Karnataka High Court: Cancellation of Supplier's GST Registration After Transactions Does Not Automatically Establish Fraudulent ITC Availment — Anticipatory Bail Granted
Overview of the Ruling
The Karnataka High Court, in Venkatasubbaiah C & Anr. v. Superintendent of Central Tax & Anr., Criminal Petition No. 9023 of 2026, delivered a significant ruling on the limits of the arrest power under Section 69 of the Central Goods and Services Tax Act, 2017 ("CGST Act") in the context of alleged fraudulent Input Tax Credit ("ITC") availment. The Court granted anticipatory bail to two petitioners — a sole proprietress and her husband who managed the business — holding that the mere subsequent cancellation of a supplier's GST registration or its non-traceability cannot, standing alone, establish that the purchasing assessee fraudulently availed ITC. The decision further reinforces the principle that economic offences under the CGST Act do not automatically necessitate custodial interrogation.
Background and Factual Matrix
M/s Sri Lakshmi Venkateshwara Enterprises, a sole proprietorship ("the Firm") engaged in recycling used lead-acid batteries and manufacturing remelted lead ingots, was registered under the CGST Act. The Firm was owned by Smt. Guramma C ("Petitioner No. 2"), with its day-to-day operations managed by her husband, Sri Venkatasubbaiah C ("Petitioner No. 1") (together, "the Petitioners").
The Superintendent of Central Tax, Headquarters Anti-Evasion, Bengaluru East Commissionerate ("the Respondent") issued summons dated April 10, 2026, under Section 70 of the CGST Act, alleging that the Petitioners had claimed ITC on the basis of fraudulent invoices raised by fictitious suppliers in the absence of any actual supply of goods — an offence attracting liability under Section 132 and the power of arrest under Section 69 of the CGST Act.
Fearing arrest, the Petitioners applied for anticipatory bail before the jurisdictional Sessions Court in Crl. Misc. No. 4859 of 2026, which was rejected by order dated June 16, 2026. The Petitioners thereafter approached the Karnataka High Court by way of a petition under Section 482 of the Bharatiya Nagarik Suraksha Sanhita, 2023 ("BNSS") — the provision that now corresponds to Section 438 of the Code of Criminal Procedure, 1973 — seeking pre-arrest protection.
Contentions of the Parties
Petitioners' Position
The Petitioners placed the following submissions before the Court:
- The Firm holds a valid GST registration.
- Goods were actually procured from various registered suppliers against proper tax invoices.
- Invoice values inclusive of GST were remitted to suppliers exclusively through banking channels.
- Periodic GST returns have been filed without interruption since registration.
- Documentary evidence establishing actual receipt of goods from the invoicing suppliers is available and the Petitioners are willing to produce the same.
- The Petitioners have no prior criminal record and had already appeared before the Respondent, cooperating fully with the investigation.
Respondent's Position
The Respondent, through a statement of objections, contended that:
- All suppliers of the Petitioners are fictitious entities that are non-existent and could not be located despite sustained efforts.
- The invoices issued by these entities are, accordingly, bogus.
- Amounts transferred to the bank accounts of such suppliers were subsequently withdrawn and shared between the suppliers and the Petitioners, thereby defrauding the Government.
- Petitioner No. 1 is the mastermind behind the alleged scheme.
- Given the nature of the allegations, custodial interrogation of the Petitioners is necessary for a proper investigation.
Legal Issues Framed
Whether anticipatory bail can be granted to a purchasing assessee accused of availing ITC on invoices raised by suppliers later found to be non-existent or whose GST registrations have been cancelled, where no prima facie material exists to demonstrate collusion between the supplier and the purchaser or a violation of
Section 132(1)(a)or(b)of the CGST Act by the supplier?Whether custodial interrogation is warranted solely because the alleged offence under the CGST Act is economic in nature?
Court's Findings and Reasoning
On ITC Eligibility and the Supplier's Registration Status
The Court reaffirmed the well-settled legal position that subsequent cancellation of a supplier's GST registration certificate or the closure of the supplier's business operations after the date of supply does not, by itself, disentitle a purchasing assessee from claiming ITC, unless the Department establishes prima facie that there was active collusion between the supplier and the purchaser. The Court placed reliance on:
- State of Maharashtra v. Suresh Trading Company [(1997) 11 SCC 378] — wherein the Supreme Court held that a purchasing dealer is entitled to rely on the registration certificate of the selling dealer as subsisting on the date of the transaction and cannot be prejudiced by its retrospective cancellation.
- Gargo Traders v. Joint Commissioner, Commercial Taxes (State Tax) [2023 SCC OnLine Cal 1441] — wherein the Calcutta High Court directed examination of the recipient's documentary evidence of genuineness rather than denying ITC solely on account of the supplier's cancelled registration or non-reflection of credit in GSTR-2A.