One provision, divergent views: Retrospective penalty under Section 122(1A) CGST Act

The GST regime is about to complete a decade. However, certain provisions of the GST law continue to be exposed to judicial scrutiny and interpretation. One such provision is Section 122(1A) of the CGST Act. Though this provision was inserted in the statute book with effect from January 1, 2021, the tax department is invoking this provision to impose penalty on partners, directors, employees, etc. of a company/firm, even for a period prior to the date when such provision was brought into effect.

Such actions on the part of the department were challenged before various Courts. In this context, the questions that arose for consideration before Courts were two-fold: Can penalty be imposed on partners / employees / directors under Section 122(1A) of the CGST Act? If yes, can it be imposed from a retrospective period, i.e. before the provision was brought into effect?

Section 122(1) provides for the imposition of a penalty on a ‘taxable person’ for various offences/contraventions mentioned in that provision. This provision was amended with effect from January 1, 2021 and a new sub-section (1A) was inserted, which purports to empower the department to impose a penalty on ‘any person’: 

a. who retained the benefit of the transactions covered under specified clauses of Section 122(1) of the CGST Act; and

b. at whose instance, the disputed transactions were conducted.

The department considered newly inserted sub-section (1A) of Section 122 as an enabling provision that empowers them to initiate penalty proceedings against individuals connected with taxable persons. Interestingly, the department started invoking the said provision proposing a penalty on partners, employees, directors, etc. of the taxable person, even for the period July 1, 2017 to December 31, 2020, when the said provision was not even in force.

These retrospective penal proceedings came to be challenged before different High Courts. It is worth noting that the views taken by different High Courts on these issues are not uniform.

Bombay High Court

The controversy came up before the Bombay High Court in the cases of Sanjay Hundekari and Amit Haria. After a holistic examination of the statutory scheme, the High Court ruled in favour of the assessees. It held that the expression ‘any person’ under Section 122(1A) has to be read in the context of ‘taxable person’, as provided in Section 122(1) of the CGST Act. Thus, penalty under Section 122(1A) cannot be imposed on directors, employees, partners, etc., in their individual capacity. It was further held that newly inserted sub-section (1A) of Section 122 would apply prospectively (i.e. from January 1, 2021), as its retrospective applicability would be violative of Article 20(1) of the Constitution of India.

Delhi High Court

The Delhi High Court differed with the Bombay High Court and held that penalty under Section 122(1A) can be imposed on any person, including individuals, i.e. directors/partners/employees, as the term ‘person’, as defined under Section 2(84) of the CGST Act, is wider than the term ‘taxable person’. Further, the High Court also upheld retrospective applicability of Section 122(1A) even for the period when the said provision was not in force. Notably, the issue regarding retrospective applicability of Section 122(1A) is presently pending before the Supreme Court.

Gauhati High Court

In a recent decision, the Gauhati High Court agreed with the findings of the Delhi High Court and upheld the imposition of a penalty on partners under Section 122(1A), that too from a retrospective date.

It is worth noting that the legislature inserted Section 122(1A) only with effect from January 1, 2021. Despite having power to amend provisions retrospectively, the legislature deemed it fit to insert a penal provision from a prospective period. This is also in line with the settled jurisprudence that penal provisions should be construed strictly and should not be applied retrospectively, unless the legislative intent indicates otherwise.

The judgments passed by the Delhi High Court and Gauhati High Court have undoubtedly expanded the scope of Section 122(1A). Such expansive interpretation given by the High Court(s) appears to be contrary to the clear legislative intent and settled jurisprudence, as discussed hereinbefore.

Further, the High Courts upheld retrospective applicability of Section 122(1A) without examining if such situations would be covered by Section 122(3), which is in force since the inception of GST law.

Considering the contradictory decisions of different High Courts and considering the fact that certain statutory provisions were not brought before the High Court, it would be interesting to see outcome of this issue before the Supreme Court.

In any event, before imposing the penalty under Section 122(1A), the department will have to demonstrate that the person, which is sought to be penalized, had “retained the benefit” of a transaction and “at his instance” the said transaction was conducted. The department will have to produce sufficient evidence to establish the factum of retention of benefit by such person. Besides, at the time of adjudication, the person sought to be penalized will also get the opportunity to demonstrate/establish that there was no retention of benefit on its part and therefore, penalty under Section 122(1A) is inapplicable.

About the authors: Yogendra Aldak is an Executive Partner and Yatharth Tripathi is a Senior Associate at Lakshmikumaran & Sridharan attorneys.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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