The Karnataka High Court has granted anticipatory bail to three proprietors facing proceedings under Section 132 of the Central Goods and Services Tax Act, 2017 and the Karnataka GST Act, observing that where purchasers possess valid GST registrations, hold tax invoices, have paid the invoice value and GST through banking channels and have regularly filed returns, custodial interrogation would ordinarily not be necessary unless there is prima facie material indicating collusion with the supplier.

The bench of Justice S. Vishwajith Shetty has observed that  the GST framework is based on self-assessment and voluntary compliance. It then identified the relevant requirements for ITC, including possession of a tax invoice, actual receipt of goods or services, payment of tax charged by the supplier, filing of returns and payment of the invoice value along with tax within the prescribed statutory period. 

BUY NOW: E-Magazine: Top 100 GST ITC Judgements

The petitioners were registered under GST and were engaged in dealing with steel and scrap materials. They claimed to have purchased aluminium scrap from M/s. KH E-Waste Recyclers and M/s. SKS Traders. 

The GST department had conducted raids at the premises of the suppliers and arrested their proprietors. Thereafter, summons were issued to the petitioners under Section 70 of the Act requiring them to appear and produce documents concerning their purchases. The petitioners had earlier approached the Sessions Court after apprehending arrest, but their applications were dismissed. 

The Department alleged that the transactions formed part of a large-scale organised economic offence involving fraudulent availment and passing of bogus ITC running into hundreds of crores of rupees. According to the prosecution, the suppliers were fictitious entities which issued concocted invoices without actual supply of goods or services. It was further alleged that amounts credited to the suppliers were subsequently routed back to the petitioners through hawala transactions. 

The Department therefore argued that custodial interrogation was necessary to uncover the involvement of other firms allegedly forming part of the racket.

The petitioners, however, contended that they were genuine registered purchasers. They submitted that they had paid the invoice value as well as GST to the suppliers through banking channels and had periodically filed their GST returns after obtaining registration.

They further stated that they had appeared before the authorities pursuant to the summons and were ready to cooperate with the investigation and produce the necessary documents. 

The High Court noted that the petitioners possessed valid GST registration certificates and that, according to their case, the purchases were supported by invoices and payments made through banking transactions. Their returns had also been filed periodically. 

The Court observed that the petitioners had paid the invoice value and tax to the suppliers through banking transactions and had periodically filed returns along with invoices. 

The High Court made a significant observation concerning the liability of a purchaser when the supplier subsequently faces adverse action.

It held that where the supplier was registered and active at the time of the transaction and the purchaser had paid the invoice value and GST through banking channels, ITC cannot be denied to the purchaser merely because the supplier’s registration was subsequently cancelled or the supplier ceased to exist after the transactions.

According to the Court, unless fraud and collusion are proved, recovery in such circumstances would ordinarily have to be pursued against the defaulting supplier. 

This observation is particularly relevant in GST investigations involving recipients whose suppliers are subsequently found to be non-compliant or whose registrations are cancelled.

The Court also emphasised that the question of whether goods were actually received is capable of being examined through documentary evidence.

It specifically referred to documents such as e-way bills, transport vehicle receipts, weighbridge receipts, stock records and sale records as material that may establish actual movement and receipt of goods. 

The petitioners had undertaken to produce such documents to establish actual receipt of the goods.

The Court therefore drew a distinction between a case where there is documentary material capable of being examined during investigation and a case where there is prima facie evidence suggesting that the purchaser was knowingly involved in a fraudulent arrangement.

The Court’s central observation concerned the necessity of custodial interrogation.

It held that where a purchaser has paid the invoice value and GST, filed returns periodically and possesses the relevant documentary material, custodial interrogation would not normally be necessary merely to determine whether the goods were actually received.

The Court stated that such interrogation would become relevant where there is prima facie material demonstrating collusion between the purchaser and supplier. 

Thus, the mere existence of an investigation into a supplier’s alleged fraudulent activities does not automatically establish that every purchaser who transacted with that supplier requires custodial interrogation.

The High Court subsequently examined Sections 69 and 132 of the CGST Act.

Section 69 deals with the power to arrest, while Section 132 prescribes punishment for specified GST offences. The Court noted that Section 69 requires authorisation by the Commissioner where the statutory conditions for arrest are met. 

The Court relied upon the Supreme Court’s decision in Radhika Agarwal v. Union of India, particularly its discussion on the safeguards surrounding GST arrest.

The principle extracted by the High Court was that arrest must be based on a belief supported by reasons and material establishing that the statutory conditions are satisfied. Arrest cannot be undertaken merely on suspicion or simply for the purpose of investigating whether the statutory conditions exist. The reasons to believe must be based on evidence satisfying the Commissioner that the requirements of Section 132(5) are fulfilled. 

The petitioners had also relied upon the fact that the alleged offence was compoundable and carried a maximum punishment of five years.

The High Court rejected the argument that compoundability by itself entitled the petitioners to anticipatory bail. Relying upon Radhika Agarwal, the Court observed that there is a distinction between compounding of offences and arrest, and safeguards must ensure that arrest does not take place unless the statutory conditions are established on the basis of material and evidence. 

At the same time, the Court considered the coordinate bench decision in Akram Pasha v. Senior Intelligence Officer, DGGI. In that case, the Court had observed that although GST offences are economic offences, the nature and maximum punishment prescribed under the GST Act cannot be ignored while assessing the gravity of the alleged offence.

The High Court also noted that the Supreme Court had dismissed the Special Leave Petition against the Akram Pashajudgment on March 25, 2026. 

Another important factor was the petitioners’ conduct during the investigation.

The Court recorded that, after receiving summons, the petitioners had appeared before the authorities on May 22, 2026. Although the parties disputed whether the necessary documents had actually been produced and received, their appearance pursuant to summons was undisputed. 

The Court also noted that the petitioners had no antecedents of a similar nature. They had paid the invoice value plus GST through banking transactions, filed returns periodically and undertaken to cooperate with the authorities and produce documents establishing receipt of goods or services. 

While considering anticipatory bail, the Court also referred to the principles laid down in Siddharam Satlingappa Mhetre v. State of Maharashtra. The judgment emphasises that where an accused has joined the investigation, is cooperating with the investigating agency and is not likely to abscond, custodial interrogation should be avoided. It also recognises the serious consequences associated with arrest even at the pre-conviction stage. 

The Court therefore balanced the investigative interests of the GST authorities against the petitioners’ right to personal liberty.

Ultimately, the High Court allowed all three petitions and directed that the petitioners be released in the event of their arrest in connection with the respective GST investigations and offences under Section 132(1) of the Act. 

The relief, however, was accompanied by stringent conditions.

The petitioners were directed to appear before the respondent authorities on August 10, 2026. The authorities were permitted to take them into custody if necessary for interrogation, but after interrogation they were required to release them on the same day, on or before 6:00 p.m., subject to execution of a personal bond of ₹5 lakh each with two sureties for the like amount. 

They were further required to cooperate with the investigation and appear whenever summoned. They were prohibited from inducing, threatening or promising any person acquainted with the facts of the case. They were also required to keep their mobile numbers operational. 

Additionally, the petitioners were directed to drop a PIN on Google Maps so that their location remained available to the authorities. They were required to surrender their passports and were prohibited from leaving India without prior permission. Breach of any condition could lead to an application for cancellation of anticipatory bail. 

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: JURISHOUR | TAX LAW DAILY BULLETIN : 12 SEPTEMBER, 2026