture: The applicant’s willingness to deposit ₹2 crore (approximately 10% of the alleged fraud amount) was seen as a sign of good faith.

3. Liberty vs. Detention: Relying on Sanjay Chandra vs. CBI (2012 (2) SCC 40), the court held that constitutionally protected liberty must be respected, and a balanced approach of granting bail with conditions was more appropriate than indefinite detention.

Bail Conditions Imposed:

The applicant was ordered to be released on regular bail in connection with File No. DCST/ENF08/SURAT/AC-1/HASAN KALLIWALA/58-21-22, subject to the following conditions:

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

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

(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; cannot change residence without prior permission of the Trial Court

(f) Must deposit ₹2 crore in two installments: ₹1 crore within 1st month, and remaining ₹1 crore in the 2nd month. Failure = Automatic bail cancellation

• Personal Bond: ₹10,000 with one surety of the same amount.
• The Sessions Judge has the power to delete, modify, or relax any of the above conditions.
• The court clarified that nothing in this order should be taken as an opinion on the merits of the case.

FAQs

Q1: Why was bail granted even though the fraud amount was so large (₹21.59 crores)?

The court found that the investigation was virtually complete, the complaint had already been filed, and the trial would take a long time. Keeping someone in jail indefinitely without a trial is against their constitutional right to liberty. The court balanced this by imposing very strict conditions, including a ₹2 crore deposit.

Q2: What happens if the applicant doesn’t deposit the ₹2 crore on time?

The bail stands automatically cancelled — no separate court order is needed. The applicant would go back to jail immediately.

Q3: Why did the lower courts reject bail but the High Court granted it?

The judgment doesn’t explicitly explain the lower courts’ reasoning. However, the High Court took into account the fact that the investigation was now over, the complaint had been filed, and the applicant showed good faith by agreeing to deposit ₹2 crore.

Q4: What is “fake invoice fraud” in GST terms?

It means creating invoices on paper for goods/services that were never actually supplied or moved. Other businesses then use these fake invoices to claim Input Tax Credit (ITC) — essentially reducing their tax liability using fraudulent documents. This is a serious offence under Section 132(1)(b) of the CGST Act.

Q5: Can the bail conditions be changed later?

Yes! The Sessions Judge concerned has the power to delete, modify, or relax any of the bail conditions in accordance with law.

Q6: Does this judgment mean the applicant is innocent?

Absolutely not. The court explicitly stated that “nothing stated hereinabove shall tantamount to the expression of any opinion on the merits of this case.” Bail is just about temporary release pending trial — the actual guilt or innocence will be decided during the trial.

Q7: What is the significance of the ₹2 crore deposit condition?

It serves multiple purposes — it acts as a financial deterrent against fleeing, demonstrates the applicant’s good faith (bonafide), and partially compensates the government exchequer for the alleged fraud. It’s approximately 10% of the total alleged tax evasion amount.

1. The applicant, presently in custody, has filed regular bail application under Section 439of the Cr.P.C., in connection with File No. DCST/ENF08/SURAT/ AC-1/HASAN KALLIWALA/58-21-22, for the offences under punishable under Sections 132(1)(b) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘CGST Act’) and Section 132(1)(b) of the Gujarat Goods and Services Tax Act, 2017 (herein after referred to as ‘the GST Act’.).

2. The applicant is arrested on 17.04.2022. He moved an application for regular bail before the Metropolitan Magistrate, Ahmedabad and City Sessions Court at Ahmedabad, which came to be rejected by the courts below.

3. Brief facts leading to file present application is that, it came to be the notice of the department that present applicant and others were indulged into activities of creating fictitious entity to pass ineligible input tax

credit. It is in this matter, the search proceedings against HK Metal and Blue Star Trading Company were conducted at their registered places of

business. Both the firms are proprietorship concern, doing scarp business at Bhavnagar and are registered in the name of Kalawala Haji and Mrs. Sabana Aslam, who are father and mother of the applicant respectively and according to record, the applicant is the authorized representative of both the firms and managing its bank transactions. During the search proceedings, both the firms were not operative and not in existence at the business place and one new firm M/s. Ashiya Enterprise was found.

The findings of the investigation, emerged that these firms doing wrongful activity of issuing fake invoices, to pass ineligible input tax credit to beneficiaries without any actual movement of goods, whereby, the applicant caused revenue loss to the government exchequer to the tune of Rs.21.59 crores, as by passing the illegal ITC, the beneficiary firms had claimed unlawful input tax credit. In such circumstances, the applicant has violated the provisions of GST, GGST and IGST and rules made thereunder and thereby evaded tax of Rs.21.59 crores. The proprietor of these firms were served summons under Section 70 of the Act and they were arrested after due process of law. The applicant herein was evaded the investigating proceedings since long and lastly, he was apprehended on 17.04.2022. He was produced before the Metropolitan Magistrate Court, Ahmedabad and was granted custodial interrogation for 4 days. During the pendency of the petition, the complaint as contemplated under CGST Act, is filed before the court concerned, which came to be registered as CC No. 57059 of 2022.

4. This Court has heard learned Senior Counsel Mr. N.D.

Nanavati, assisted by Mr. Chetan Pandya, learned

counsel appearing for and on behalf of applicant, Mr.

Manan Mehta, learned APP for the respondents.

5. Mr. N.D. Nanavati, learned Senior Counsel urged

that:

(i) During the interrogation of the Proprietors of 2

firms who are happened to be a parents of the

applicant, the respondent agency has recovered

the necessary documentary evidence and same

is in the custody of the department. Even after

the arrest of the applicant, during remand

period, he was extensively interrogated by the

department and necessary documents have

been recovered. It is in this context, learned

counsel submitted that now further custody of

the applicant is not necessary, as after

investigation, complaint is filed before the court

concerned and in near future, there is no

possibility to conclude trial in a reasonable time

so keeping behind the bar the applicant, would

not serve any purpose.

(ii) Learned counsel on instructions, states that the

applicant is ready and willing to deposit Rs. 2

crore within 2 months from his release before

the department without prejudice to his rights

and contentions;

(iii) On factual aspect, learned senior counsel

submitted that both the firms had filed regular

returns for its business transactions and till

date, have not received any show cause notice,

raising any dispute with respect to fake invoices

etc. It is in this context, it was submitted that

both the firms have filed their return in GSTR1

disclosing sale of goods and same was being

reflected in GSTR2A and therefore, question

does not arise, to avail wrongfully ITC;

6. In view of the aforesaid contention, learned counsel

submitted that discretion may kindly be exercised in

favour of the applicant by enlarging him on bail by

imposing suitable conditions.

7. Mr. Manan Mehta, learned APP reiterating the

contents of the sworn affidavit, contended that the

applicant defrauded the State Exchequer to the tune

of Rs.21.59 crores and still investigation is going on

and quantum of tax evasion involved is also further

likely to increase and considering the conduct of the

applicant, if bail is granted, then, the applicant may

manipulate or attempt to destroy the evidences,

which will adversely affect the investigation. He

further submitted that the offence committed is

grave economic offence, and detrimental to the

nation economy as economic offense constitute a

class apart and need to be viewed with different

approach in the matter of bail and therefore, he

prays that the applicant should not be enlarged so as

to ensure proper investigation.

8. Having considered the rival contention of respective

parties and having regard to the material on record,

it appears that so far 2 firms are concerned, as

referred above, investigation is virtually over. The

applicant being an authorized attorney of 2 firms,

initially he had evaded the investigation but later on

after his arrest and during his remand period, he was

interrogated extensively and necessary materials

have been recovered. Department has also filed

complaint against the applicant. The applicant herein

to show his bonafide, willing to deposit Rs.2 crore,

which is approximately 10% of the alleged amount.

Considering the facts and circumstances of the

present case, it is worthwhile to note the observation

made by the Apex Court in the case of Sanjay

Chandra Vs. CBI, reported in 2012 2 SCC 40,

wherein, it was observed that “constitutionally

protected liberty must be respected unless the

detention becomes necessary. The balance approach

is to grant bail subject to certain conditions rather

than to keep the individual under detention for an

indefinite period.

9. For the foregoing reasons, considering the facts and

circumstances of the present case and role

attributable to present applicant herein as well as his

bonafide to deposit Rs.2 crore, this Court is of the

considered view that case is made out for exercising

discretion enlarging the applicant on bail and

accordingly, I incline to release the applicant on bail,

subject to deposition of Rs.2 crore before the office of

the Deputy Commissioner of State Tax, Division 8,

Enforcement, Surat within a period of 2 months from

his release. Hence, present application is allowed.

10. Hence, the applicant is ordered to be released on

regular bail in connection with the File No.

DCST/ENF08/SURAT/AC-1/HASAN KALLIWALA/

58-21-22, 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:

11. 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)