The Telangana High Court has granted anticipatory bail to a director of Shah Batteries Private Limited in a case involving allegations of wrongful availment and utilisation of Input Tax Credit (ITC) of approximately ₹98.47 crore through invoices allegedly issued by non-genuine suppliers. 

The bench of Justice N. Tukaramji emphasised that while the seriousness and magnitude of an alleged GST economic offence are relevant, the existence of the statutory power to arrest does not automatically mean that arrest is necessary in every investigation.

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The case arose from proceedings initiated against Shah Batteries Private Limited and its directors over alleged wrongful availment of ITC amounting to approximately ₹98.47 crore. According to the Department, the ITC was allegedly claimed on the strength of invoices issued by non-genuine suppliers.

The investigation included searches of the company’s premises on April 30, 2026 and June 5, 2026, during which documents and electronic devices were seized. The petitioner maintained that he and the company had cooperated with the investigation and complied with summons by furnishing replies and relevant documents. 

The petitioner also pointed out that the company had deposited ₹1.50 crore through DRC-03 under protest during the investigation.

The defence further contended that the disputed transactions were genuine business transactions supported by tax invoices, e-way bills, photographs, banking transactions and books of account. It was also submitted that the concerned suppliers possessed valid GST registrations at the relevant time. 

Opposing anticipatory bail, the Commercial Taxes Department alleged that the disputed ITC had been availed through invoices issued by 17 fraudulent or shell taxpayers without actual supply or movement of goods.

According to the Department, against declared GST liability of approximately ₹102.33 crore, only around ₹45.42 lakh had been discharged in cash, while approximately ₹98.47 crore was discharged by utilising the disputed ITC. 

The Department further alleged that the 17 supplier entities formed part of a fraudulent network. Several entities allegedly shared common residential addresses and their GST returns were allegedly filed from a common IP address, sometimes within short intervals.

On this basis, the Department alleged that the transactions were centrally managed and not genuine, and further alleged that the petitioner and the co-accused director were actively involved in the transactions and acted as masterminds of the alleged ITC fraud. 

The Department argued that merely possessing invoices, e-way bills and banking records could not establish that actual supplies had taken place, as such documents could allegedly have been created or used to give transactions a semblance of genuineness.

It contended that the investigation was still at a crucial stage and custodial interrogation was required to trace the complete financial trail, identify ultimate beneficiaries, examine alleged hawala channels and ascertain the involvement of other persons and entities.

The Department also expressed apprehension regarding possible tampering with electronic evidence, destruction or manipulation of books of account and influence over witnesses. 

The High Court held that the application could not be decided merely by looking at the magnitude of the alleged ITC fraud.

The Court observed that the issue required a balance between the seriousness of the alleged economic offence and the petitioner’s fundamental right to personal liberty, particularly by examining the factual necessity for custodial interrogation at the relevant stage of investigation. 

The Court acknowledged that the allegations were grave and noted that the alleged ITC fraud of ₹98.47 crore, involving 17 allegedly non-genuine suppliers and alleged absence of actual supply or movement of goods, attracted serious consequences under Section 132 of the CGST and TGST Acts.

However, the Court also noted that Section 69 does not contemplate automatic arrest in every case. The statutory power of arrest depends upon the Commissioner having “reasons to believe” that the person has committed an offence specified under Section 132(1)(a) to (d). 

The High Court noted that the Supreme Court, while upholding the validity of Sections 69 and 70 of the CGST Act, had emphasised that the Commissioner must record reasons to believe based on material demonstrating satisfaction of the statutory requirements.

The High Court observed that arrest cannot be based merely on suspicion or be used simply to investigate whether the statutory conditions for arrest exist. The power of arrest, the Court noted, must be exercised with circumspection. 

The Court further noted the principle that the seriousness of an economic offence, by itself, does not justify arrest. Factors including the availability of evidence, conduct and cooperation of the accused, possibility of abscondence or tampering, and the actual necessity of custodial interrogation have to be considered. 

The Court also referred to Tarun Jain v. Director General of GST Intelligence, where the Delhi High Court had considered allegations involving approximately ₹72 crore of fraudulent ITC and treated the necessity of custodial interrogation as a matter dependent upon the facts of the particular investigation.

The Telangana High Court also referred to the broader principle that the existence of a power of arrest does not automatically justify its exercise, while acknowledging that the gravity and magnitude of an alleged economic offence remain relevant considerations in bail proceedings. 

In the present case, the Court specifically considered the fact that documents and electronic devices had already been seized.

It held that such seizure was a material circumstance, though not by itself conclusive. The relevance of the seized material had to be assessed alongside the Department’s contention that additional material remained to be traced and that the petitioner might be in a position to explain the movement of funds or functioning of the alleged supplier network. 

A key observation of the High Court was that where the Department relies substantially on material already in its possession and the accused has appeared pursuant to summons and cooperated with the investigation, a mere assertion that custodial interrogation is necessary cannot substitute for a specific demonstration of investigative necessity.

The Court observed that investigative objectives such as tracing the financial trail or examining documents could potentially be pursued through further summons, production of documents, examination of witnesses, forensic examination of seized material and electronic devices, scrutiny of books of account and other investigative measures short of custodial interrogation. 

At the same time, the Court clarified that the seizure of documents and devices does not automatically rule out custodial interrogation. If the Department demonstrates that evidence remains vulnerable to destruction or manipulation, or that the accused has deliberately avoided meaningful cooperation and custodial interrogation is necessary to secure or recover material, the position could be different. 

The Court also examined the allegation that the petitioner and the co-director were masterminds of the alleged fraud.

While recognising the seriousness of the allegation, the Court observed that such an allegation must be assessed with reference to the material collected during investigation. The status of a person as a director, by itself, cannot conclusively establish personal participation in every transaction undertaken by a company.

The Court clarified that while deciding anticipatory bail, it was not required to conduct a mini-trial into the genuineness of the supplier entities. Nevertheless, the material connecting the particular accused to the alleged fraudulent availment and utilisation of ITC, as well as the necessity of his arrest for further investigation, remained relevant.

The petitioner had relied on the fact that the other director, who had been arrested on June 16, 2026, had subsequently been granted bail by the trial court on July 23, 2026.

The High Court held that although parity cannot be applied mechanically, the fact that the co-director had been arrested in the same investigation and subsequently released on bail could have persuasive value where the allegations, respective roles and circumstances were substantially comparable. 

The Court nevertheless clarified that parity was not an independent or inflexible ground for anticipatory bail. If materially different conduct, role or investigative requirements were established against the petitioner, the co-accused’s bail would not automatically entitle him to similar relief.

The High Court also considered the company’s deposit of ₹1.50 crore through DRC-03 under protest.

The Court held that the payment was relevant while assessing the petitioner’s conduct and bona fides, but it neither extinguished nor determined his alleged criminal liability.

Importantly, the Court stated that payment or deposit during an investigation cannot be treated either as an admission of guilt or as an automatic defence to prosecution. At the same time, such conduct could not be completely ignored when assessing the petitioner’s willingness to cooperate with the investigation. 

Another significant issue considered by the High Court was the alleged arrest authorisation.

The Court relied upon the Supreme Court’s decision in Sunil Biyani v. Union of India, 2026 INSC 849, and noted that an order under Section 69 of the GST Act recording the Commissioner’s “reasons to believe” is a sine qua non for exercise of the power of arrest.

The Court further noted that the order and reasons forming the basis of arrest must be communicated to the person sought to be arrested so that the person can effectively avail the remedy of pre-arrest bail. Until such communication, the question of arrest does not arise, according to the principle noted by the High Court. 

The High Court concluded that the petitioner had made out a case for anticipatory bail.

The Court took into account the searches and seizures already conducted, the documentary and electronic nature of the material, the petitioner’s assertion of cooperation and the fact that the co-accused director had already been granted bail. At the same time, it imposed conditions designed to protect the interests of the investigation and prosecution. 

The Criminal Petition was accordingly allowed and the petitioner was granted anticipatory bail.

The order requires the petitioner to surrender before the concerned authority and, upon surrender or arrest, be released on bail on execution of a personal bond of ₹5 lakh with two sureties for the like amount. He is also required to appear before the Investigating Officer every Tuesday and Saturday between 10 AM and 3 PM for 12 weeks from release or until filing of the final result, whichever is earlier. 

The petitioner must further appear before the investigating authority whenever directed and cooperate with the investigation. He is required to furnish his residential address and contact details, cannot leave India without prior permission of the jurisdictional court, and cannot induce, threaten or influence persons acquainted with the facts of the case or tamper with prosecution evidence. 

The High Court made it clear that the anticipatory bail order does not prevent the competent authority from taking further action in accordance with Sections 69 and 132 of the GST Act.

The investigating officer remains free to continue the investigation in accordance with law. If subsequent material establishes satisfaction of the statutory conditions and demonstrates a genuine necessity for arrest, the competent authority may take further action as permissible in law. 

The Court also expressly clarified that its observations were confined to the adjudication of the anticipatory bail application and should not be construed as an opinion on the merits of the allegations.

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