Bombay HC : Section 122(1A) of GST Act Penalty Cannot Be Imposed on Company Employees

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Penalty under Section 122(1A) of the CGST Act cannot be imposed on employees

The Bombay High Court has held that penalty under Section 122(1A) of the Central Goods and Services Tax Act, 2017 can be imposed only on a “taxable person” and not on employees of a company who are not registered or liable to be registered under the Act. Allowing a writ petition filed by senior officials of a company, the Court quashed penalties of ₹133.60 crore each imposed on them for alleged fake input tax credit transactions.

The Division Bench ruled that Section 122(1A) contains specific jurisdictional requirements, including that the person must have retained the benefit of the transaction and that such transaction must have been conducted at their instance. In the absence of any material establishing these conditions, the invocation of the provision against the petitioners was held to be without jurisdiction. The Court further clarified that the expression “any person” in Section 122(1A) must be read in the context of violations attributable to a “taxable person” under Section 122(1).

Importantly, the Court also held that Section 122(1A), introduced with effect from 1 January 2021, cannot be applied retrospectively to periods prior to its enactment, as such application would violate Article 20(1) of the Constitution. The impugned order was accordingly set aside to the extent it related to the petitioners.

Facts of the Case

  • The petitioners are employees/officers (CFO, CEO, Joint Managing Director) of M/s. Shemaroo Entertainment Ltd., a company incorporated under the Companies Act, 1956.
  • A search was initiated on 5 September 2023 under Section 67(2) of the CGST Act against four firms, leading to investigation against the company based on statements of a partner of those firms.
  • The company’s premises were searched, and the petitioners’ statements were recorded on 6 September 2023; they were arrested for alleged offences under Section 132(1)(b) and 132(1)(c) of the CGST Act, and granted bail on 7 September 2023. Their statements were retracted before the Magistrate.
  • Further summonses were issued, and the company deposited Rs. 12 crores under protest in Form GST DRC-03.
  • The company filed representations denying allegations of fake invoicing and circular trading. Prosecution was lodged against the company and petitioners under Sections 132(1), 132(5), and 137 of the CGST Act.
  • On 2 August 2024, show cause notices were issued to the company and separately to the petitioners for the period FY 2017-18 to FY 2021-22, alleging wrongful availment and passing on of ITC and proposing penalties under Section 122(1A).
  • The company and petitioners filed replies, relying on the decision in Shantanu Sanjay Hundekari v. Union of India.
  • After a personal hearing, the impugned order-in-original dated 1 February 2025 imposed penalties of Rs. 133,60,60,889/- each on the petitioners under Section 122(1A).
  • The petitioners challenge the impugned order in this writ petition, seeking its quashing on grounds of lack of jurisdiction, ultra vires Section 122, and violation of principles of natural justice.

Contentions of the Parties

Petitioners

  • Petitioners are employees, not registered as taxable persons under the CGST Act; Section 122(1A) is inapplicable to them.
  • Jurisdictional error in issuing show cause notices and imposing penalties on employees for company’s alleged tax liability.
  • Section 122(1A) applies only to ‘taxable persons’ as per Section 2(107), not to ‘person’ under Section 2(84).
  • Penalty is disproportionate and unsustainable, as petitioners derived no personal benefit.
  • Section 122(1A) was brought into force prospectively from 1 January 2021; its retrospective application is unconstitutional and barred by Article 20(1) of the Constitution.
  • Imposition of personal penalties is excessive and contrary to precedent in Shantanu Sanjay Hundekari, confirmed by the Supreme Court.
  • Section 122(1A) is derivative and conditional; preconditions not established in the impugned order.
  • Impugned order covers a period beyond the show cause notice, violating natural justice.
  • Failure to consider binding precedent vitiates the impugned order.

Respondents

  • Impugned order does not exceed the period of the show cause notice; any typographical error was corrected by corrigendum.
  • Section 122(1A) is an integral part of the CGST Act and was in effect at the relevant time; correctly invoked against petitioners.
  • Petitioners, by virtue of their positions, controlled and managed the company and were responsible for the alleged fraudulent transactions.
  • Penalty can be imposed on ‘any person’ under Section 122(1A), including non-taxable persons, as per Section 2(84).
  • Reliance on Shantanu Hundekari is misplaced; facts are distinguishable.
  • No bar under the CGST Act to issue consolidated show cause notices and orders for multiple years within limitation.
  • Alternative remedy available; writ petition should not be entertained.

Issues

  • Whether the impugned show cause notices and order-in-original imposing penalties on the petitioners under Section 122(1A) of the CGST Act are bad, illegal, and invalid for want of jurisdiction.
  • Whether Section 122(1A) can be retrospectively applied for periods prior to its enactment (before 1 January 2021).
  • Whether the impugned order is vitiated by failure to consider binding precedent and by violation of principles of natural justice.

Decision

A. Statutory Framework and Applicability of Section 122(1A) (paras 19–24)

  • Section 122(1) applies to a ‘taxable person’ as defined under Section 2(107) of the CGST Act, i.e., a person registered or liable to be registered under Section 22 or 24. (p21)
  • Section 122(1A) stipulates a two-fold requirement: (i) any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii), or (ix) of sub-section (1); and (ii) at whose instance such transaction is conducted. Both requirements must be fulfilled for jurisdiction to invoke Section 122(1A). (p22)
  • The violations under clauses (i), (ii), (vii), or (ix) are attributable to a ‘taxable person’. Thus, unless the petitioners are taxable persons, they cannot be held liable under Section 122(1A). (p23)
  • The term “any person” in Section 122(1A) must be understood in the context of a ‘taxable person’ as per the structure of Section 122. (p24)

B. Application to the Petitioners and Precedent (paras 25–27)

  • The petitioners, as employees (CFO, CEO, Joint Managing Director) of the company, cannot be held liable for penalty under Section 122(1A) as they are not taxable persons. (p25)
  • The decision in Shantanu Sanjay Hundekari v. Union of India is squarely applicable. In that case, the Court held that Section 122(1A) applies only to taxable persons and not to employees, and that there was no vicarious liability under the CGST Act. The Supreme Court dismissed the Revenue’s SLP, confirming the High Court’s view. (p25–26)
  • No material or finding in the impugned order shows that the petitioners retained the benefit of the transactions or that the transactions were conducted at their instance. The jurisdictional requirements of Section 122(1A) are not satisfied. (p27)

C. Retrospective Application of Section 122(1A) (paras 29–30)

  • Section 122(1A) was incorporated with effect from 1 January 2021. The impugned order seeks to impose penalties for the period July 2017 to July 2023, including periods prior to 1 January 2021. (p29)
  • Retrospective application of a penal provision is impermissible under Article 20(1) of the Constitution. A person cannot be penalized under a law not in force at the time of the alleged act. Thus, the impugned order, insofar as it applies Section 122(1A) retrospectively, cannot be sustained. (p30)

D. Reliance on Other Precedents and Alternative Remedy (paras 31)

  • Reliance by the respondents on Mukesh Kumar Garg v. Union of India is misplaced, as that case did not consider the jurisdictional issue under Section 122(1A) as in Shantanu Sanjay Hundekari. (p31)
  • The issue in the present case is one of jurisdiction, not merely factual adjudication, and thus is amenable to writ jurisdiction. (p31)

E. Final Determination (paras 32–33)

  • The show cause notices and impugned order-in-original against the petitioners are illegal and without jurisdiction. The petition succeeds in terms of prayer clause (a). (p32)
  • No order as to costs. (p33)

Conclusion

The Court concluded that the impugned show cause notices and order-in-original imposing penalties on the petitioners under Section 122(1A) of the CGST Act are without jurisdiction, illegal, and unsustainable, as the petitioners are not taxable persons and the jurisdictional requirements of Section 122(1A) are not met. The retrospective application of Section 122(1A) is also impermissible. The writ petition is allowed, and the impugned order is quashed to the extent it relates to the petitioners.

Disposition

Writ petition allowed. The impugned order dated 1 February 2025 is declared to be without authority of law, without jurisdiction, and unsustainable in law to the extent it has been issued to the petitioners; the impugned order is quashed and set aside as against the petitioners.

Source: Amit Manilal Haria and Ors. v. Joint Commissioner CGST & Central Excise and Anr., (2026) taxcode.in 455 HC

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