Arrest Under GST Law Need Not Await Tax Adjudication If 'Reason To Believe' Exists: Chennai Court

A Chennai court has recently refused bail to a director of Attica Gold Pvt. Ltd. in a GST evasion case, holding that authorities need not wait for completion of tax adjudication before making an arrest if they possess sufficient material to form a "reason to believe" that an offence has been committed.

Principal Sessions Judge S. Karthikeyan dismissed the bail plea of Dr. Obed Ulla A, who was arrested by the Directorate General of GST Intelligence (DGGI) on June 12 in connection with an investigation into alleged GST evasion. The court found that the investigation remained at an early stage and that custodial interrogation was still necessary.

The court observed, "As per sec. 69 of CGST Act, what is required for according approval for arrest is some materials to believe that the arrestee has committed an offence punishable u/s. 132 of CGST Act and not the final adjudication."

According to the prosecution, Attica Gold purchases second-hand gold jewellery from customers and claims the benefit of the GST margin scheme by reporting that the jewellery is resold as such.

The DGGI alleged that, instead, substantial quantities of the gold were transported to Bengaluru, melted into Gatti Gold and sold to jewellery manufacturers without proper accounting, resulting in suppression of taxable turnover. The investigation, according to the agency, has so far indicated GST evasion exceeding ₹100 crore.

Dr. Obed Ulla argued that he became a director only in 2024, that no incriminating material was recovered during the search of his residence, and that the allegation of GST evasion exceeding ₹100 crore was unsupported by material.

Relying on the Supreme Court's decision in Radhika Agarwal v. Union of India and several High Court rulings, he contended that the approval for his arrest had been granted mechanically, that arrest could not be used as a means of recovering tax, and that no assessment or adjudication had yet determined any tax liability.

The DGGI opposed bail, submitting that searches at the company's offices yielded transporter records, CCTV footage, electronic devices, tally data, melting records and employee statements. It also pointed out that Dr. Obed had failed to respond to repeated summons despite assuring investigators that he would furnish information within seven days, and later retracted his earlier statement.

Examining the "reasons to believe" recorded by the Additional Director General, the court found that the arrest approval referred to employee statements, transporter data, CCTV footage of the melting room, melting reports, tally data and documents seized during the searches. It therefore rejected the contention that the approval had been granted mechanically or without supporting material.

The court further observed that the petitioner's failure to respond to summons and his subsequent retraction indicated that he would not cooperate with the investigation unless subjected to custodial interrogation.

On the petitioner's argument that arrest could not precede adjudication of tax liability, the court ruled:

"Therefore, at the time of arriving conclusion to arrest or not to arrest, a final adjudication is not necessary, but sufficient materials to believe that he committed offence is necessary."

The court also observed that, while deciding the bail application, it was not confined to examining only the "reasons to believe" document and was entitled to consider the other materials collected during the investigation.

Taking into account the stage of the investigation, the gravity of the allegations, the petitioner's conduct during the investigation the court declined to grant bail.