Case Study

An investigation was conducted by DGGI, Kolkata Zonal unit against 12 fake firms. The list of the said firms was sent to DGGI, Jaipur Zonal Unit. Out of the 12 fake firms, three firms were found to have issued fake invoices and transferred fake input tax credit to M/s Bhagyashree Enterprises without underlying supply. Based on the information, DGGI, Jaipur Zonal unit initiated investigation against M/s Bhagyashree Enterprises and no trading unit was found existing or operating at the declared address. Thereafter, proprietor ( Mr. Suresh Chandra Vaishnav) of the said firm was contacted and it was revealed that he does not own firm and the said firm was created and operated by CA. Chandresh Jain. Pursuant to which, statements of CA Chandresh Jain were taken which revealed that he had created several fake firms for passing on ITC against commission with the help of one person- Mr. Pankaj Choudhary. Consequently, statements of Mr. Pankaj Choudhary were also taken by DGGI, Jaipur Zonal unit in which he affirmed assistance granted by him to CA Chandresh Jain. Thereafter, during investigation it was found that M/s Bhagyashree Enterprises has availed ITC from 37 suppliers in total and M/s Hansa Choudhary (hereinafter referred to as Appellant) was alleged as one of those suppliers. This led to the issuance of a Show Cause Notice was issued proposing the allegations as follows:

The appellant has fraudulently passed on input tax credit to M/s Bhagyashree Enterprises, thereby proposing the equal Penalty under section 122(1)(ii) of CGST Act, 2017
The appellant has involved in clandestine supply of goods. Therefore, demand of Tax under section 74(1) along with interest under section 50 of CGST Act, 2017 and Penalty equivalent to tax under section 74(1) of CGST Act, 2017 was proposed.

However, appellant failed to submit reply against the same. Consequently, the allegations raised by the impugned show cause notice were confirmed by the adjudicating authority in his order. Aggrieved by the impugned order, the appellant filed and appeal before Commissioner (Appeals).
Learned representative of the notice, CA Pradeep Jain appeared for personal hearing to present the merits of the case.

Submissions of the Appellant:

The appellant submitted the following contentions:

Demand raised on the basis of assumptions and presumptions deserves to be quashed:

The impugned order-in-original has raised two allegations- 1. Passing of fake ITC and 2. Clandestine removal. However, the entire investigation has just been focused on the first allegation of passing on fake ITC. Further, there was no investigation conducted regarding the clandestine removal of goods. The said fact can also be substantiated by the statement of CA Chandresh Jain i.e. mastermind of the entire modus operandi- CA Chandresh Jain and his associates Mr. Pankaj Choudhary and CA Suresh Chandra Viashnav. Their statements were relied upon by adjudicating authority at the time of confirming the demand in his order-in-original. The statements solely state that appellant has issued fake invoices which substantiates the fact that there was no investigation conducted by the department regarding allegation of clandestine removal of goods. Thus, the order in original has confirmed the clandestine supply without conducting any investigation and without substantiating the same with cogent and corroborative evidence. Thus, the demand with regards to the clandestine supply should be set aside.

No investigation conducted to substantiate the allegation of clandestine clearance of goods:

In continuation of above, it was argued that as there was no investigation conducted, hence, following questions remained unanswered:

Who were the buyers of the alleged clandestinely removed goods?
How the alleged clandestinely cleared goods were transported?
How was the payment of freight made?
Whether the transporters have confirmed the transportation of goods?
Whether the buyers have confirmed the receipt of clandestinely removed goods?
How the payments in respect of clandestinely removed goods as well as freight were received by the appellant?

And that the adjudicating authority was supposed to answer the above mentioned questions by conducting investigation. However, there was no such investigation conducted at all with regards to the above mentioned aspects. Analysis of which clarifies that the said demand was raised on the basis of the assumptions and presumptions and lacks support of any corroborative and cogent evidence.

Reliance placed upon judicial pronouncements regarding cogent and corroborative evidence are mandatorily required:

In continuation of above, reliance was placed upon various judicial pronouncements in which it has been held that charge of clandestine removal of goods has to be proved with cogent and corroborative evidence. If the buyers are transporters of alleged supply are not investigated, the flowback of cash is not established. Thus, entire demand confirmed by the order in original is based on assumptions and presumptions.

Shree Nakoda Ispat ltd. v. Commissioner of Central Excise,Raipur [2017 (348) E.L.T. 313 (Tri.-Del.)]
Portland Cement (I) ltd. V. Commissioner of C.Ex., Lucknow [2015 (326) E.L.T. 304 (Tri.-Del.)]

Demand confirmed solely on the basis of the statements of the manager is not valid:

It was argued that, in the instant case, demand was confirmed solely on the basis of statements of the manager. Hence, demand cannot be confirmed solely on the basis of the confessional statement of a person and same needs to be corroborated by the independent evidence. Reliance was placed upon the judgement of Supreme Court in the case of Customs v. Mohammad Bagour [2019 (368) E.L.T. A232 (S.C.)] that the demand cannot be raised on the basis of confessional statement when the same is not corroborated by independent evidence.

Allegation of issuance of fake invoices without proving the flowback of cash is not tenable:

Appellant contended that the impugned order has confirmed the allegation of the issuance of fake invoices without actual supply of goods. Thus, there should be flow back of funds. However, the impugned order in original has nowhere proved that the amount received in their bank account has been sent back to the buyers in any manner. Reliance was placed upon the decision given by Tribunal in the case of Gaurav Mungad v. Commissioner of CGST, Ex. Cus., Bhopal [2021 (376) E.L.T. 69 (Tri.- Del.)] that the allegation of issuance of forged invoices cannot sustain unless flow back of money is proved.

Opportunity of cross examination should be granted:

That the impugned order has confirmed huge demand merely on basis of statements of CA Chandresh Jain, CA Pankaj Choudhary. However, these statements are ambiguous and cannot relied upon, thus, appellant requested to provide an opportunity to cross examine the persons in the interest of justice. However, demand was confirmed without extending such opportunity. Reliance was placed upon following judgements:

Andaman Timber Industries v. Commissioner of C.Ex. Kolkata-II [2015 (324) E.L.T. 641 (S.C.)]
in which it was held that, the burden to prove the allegations lies on the department. Without discharging such burden, demand cannot be confirmed.
Demand of tax, interest and penalty on account of clandestine clearance is not sustainable if the purchases are not challenged:

The impugned order in original did not question the authenticity of the purchases made by the appellant. Since the purchases had been made from reputable suppliers like Birla Cement and Chetak Cement, there was no doubt about the inward movement of goods and validity of input tax credit so availed. Impugned order in original has also not questioned any of these facts. Furthermore, no question regarding the fact of making payment of tax while filing the GSTR-3B has been raised. When payment of tax on the supplies, inward movement of goods and ITC availed on the inward supplies have not been doubted, the allegations raised in the impugned order in original for imposing the penalty alleging the fake invoices become baseless as the outward supply made by the appellant is also as authentic as the inward supply of goods.

Burden of proof is not discharged by the Revenue Department:

The onus to prove clandestine clearance is on the revenue department. It is worthwhile to mention that if the allegation of clandestine clearance is made, it is required to be substantiated with evidence like to whom the goods were sold, how did the alleged buyers remitted payments, who transported the said goods, how the payments were made to transporters etc. Furthermore, if there is clandestine supply, the deviation in stock will be there, thus, stock verification is required to be done in such cases. However, the department failed to verify the stock and has not disputed the purchases made by the appellant. Mere allegations and as the allegations are not substantiated with the help of cogent and corroborative evidence. Reliance was placed upon the following jhudgements in the case of:

Sri Durga Cables Pvt LTd. v. Commr. Of C.Ex. & Cus., Bhubhneshwar [2020 (374) E.L.T. 459 (Tri.-Kolkata)

Order passed by relying on the statements taken under Section 136 of the CGST Act is not sustainable:

It was argued that the impugned order has confirmed huge demand merely on the basis of statements of few persons. The provisions related to admissibility of statements as evidence has been given in Section 136 of CGST Act. The said section has roots from Section 9D of Central Excise Act 1944. Analysis of the section 9D(1) clarifies statements will be entered as evidence only if the person who made the statement is examined as a witness in the case before the Court and also the Court is of the opinion that these statements should be admitted as evidence in the interest of justice. Further, Sub-section (2) of section 9D specified that these statements may also be applied in relation to any proceedings other than Court.

Under Section 136 of CGST Act, sub-section (2) of section 9D of Central Excise Act, 1944 has been purposely deleted while drafting section 136 of CGST Act, 2017 which indicates that the statements of a person can be relied upon only at the time of commencement of trial against a person and the same cannot be relied upon in any other proceedings.
Relaince can be placed on the following judicial precedents:

Rahul Versus Director General of Goods and Service Tax Intelligence, Nagpur [(2024) 14 Centax 370 (Bom.)]
Sanket Versus Director General of Goods and Service Tax Intelligence, Nagpur [(2024) 21 Centax 184 (Bom.)]

It has been held in these precedents that Section 136 will only come into play at the time where the trial commences and the said provision is important to highlight the fact that an admission made by person before the officials under the CGST Act, 2012 would be per se admissible in evidence unless it receives imprimatur of the Court.

Search proceedings were not properly conducted:

The search proceedings forming the basis of the impugned demand were conducted in violation of Section 67(10) of the CGST Act read with Section 100(4) of the CrPC, 1973, as the two panch witnesses were not independent persons from the locality where the search was conducted. Although the search was conducted at Bhilwara, the panchas were brought from Jaipur and Udaipur, contrary to the requirement that independent and respectable witnesses should ordinarily be from the same locality. For this reliance was placed upon the judgement in the case of Commissioner of Central Excise, Kanpur v. Bakul Poly Pack Pvt Ltd. [ 2018 (363) E.L.T. 376 (Tri.-All.) and

Jitendra Kumar Ghishulal Jain v. Collr. Of Cus. (Prev.) Mumbai [1998 (103) E.L.T. 591 (Tribunal)

Invocation of Section 74 is incorrect:

That the impugned order in original was issued under Section 74 of CGST Act. Section 74 provisions were referred and it was observed that the said section is invokable only if there is fraud, wilful misstatement or suppression of facts with an intention to evade. Hence, this section is very grave and revenue department is required to prove that there has been serious breach of law in order to invoke extended period of limitation and such provision cannot be invoked mechanically.

Reliance was placed on the decision in the case ofM/s RainbowIndustries v. CCE [1994 (74) ELT 3 (SC)].

Demand of Interest is not justified:

It was held that, the impugned order in original has failed to substantiate the allegations raised. Therefore, as the demand of tax itself is not legally sustainable, hence, interest also does not stands recoverable in the instant case.

Penalty is not imposable:

That the impugned order in original has been issued to impose penalty under Section 74(1) and Section 122(1)(ii) of the CGST Act. However, the penalty cannot be imposed without proving mens rea or presence of guilty mind. Reliance was placed upon the decision of Supreme Court in the case of Hindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)] in which it was held that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed.

Penalty imposed on manager is not sustainable:

Appellant contended that the impugned order has imposed penalty under Section 122(1A) manager of the appellant. However, while confirming the penalty, impugned order failed to specifically mention the clause number under which penalty was imposed. The analysis of this sub-section clarifies that there various clauses of sub-section (1) of Section 122 of the CGST Act 2017. Without spelling the exact clause, penalty is not imposable on the manager.

Reliance was placed upon the decision in the case of Amrit Foods v. Commissioner of Central excise, U.P. [2005 (190) E.L.T. 433 (S.C.)] in which it was held that penalty is not imposable without putting on notice the exact contravention for which assessee is liable to penal action.
In continuation of above, it was submitted that without prejudice to the submmissions made in the foregoing paras and without accepting the allegations of the impugned order, that the penalty cannot be imposed on the manager of the appellant under Section 122(1A) of CGST Act as the penalty under this section is imposable on any person who retains the benefit of a transaction covered under specified section. Hence, penalty under this section can be imposed only on the owner and cannot be imposed on employees or manager.
Further, that the manager has acted in the capacity of manager and has acted as per the directions given to him. For this reliance was placed upon the decision in the case of:
Commissioner of Customs (Export), Mumbai v. Styale Corporation [2020 (371) E.L.T. 772 (Tri.- Mumbai)]

Findings and Judgement of the Appellate Authority:

Following are the findings and judgement of the appellate authority:
It was observed that, there are three issues:

Fraudulently passed on ITC to M/s Bhagyashree Enterprises;
Clandestinely removed the goods involving GST to their various purchasers or not;
Appellant is liable to imposition of penalty under Section 122(1A) of CGST Act.

Regarding allegation of Fraudulently passed on ITC to M/s Bhagyashree Enterprises

That statements of the following persons were analysed:

Mr. Suresh Chadra Vaishnav;
Investigation against M/s Hansa Choudhary;
Statements of CA. Chandresh Jain &
Statement of Mr. Pankaj Choudhary

It was observed that, statements recorded during investigation establish that M/s Bhagyashree Enterprises was a non-existing/fictitious firm functioning only on paper and was not engaged in genuine business. Further, Mr. Suresh Chandra Vaishnav accepted the allegations regarding opening of the said firm by CA. Chandresh Jain against which he received money. Further, manager of the appellant categorically admitted the fact that fake invoices have been issued to M/s Bhagyashree Enterprises without actual supply. Shri Pankaj Choudhary accepted the fact the modus operandi adopted by CA. Chandresh Jain of managing the network of fake firms and issuing fake invoices.
With regard to the appellant’s contention regarding cross examinations, the appellate authority held that the appellant has categorically admitted in his own statement that invoices were issued to M/s Bhagyashree Enterprises without actual supply of goods, thereby fraudulently passing on ITC to the said firm. The adjudicating authority observed that the allegations were not based merely on third-party statements or assumptions and presumptions, but were corroborated by the appellant's own voluntary admissions, statements of other persons and the material collected during investigation, establishing the issuance of invoices without actual movement of goods. Accordingly, the plea regarding denial of cross-examination and absence of evidence was rejected.
Further, appellant’s contention regarding reliance placed upon various judicial pronouncements, it was held that the judgments relied upon by the appellant were distinguishable on facts and that the appellant's categorical admission rendered the other contentions inconsequential. Further, in view of the supreme court judgement in the case of Sushil Suri v. Central Bureau of Investigation & Anr. [(2011) 5 SCC 708] also reliance was placed upon the decision in the case of Alnoori Tobacoo Products [ 2004 (170) E.L.T. 135 (S.C.)] that the applicability of any judgement to a specific case depends upon various factors, including the facts and circumstances.
Hence, it was held that, appellant is liable to penalty under Section 122(1)(ii) of CGST Act.

Regarding the allegation of clandestine removal of goods:
With regard to the contention of the appellant in relation to demand of GST on the allegation of clandestine removal of goods, it was held that, the fact that the invoices were issued without actual supply of goods to M/s Bhagyashree Enterprises by itself cannot automatically lead to conclusion that the physical goods covered by such invoices were thereafter clandestinely removed. The two issues are distinct and require separate evidences. Further, it was observed that search was conducted at the premises of the appellant. However, such investigation failed to bring out any discrepancy related to stock available at the business premises. Along with that, there was no shortage or excess stock detected which could corroborate allegation of clandestine removal. Hence, based on above, it was held that the demand of tax for clandestine removal is not valid as the same is not supported by any cogent and corroborative evidence.
Provision governing penalty under Section 122 came into effect from 01.01.2021 only:
It was observed that as the provisions of the Section 122 came into effect only from 01.01.2021 via Notification No. 92/2020-CT, thus, the imposition of penalty under the said provisions which was not in force during the instant period is not valid. Hence, the penalty was dropped in this regard.
Accordingly, it was held that,

appellant shall remain liable for the penalty under Section 122(1)(ii) of the CGST Act;
not liable to pay GST on account of clandestine removal of goods;
Shri Shrenik Choudhary i.e. Manager, is not liable to pay penalty under Section 122(1A) of the CGST Act;

In view of the above, the appeal filed by the appellant was partly allowed.

Author’s Comment:

With respect to the demand confirmed for the fraudulently passing on ITC, the appellant has preferred to file the appeal before the Hon’ble GSTAT. This judgement of the Appellate authority still assumes significance as the authorities has clearly held that conclusion of passing on fake ITC cannot automatically lead to the conclusion that the goods were clandestinely removed and sold without without payment of tax. The two issues are distinct and require separate evidentiary evidence. For clandestine removal like grave allegations, department cannot raise allegations merely on the basis of assumptions and presumptions. Officials should possess corroborative and cogent evidence which are based on detailed investigations. In a recent case of CESTAT New Delhi, M/s Ashish Enterprises v. Principal Commissioner, CGST & Central Excise, Bhopal (Excise Appeal No.: 52020 of 2024) it was held that clandestine removal cannot be sustained unless the four essential ingredients required to prove the clandestine removal of goods has been satisfied. First, procurement of raw materials; Second, manufacture of final products; Third, clandestine removal of goods; Fourth, receipt of consideration against such removal. Similarly, in case of trading units, demand of clandestine removal cannot be challenged unless purchases are challenged as in the instant case.

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PJ case study/2026-27/16

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