Introduction to the CGST Act and Section 122(1A)
The Goods and Services Tax (GST) system in India is nearing its ten-year milestone, yet certain provisions continue to undergo legal scrutiny. One such provision, Section 122(1A) of the Central Goods and Services Tax (CGST) Act, has sparked significant debate and judicial examination. This section, effective from January 1, 2021, is being utilized by tax authorities to impose penalties on various stakeholders of a company or firm, including partners, directors, and employees, even for periods before the provision’s enactment.
Legal Challenges and Court Considerations
The application of Section 122(1A) spurred legal challenges across multiple courts, raising key questions: Is it permissible to levy penalties on partners, employees, or directors under this section? Furthermore, can such penalties be imposed retroactively, prior to January 1, 2021?
Understanding Section 122(1A)
Section 122(1) of the CGST Act originally addressed penalties for ‘taxable persons’ committing specific offenses. The introduction of sub-section (1A) empowers authorities to penalize ‘any person’ who benefits from or instigates certain transactions. This broadened scope has led to its controversial application.
Department’s Invocation of Section 122(1A)
The tax department has interpreted Section 122(1A) as a tool to initiate penalty proceedings against individuals associated with taxable entities. Notably, penalties have been proposed for periods from July 1, 2017, to December 31, 2020, before the provision was enacted, prompting legal battles in various High Courts.
Contrasting High Court Rulings
The Bombay High Court, in cases like Sanjay Hundekari and Amit Haria, ruled in favor of the assessees. The court opined that ‘any person’ in Section 122(1A) should be interpreted in relation to ‘taxable persons’ as defined in Section 122(1), thus precluding penalties on directors, employees, and partners individually. It further stated that retrospective application of the provision would contravene Article 20(1) of the Indian Constitution.
Conversely, the Delhi High Court held a broader interpretation, affirming that penalties under Section 122(1A) could extend to individuals, as the term ‘person’ in Section 2(84) of the CGST Act encompasses more than just ‘taxable persons’. The court also supported the retrospective application of the section. This matter is currently pending before the Supreme Court.
Similarly, the Gauhati High Court sided with Delhi’s decision, endorsing penalties on partners from a retrospective date.
Analysis and Conclusion
Despite legislative capability to amend laws retrospectively, Section 122(1A) was introduced prospectively, aligning with established legal principles that penal provisions should not be applied retroactively unless clearly intended by the legislature.
The Delhi and Gauhati High Courts’ interpretations potentially expand Section 122(1A)’s scope beyond legislative intent. Their decisions did not consider whether Section 122(3), effective since GST’s inception, might cover these scenarios.
With varying High Court decisions and unexamined statutory provisions, the Supreme Court’s ruling will be pivotal. Meanwhile, the tax department must substantiate that the penalized individual retained transaction benefits and instigated the transaction. The accused will have the opportunity to refute these claims.
About the authors: Yogendra Aldak is an Executive Partner, and Yatharth Tripathi is a Senior Associate at Lakshmikumaran & Sridharan Attorneys.
Disclaimer: The views expressed are those of the authors and do not necessarily reflect the views of Bar & Bench. For publication requests, please fill the form available here.
