Allahabad High Court dismissed Patanjali challenge to GST penalty of more than 273 crores on charges of indulging in circular trading of paper tax invoices without actual supply of goods.
In a recent judgment, Allahabad High Court dismissed the challenge of Patanjali to GST penalty of more than 273 crores for alleged indulging in circular trading of tax invoices only on paper without actual supply of goods.
ABCAUS Case Law Citation:
4585 (2025) (05) abcaus.in HC
In the instant case, the Patanjali had filed a writ petition under Article 226 of the Constitution of India before the Allahabad High Court praying for quashing the impugned Show Cause vide Form GST DRC-01 by Directorate General of Goods and Services Tax Intelligence (DGGI), proposing exorbitant penalty of more than 250 crores proposed to be levied against the petitioner under Section 122 (1), clause (ii) and (vii) of the Central Goods and Service Tax, Act 2017 (CGST Act) and three respective State Statutes namely Uttarakhand, Haryana and Maharasthra.
Based on the information relating to companies with large amount of Input Tax Credit (ITC) utilization with no income tax credential, resulted in an investigation conducted against various firms/companies including the three units of the petitioner which led to the issuance of the impugned demand cum-show cause notice wherein it was alleged that the petitioner, acting as a main person, indulged in circular trading of tax invoices only on paper without actual supply of goods.
The three units of petitioner situated at Uttarakhand, Haryana and Maharastra were issued notices under Sections 74 and 122 of the CGST Act. The demand included IGST under the provision of Section 74(1) of the CGST Act read with Section 20 of the IGST Act, 2017, interest under section 50(3), penalties under section 74(1), penalty under section 122(1)(ii) for issuance of tax invoices or bills for passing on irregular ITC without concomitant supply of goods, penalty u/s 122(1)(vii) for taking or utilizing Input Tax Credit without actual receipt of goods and penalty u/s 122(1)(x) and (xvi) of the CGST Act read with relevant provisions of IGST Act, 2017.
However, the department, with regard to show cause notice issued under Section 74 of the CGST Act, exonerated the petitioner’s unit situated at Uttarakhand on various other grounds.
Before the Hon’ble High Court, the Petitioner submitted that levy of penalty under Section 122 of the CGST Act attracts criminal liability and does not impose civil liability. In other words, Section 122 of the CGST Act, 2017 specifically deals with ‘offences’ and therefore the same has to be read with Section 134 of the CGST Act. Hence, he argues that penalty for such offences would have to be imposed by the criminal courts and cannot be adjudicated by the proper officer.
Secondly, it was submitted that proceedings under Section 122 cannot uphold its integrity subsequent to dropping of proceedings against the same person, that is, the petitioner under Section 74 of the CGST Act in view of Explanation 1(ii) to Section 74.
On the contrary, the Department submitted that Section 122 of the CGST Act attracts civil liability and not criminal as penalty in taxation matters subsumes civil liability. Furthermore, penalty provision prescribed under Section 122(1) is for offences committed by a taxable person and is different from penalty prescribed under the head ‘Chapter XV: Demand and Recovery’ that includes Sections 73/74. Issuance of tax invoice without actual supply of goods and utilisation of input tax credit without actual receipt of goods are different acts of omission and commission and hence penalty provisions under Section 122(1) of the CGST Act would be attracted. Secondly, with regard to abatement of proceedings under Section 122 in view of the explanation (1)(ii) to Section 74, it was submitted that a taxable person is liable for penalty under Section 122(1), if it violates the provisions of the CGST Act.
It was submitted that merely because no tax is demanded subsequent to dropping of proceedings under Section 74 by the department, it cannot exonerate the taxable person from the penalty for the wrongs committed by it under any of the sub-sections in Section 122(1), and therefore, Section 122(1) can very well be imposed.
The Hon’ble High Court perused the definitions of the term “offence”, “penalty” as per law dictionaries and as stated by the Hon’ble Supreme Court. The High Court conclude that the word ‘offence’ does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence. Similarly, ‘penalty’ is a slippery word and the same has to be understood in the context in which it is used in a given statute. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. However, there would be circumstances for certain offences, penalty may not be imposed and the same may be punishable by incarceration. Penalty may be imposed in cases where there is a simple violation of a law or for omission to do a particular act without there being any mens rea. On the other hand, penalty may also be imposed for serious contravention of the law with or without mens rea that may amount to an offence for the purpose of deterrence and punishment. A statute may provide for further punishment by prosecution for the same offence/contravention, if the legislature deems it necessary.
The Hon’ble High Court observed that Section 74 of CGST Act is clearly a charging and machinery provision for determination/quantification of tax and penalty while Section 122 is a penal provision in discouraging the tax payers from indulging in unlawful activities of various kinds, and accordingly, is a penal provision for deterring evasion of taxes.
The Hon’ble High Court opined that upon perusal of the various judgments and interpretation of statute, one may conclude that both Sections 74 and 122 being charging sections are required to be interpreted strictly and plain meaning to the word used therein should be provided by the courts. An absurd interpretation that makes the charging sections unworkable should be avoided. This does not mean that a person who is not liable to tax or to penalty should be roped into the charging provision simpliciter to curb evasion of taxes. However, the court is allowed to look at all the provision of the statute to bring about a harmonious construction and come to an interpretation which could make the statute workable. A word may have several meanings and the court may choose the meaning that could harmonise the entire statute instead of putting a meaning that would be contrary to the intention of the Legislature.
Upon perusal of the various judgments of the Hon’ble Supreme Court which dealt with penalty in tax delinquency cases, the Hon’ble High Court held that penalty may be imposed in cases where men rea is a requirement. It is the scheme of a particular statute that shall determine whether for imposition of penalty there is a requirement for men rea or not. However, when a taxing statute speaks of prosecution, for those offences mens rea or guilty intent is a sine qua non. The word penalty by itself will not be determinative to conclude the nature of proceedings being criminal or quasi criminal. It is crystal clear that in a particular statute penalty may be imposed for certain contraventions that do not require mens rea and in the same statute penalty may be imposed for contraventions which are far more serious in nature wherein mens rea would be a desideratum.
The Hon’ble High Court opined that since the petitioner was registered under the CGST Act, he would fall under the definition of taxable person as mentioned in the very opening sentence of Section 122 of the CGST Act. The argument that one would have to be first taxed under Sections 73/74 and only thereafter penalty can be imposed is fallacious in nature and is accordingly rejected. Under the present GST regime, persons who are not liable to pay tax under Sections 73/74 of the CGST Act may very well be liable for penalties as described in the twenty-one sub-sections of Section 122(1) and under sub-sections 122(2) and 122(3).
The Hon’ble High Court further observed that a plain reading of Section 2(38) of the General Clauses Act, 1897, and Section 2(n) of CrPC makes it clear that an offence is any act or omission made punishable by law for the time being in force. Punishment need not always be imposed by way of a criminal trial and it could very well be imposed by way of penalty.
The argument that penalty was also being imposed under Section 74 of the CGST Act and therefore no further penalty can be imposed u/s 122 of the CGST Act for the same contravention was rejected by the Hon’ble High Court holding that a perusal of Section 74, makes it crystal clear that the penalty imposed under this section is for non payment of tax or where tax had been short paid or erroneously refunded or where ITC has been wrongly availed of or utilised. Ergo, this penalty is very specific in nature in contradistinction to the penalties envisaged under Section 122 of the CGST Act that are far broader and for different actions/omissions that amount to contraventions, not necessarily covered under Section 74 of the CGST Act.
The Petitioner had also contended that seval sub sections in Section 122 (penalty for certain offences) and Section 132 (punishment for certain offences) of the CGST Act are identical and therefore the same can only be done by way of conviction under Section 122 of the CGST Act read with Section 134 of the CGST Act. However, the Hon’ble High Court observed that perusal of offences under Section 132, it is patently clear that these offences are far more serious in nature and therefore the legislature has chosen to impose criminal punishment for the same. Before imposing any such punishment, Section 132(6) specifically states that a person shall not be prosecuted for any of the offences provided in the section except with the previous sanction of the Commissioner. This requirement is clearly absent in Section 122 of the CGST Act. Also, Section 138 of the CGST Act relating to compounding of offences, which deals with offences that may be compounded but provides for a proviso which is an indication that the legislature never intended to treat Section 122 as an offence prosecutable and punishable by way of a criminal trial.
The Petitioner also relied upon CBIC Circular No.3/3/2017- GST dated July 7, 2022 wherein the Board had assigned the proper officer for adjudication in relation to various sections of the CGST Act but has intentionally excluded the proceedings under Section 122 for prosecution by criminal courts. He has further submitted that Section 122 does not contain any reference to proper officer and therefore it implies these proceedings can only be carried out in a criminal court.
The Hon’ble High rejected the above argument and observed that Section 74 of the CGST Act clearly indicates that it is the proper officer who initiates the proceedings under Sections 73 and 74 is also the person who is initiating the proceedings under Sections 122 and 125 as the explanation provides for proceedings against the persons liable to pay penalty under Sections 122 and 125 are deemed to be concluded when the proceedings against the main person charged under Sections 73 and 74 are concluded. Also, Explanation 1(i) to Section 74 of the CGST Act categorically states that the expression “all proceedings in respect of the said notice” shall not include proceedings under Section 132 of the CGST Act. Inclusion of this particular sub-clause can only be interpreted to mean that the legislature’s intention was to exclude the criminal proceedings which dealt with punishment for offences. On the other hand, it is an indication that a penalty under Section 122 of the CGST Act would fall within the proceedings in respect of a notice issued under Section 74, if so desired by the proper officer. Sub-clause (ii) of the explanation further buttresses the argument of the respondent that conclusion of a proceedings under Sections 73 or 74 against the main person would conclude proceedings against all other persons liable to pay penalty under Section 122 of the CGST Act.
The Hon’ble High Court also held that in a particular case when a show cause notice is issued against the main person under Section 73/74 and also against the main person under Section 122, dropping of proceedings under Section 73/74 would not automatically result in dropping of proceedings under Section 122 against the main person as the proceedings are with respect to contravention of two different offences
As a result, the Hon’ble High Court held that the proceeding under Section 122 of the CGST Act is to be adjudicated by the adjudicating officer and is not required to undergo prosecution and also abatement of proceedings under Section 74 of the CGST Act does not ipso facto abate the proceedings under Section 122 which are for completely different offences.
The Hon’ble High Court held that Section 122 of the CGST Act is a provision specifically for imposition of penalty to be adjudicated by the proper officer while the provisions from Sections 132 to 138 deal with prosecution to be done by the criminal courts. Moreover, as discussed above, conclusion of proceedings on the main person under Section 74 of the CGST Act shall not ipso facto abate the proceedings under Section 122 of the CGST Act proposed to be imposed on the main person. The scheme of the CGST Act read with CGST Rules lead one to the inescapable conclusion that the arguments raised by the petitioner, though innovative and thought provoking, are fallacious as the interpretation given by the petitioner would lead to obfuscation of the very purpose and objective of the CGST Act.
Accordingly, the Writ Petition was dismissed.
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