The Allahabad High Court on May 29 dismissed Patanjali Ayurved Limited's challenge to a ₹273.5-crore Goods and Service Tax (GST) penalty. .The Bench comprising Justices Shekhar B Saraf and Vipin Chandra Dixit rejected Patanjali's argument that such penalties constitute criminal liability and can be imposed only after a criminal trial.The Court held ruled that tax authorities can impose penalties under Section 122 of the GST Act through civil proceedings without requiring criminal court trials.The judgment clarified that GST penalty proceedings are civil in nature and can be adjudicated by proper officers."After detailed analysis, it is clear 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," the Court said..Patanjali Ayurved Ltd. operates three manufacturing units at Haridwar (Uttarakhand), Sonipat (Haryana) and Ahmednagar (Maharashtra). The company came under investigation following information received by authorities about suspicious transactions involving firms with high Input Tax Credit (ITC) utilisation but no income tax credentials.The investigation led to allegations that Patanjali "acting as a main person, indulged in circular trading of tax invoices only on paper without actual supply of goods." The Directorate General of Goods and Services Tax Intelligence (DGGI) issued a show cause notice on April 19, 2024 proposing a penalty of ₹273.51 crore under Section 122(1), clauses (ii) and (vii) of the Central Goods and Service Tax Act 2017.However, in a significant development, the department subsequently dropped tax demands under Section 74 through an adjudication order dated January 10, 2025. The department found that "for all the commodities, the quantities sold were always more than the quantities purchased from the suppliers, thereby making the observation that all the ITC which was availed in the impugned goods was further passed on by the petitioner."Despite dropping the tax demand, authorities decided to continue with penalty proceedings under Section 122, prompting Patanjali to challenge this before the High Court. The company argued that penalties under Section 122 are criminal in nature and can be imposed only by criminal courts after a trial, not by departmental officers. This prompted Patanjali to move the Allahabad High Court. .The Court extensively analysed the nature of Section 122 penalties and concluded they are civil proceedings. "The term 'penalty' has also been given a broad definition by the law dictionaries and the Supreme Court judgments wherein it is stated that the term 'penalty' is used very loosely in statutes in some cases and may be held to embrace all the consequences visited by law for an infringement of the law," Justice Saraf observed.The Court distinguished between civil and criminal penalties by relying on the Supreme Court judgment in Gujarat Travancore Agency case."A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws," it said..The Court also rejected Patanjali's argument that Section 122 doesn't mention "proper officer" and therefore, requires criminal court adjudication."Explanation 1(ii) to 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," the Court held.The judgment further clarified that Rule 142(1)(a) of CGST Rules categorically states that a proper officer shall serve along with the notice issued under Sections 52/73/74/76/122/123/124/125/127/129/130, a summary of the same electronically in form GST DRC-01."The above clearly indicates the intention of the legislature that the proper officer is required to issue show cause and thereafter adjudicate and pass order under Section 122 of the CGST Act and nothing further remains in doubt.".The Court analysed the structure of the GST Act to distinguish between penalty and punishment provisions. .On the issue of whether dropping Section 74 proceedings automatically terminates Section 122 penalties, the Court ruled they are independent. "The contravention under Section 73/74 need not necessarily be a contravention covered under Section 122 of the CGST Act and the proceedings are with respect to contravention of two different offences," the Bench made it clear..The Court noted that Section 122 is a penal provision aimed at curbing evasion of taxes and discouraging unlawful activities with regard to supplying goods without invoice, issuing fake invoices, non payment of tax to government after collection, non deduction or non remittance of tax, claiming wrongful input tax credits or fraudulently obtaining tax refunds.Deterrence is the main theme or object behind the imposition of penalty and, therefore, it is not possible to say that in the instant case the provision of Section 10(3) infringes Articles 14 and 19(1)(g) of the Constitution, the Bench concluded while dismissing he plea..Patanjali Ayurved was represented by Senior Advocate Arvind Datar with advocates Ashwarya Sharma, Nishant Mishra, Devansh Srivastava, Kinjal Shrivastava, Vedika Nath and Yashonidhi Shukla..CGST was represented by Additional Solicitor General N Venkataraman with Advocates Parv Agarwal, NC Gupta and Gaurav Mahajan..[Read Judgment]
