Personal Penalty under Section 122(1A) CGST Act: Bombay High Court Reins in Revenue’s Attempt to Fasten GST Liability on Company Executives
Summary: The Bombay High Court in Amit Manilal Haria & Ors. v. Joint Commissioner, CGST & Central Excise held that Section 122(1A) of the CGST Act cannot be invoked mechanically against directors, CEOs, CFOs, or other company officials merely because proceedings have been initiated against the company. The Court ruled that the Revenue must establish two mandatory conditions before imposing a personal penalty: the individual must have retained the benefit of the impugned transaction and the transaction must have been undertaken at that individual’s instance. Mere designation or participation in company affairs is insufficient to create personal liability, as the CGST Act does not recognize a general principle of vicarious liability under Section 122. The Court also held that Section 122(1A), introduced with effect from 1 January 2021, cannot be applied retrospectively to earlier transactions, reaffirming the protection against retrospective penal provisions under Article 20(1) of the Constitution. Consequently, the collective penalty exceeding Rs. 400 crore imposed on company officials was held to be legally unsustainable.
Key Takeaways
Section 122(1A) cannot be mechanically invoked against directors, CFOs, CEOs or employees merely because proceedings are initiated against the company without establishing following two conditions.
Revenue must establish both statutory conditions under Section 122(1A):
– The individual retained the benefit of the impugned transaction; and
– The transaction was conducted at such individual’s instance.
The Court reaffirmed that provisions of the CGST act and rules framed thereunder does not create a general principle of vicarious liability for employees or officers under Section 122.
– Penalty provisions introduced from 1st January 2021 cannot be retrospectively applied to earlier periods in light of Article 20(1) of the Constitution.
– A penalty demand of over ₹400 crore collectively imposed on company officials where no finding existed regarding personal benefit lacks also hereby principle of proportionality, was held unsustainable.
Background
The Department alleged that the company had availed inadmissible input tax credit and raised fake invoices without corresponding supplies, resulting in wrongful availment and passing of ITC. In respect to same proceedings were initiated against the company and parallel show cause notices were issued to its senior management personnel, namely the CFO, CEO and Joint Managing Director.
The adjudicating authority imposed a penalty of approximately ₹133.60 crore on each individual under Section 122(1A), aggregating to more than ₹400 crore. The basis of the penalty was the allegation that the executives had derived benefit from transactions involving fake invoices and inadmissible ITC. Thereupon, the officer of the company i.e. M/s. Shemaroo Entertainment Limited challenged the order of adjudicating authority before the Hon’ble Bombay High Court.
Core Legal Issue
Whether directors and senior employees of a company can be subjected to penalties under Section 122(1A) of the CGST Act over and above the penalty imposed upon the taxable person u/s 122(1) of act solely because the company allegedly availed inadmissible ITC or engaged in fake invoicing, without establishing that such individuals personally retained the benefit of the transactions and caused such transactions to be undertaken. Furthermore, application of provisions of the section 122(1A) with retrospective with came into force from 1st January 2021.
Petitioners’ Key Arguments
1. Jurisdictional Error: Demand Pertains
to the Taxable Person, Not Employees
– The principal challenge was that the petitioners were merely officers, employees of the company and not the taxable person against whom the GST demand was raised. Section 122(1A) could not be invoked against individuals who were not taxable persons in relation to the disputed transactions.
– The petitioners contended that the Department was attempting to convert a corporate tax dispute into a personal liability of employees without statutory sanction. It was further contended by the petitioners that jurisdiction for invoking provisions of Section 122(1A) of the CGST Act, shall be applicable only to the ‘taxable persons’ as defined under Section 2(107) of the CGST Act and not to a ‘person’ as defined under Section 2(84) of the CGST Act.
Significance
This argument strikes at the foundation of many ongoing investigations where notices are routinely issued to directors and key managerial personnel merely because they held positions of responsibility.
2. Grossly Disproportionate Penalty
The impugned order sought to recover an aggregate amount exceeding ₹400 crore from the petitioners. The petitioners argued that the alleged tax dispute pertained to the company i.e. Taxable Person, and thereupon recovery of such enormous amounts from employees was wholly disproportionate and arbitrary.
Practical Dimension
A contrary interpretation would expose every CFO, director and finance head to personal recovery proceedings equivalent to the entire disputed tax amount of the company.
3. No Retrospective Application of Section 122(1A)
A particularly important challenge related to temporal applicability. Section 122(1A) was inserted and made effective from 1 January 2021. However, the show cause notice covered periods commencing from July 2017. The petitioners argued that a penal provision cannot be retrospectively applied. Reliance was placed on Article 20(1) of the Constitution which prohibits imposition of penalties under a law that was not in force when the alleged act occurred.
Why This Matters
Several GST investigations involving fake invoicing span periods from 2017 onward. This ruling provides a strong constitutional defence where Section 122(1A) is sought to be applied before its effective date. However, it is prominent to note that protection of article 20 does not cover civil offences.
4. Derivative Nature of Section 122(1A)
The petitioners also emphasized that Section 122(1A) does not operate independently. The provision is linked to offences falling under clauses (i), (ii), (vii) and (ix) of Section 122(1). Therefore, the adjudicating authority must first establish the foundational ingredients of those provisions before independently penalizing another person under Section 122(1A). i.e. individual retained the benefit of the impugned transaction; and the transaction was conducted at such individual’s instance.In absence of a valid finding regarding issuance of invoices without supply or wrongful availment of ITC, penalty under Section 122(1A) could not survive.
5. Violation of Natural Justice
Another prominent submission by the petitioner was that show cause notices covered assessment period from July 2017 to March 2022. However, the final adjudication order allegedly travelled beyond the notice period and sought to impose consequences till July 2023. In respect to such expansion of scope without fresh notice or hearing would tantamount proceedings to be ultra vires and violative of natural justice.
Findings of the Bombay High Court
Section 122(1A) Requires Satisfaction of Two Mandatory Conditions The Court undertook a detailed examination of Section 122(1A) and identified two cumulative requirements:
1. The individual must have retained the benefit of the transaction; and
2. The transaction must have been conducted at that individual’s instance.
The use of the word “and” in the provision was held to be decisive. Mere
involvement in company affairs would not automatically satisfy these
conditions.
Conclusion
The Bombay High Court has delivered a significant taxpayer-friendly ruling by holding that Section 122(1A) cannot be used as a sweeping tool for personalizing corporate GST liabilities. Unless Revenue establishes that an individual personally retained the benefit of the impugned transaction and that the transaction occurred at such person’s instance, the jurisdictional foundation for penalty collapses. Further, the Court’s reaffirmation of the constitutional prohibition against retrospective penal liability serves as an important safeguard against overbroad use of GST penalty provisions.
Bottom Line:
Section 122(1A) is not a mechanism for automatic personal liability of company officials; it is a narrowly drafted anti-abuse provision whose conditions must be strictly proved.
√ Contrary Judgement passed by Guwahati High court: Mayank Bansal v. Union of India
The Guwahati High Court has held that partners of a partnership firm can be subjected to personal penalty under Section 122(1A) of the CGST Act, 2017 where the alleged tax evasive transactions were undertaken at their instance and the benefits thereof were retained by them. The Court also held that the said provision can be invoked even in respect of transactions undertaken prior to its introduction on 1 January 2021, provided the proceedings were initiated after the provision came into force.
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