GST Penalties Under Section 122

Allahabad High Court Rules: GST Penalties under Section 122 are Independent of Section 74 Proceedings

The recent judgment by the Allahabad High Court in the case of Patanjali Ayurved Ltd. vs. Union of India has sent a clear message to businesses and tax professionals alike. The ruling addresses a critical and often-debated issue under the GST framework: the independence of penalty proceedings under Section 122 from tax evasion proceedings under Section 74. This landmark decision clarifies that even if tax demands are dropped, companies may still face significant penalties for offenses like issuing fake invoices or circular trading. This article will break down the court's reasoning, explain the key distinctions between these two sections, and discuss the far-reaching implications of this verdict for your legal and compliance strategy.

Allahabad High Court Judgment Summary

PATANJALI AYURVED LTD.

Versus

UNION OF INDIA

Writ Tax No. 1603 of 2024, decided on 29-5-2025

• The Allahabad High Court addressed a writ petition (Writ Tax No. 1603 of 2024) concerning penalties under the CGST Act, specifically Section 122, related to circular trading of tax invoices by Patanjali Ayurved Ltd.
• The court held that concluding proceedings under Section 73/74 against an assessee does not automatically nullify penalty proceedings under Section 122, as these sections address different offences.
• The court favored the revenue, supporting the independence of penalty proceedings for offences like issuing fake invoices.

Background and Relief Sought

• Patanjali Ayurved Ltd. faced a show cause notice proposing a penalty of Rs. 273.51 crore under Section 122 (1), clauses (ii) and (vii) of the CGST Act for alleged circular trading of tax invoices.
• The petitioner sought a writ of certiorari to quash the penalty outlined in the show cause notice.
• The investigation alleged that Patanjali Ayurved, as the main entity, engaged in circular trading of tax invoices without actual supply of goods through its units in Uttarakhand, Haryana, and Maharashtra.

Factual Developments

• Notices were issued to Patanjali's units under Sections 74 and 122 of the CGST Act, alleging circular trading of tax invoices without the actual supply of goods.
• The respondent authority later set aside demands and dropped proceedings under Section 74 of the CGST Act against the petitioner, proposing only penal action.
• The petitioner contested the penalty under Section 122, arguing it could not be invoked without first determining tax under Section 73/74 and only after a conviction under Section 132.

Detailed Findings

• The department took into account the product-wise books of accounts of the petitioner showing details of purchased and sold quantities of the goods during the impugned period wherein it was observed by the department 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.
• The department, with regard to show cause notice issued under Section 74 of the CGST Act, has decided to exonerate the petitioner's unit situated at Uttarakhand on various grounds, including that the show cause notice did not specify consignment of particular suppliers as fake.
• The court had granted an interim stay to proceedings under Section 122 of the CGST Act and had given time to the petitioner to file its reply with regard to impugned show cause notice issued under Section 74 of the CGST Act.

Petitioner's Arguments

• The petitioner argued that Section 122 of the CGST Act is criminal in nature, requiring a determination of tax evasion under Section 73/74 before penalties can be imposed.
• It was contended that the term "offence" in Section 122 aligns with definitions in the General Clauses Act, 1897, and the Code of Criminal Procedure, necessitating governance by Section 4(2) of the CrPC.
• The petitioner claimed that since Section 74 addresses revenue loss with penalties, Section 122 must be for more serious offences, attracting criminal proceedings, especially with identical subsections between Sections 122 and 132.

Further Arguments by the Petitioner

• The use of the phrase "wilful misstatement or suppression of facts to evade tax" in Section 122 implies the need for a criminal trial to establish mens rea.
• The CBIC Circular No.3/3/2017-GST excludes proceedings under Section 122 from prosecution by criminal courts and lacks reference to a proper officer, suggesting these proceedings should undergo prosecution by criminal courts.
• The petitioner argued that the word 'penalty' does not automatically indicate civil liability and its character depends on the context and legislative intent.

Respondent's Contentions

• The respondent argued that Section 122(1) targets offences committed by taxable persons, differing from penalties in Sections 73/74.
• Tax demands under Section 74 and penalties under Section 122 are for separate offences, such as issuing invoices without supplying goods or utilizing input tax credit without receiving goods.
• The respondent argued that penalties in taxation are civil liabilities, aimed at preventing revenue loss, and that Section 122 is an anti-evasion measure not requiring criminal intent.

Elaboration of Respondent's Arguments

• The respondent asserted that penalty is a civil liability based on preponderance of probability, while criminal offences require proof beyond reasonable doubt.
• Explanation 1 to Section 74 clarifies that proceedings under Section 132 (criminal in nature) are separate, and if the legislature intended Section 122 to be criminal, it would have been included with Section 132 in Explanation 1(i).
• Explanation 1(i) to Section 74 deems closure of proceedings under Sections 122 and 125 (general penalty) if proceedings against the main person are concluded under Section 73 or 74.

Respondent's Arguments on Proper Officer and Intent

• The respondent argued that the absence of "proper officer" reference in Section 122 does not make it criminal, providing an illustration of how Section 122 applies to individuals besides the main person.
• The respondent contended that whenever Section 74 is invoked alongside Section 122, the proper officer under Section 74 can issue show cause notices and adjudicate.
• Sections 122 to 127 are general layout sections regarding when a penalty can be imposed, and the reference or non-reference to a proper officer does not determine whether a provision is a civil liability or criminal in nature.

Issues for Consideration

• Whether the "Proper Officer/Adjudicating Officer" has the power to adjudicate on the penalty provision provided under Section 122 of the CGST Act.
• Whether dropping of proceedings under Section 74 of the CGST Act, 2017 will ipso facto abate the proceedings under Section 122 of the CGST Act.

Relevant Provisions

• The court outlined the definitions and relevant sections of the CGST Act, including Sections 2, 74, 83, and 122, to establish the legal framework.
• Section 74: Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.
• Section 122: Penalty for certain offences.

Elaboration of Relevant Provisions

• Section 122: Penalty for certain offences.
• Section 124: Fine for failure to furnish statistics.
• Section 125. General penalty.

Continuation of Relevant Provisions

• The court presented sections of the CGST Act that outline various offences, penalties, and punishments, including provisions for imprisonment and fines for specific violations.
• Section 128: Power to waive penalty or fee or both.
• Section 131: Confiscation or penalty not to interfere with other punishments.

Concluding Relevant Provisions

• Section 132: Punishment for certain offences.
• Section 134: Cognizance of offences.
• Section 138. Compounding of offences.

Analysis Overview

• The court outlined the main arguments from both sides, focusing on whether Section 122 attracts criminal or civil liability and whether dropping Section 74 proceedings affects Section 122 proceedings.
• The petitioner argues Section 122 attracts criminal liability and its proceedings are terminated once proceedings under Section 74 are dropped.
• The respondent argues Section 122 attracts civil liability and its proceedings are independent of proceedings under Section 74.

Meaning of 'Offence' and 'Penalty'

• The court examines the definitions of "offence" and "penalty" using Black's Law Dictionary and P Ramanatha Aiyar's The Law Lexicon.
• 'Offence' is defined as a violation of the law, a crime, or a transgression, while 'Penalty' is described as a punishment imposed for a wrong, often a fine or imprisonment.
• The court cites that 'Penalty' can mean recovery of an amount as a penal measure even in civil proceedings.

Detailed Definitions of 'Offence' and 'Penalty'

• 'Penalty' is described as a punishment inflicted by law for its violation or a sum of money imposed by statute as punishment for an offence.
• The definition of 'Penalty' in P Ramanatha Aiyar's, 'The Law Lexicon' (6h Edition) states that it can be punishment in taxation matters as it may attract civil liability or criminal liability.
• The word "Penalty" for the purpose of section 288(4) contemplates a penalty imposed for an actual infringement and not deemed infringement.

Supreme Court's Interpretation of 'Offence'

• The Supreme Court judgment in Standard Chartered Bank defined "offence" as the commission of an act contrary to or forbidden by law, not confined to the commission of a crime alone.
• The expression "offence" as defined in Section 3(38) of the General Clauses Act means an act or omission made punishable by any law for the time being in force.
• The Supreme Court in Shiv Dutt Rai Fateh Chand defined 'penalty' as an exaction which is not of compensatory character is also termed as a penalty even though it is not being recovered pursuant to an order finding the person concerned guilty of a crime.

Supreme Court on 'Penalty' and 'Offence'

• The Supreme Court in State of U.P. v. Sukhpal Singh Bal stated that "all penalties do not flow from an offence as is commonly understood but all offences lead to a penalty.".
• The Court noted a penalty may be for breach of statutory duty or a complaint, covering avoidance of civil liabilities without constituting offences against the State.
• Analysis of various definitions concludes that the word "offence" does not necessarily mean a crime that is required to be tried by the criminal court, but could be a contravention of a rule/law wherein only penalty is imposed.

Principles Derived from Definitions

• A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence.
• "Penalty" has a broad definition encompassing consequences visited by law for infringement and may be imposed with or without mens rea.
• Statute's scheme determines mens rea requirement for penalty; prosecution for offences requires mens rea.

Statutory Interpretation

• Courts should not presume legislative mistakes and must interpret statutes to be workable unless unattainable due to omissions or directions.
• A taxing statute involves three stages: declaring liability, assessing the sum, and methods of recovery.
• Section 74 of the CGST Act is an anti-evasion provision that is also a charging and a machinery provision, while Section 122 of the CGST Act is a penal provision aimed at curbing evasion of taxes.

Rules for Interpreting Taxing Statutes

• The intention to impose a charge in a taxing statute must be expressed clearly and unambiguously, without room for intendment or presumption.
• Machinery provisions for tax assessment should be construed to make the machinery workable, giving effect to the legislature's intention.
• Courts may interpret provisions harmoniously to gather legislative intent, thwarting attempts to avoid tax.

Judicial Precedents on Taxing Statutes

• A charging provision of a taxing statute must be strictly interpreted, and the burden is on the State to show that the subject is within the provisions of the Act.
• The Court must interpret a taxing statute in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency.
• In interpreting such a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book, should be eschewed.

Continued Rules for Interpretation

• Courts seek pragmatic solutions that best serve societal needs and avoid constructions leading to unworkable or impractical outcomes.
• Court is the sole authority to interpret what the parliament intends through the language of the statute and other permissible aids.
• Section 74 is a charging and machinery provision, and Section 122 is a penal provision for deterring tax evasion.

Application of Rules to the Case

• Both Sections 74 and 122, being charging sections, require strict interpretation and plain meaning should be provided by the courts.
• An absurd interpretation that makes the charging sections unworkable should be avoided, while still allowing the court to look at all the provision of the statute to bring about a harmonious construction and come to an interpretation which could make the statute workable.
• The meaning of a word depends on the circumstances and time in which it is used.

Penalty in Tax Delinquency Cases

• Supreme Court cases show penalties in sales tax and income tax are civil liabilities, though penal, aimed at revenue protection and tax evasion deterrence, not criminal punishment.
• 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.
• Article 20(1) of the Constitution does not apply to penalty proceedings under the Income Tax Act, 1961 which have a civil sanction and are revenue in nature.

Mens Rea and Tax Penalties

• The Supreme Court cases distinguish civil and criminal penalties under tax law, with civil penalties intended as remedial measures.
• Mens rea is not required for civil penalty imposition, but rather blameworthy conduct or breach of statutory provision is enough for tax delinquencies.
• Mens rea is an essential element in criminal law for prosecuting an accused whereas in civil matters such as taxation mens rea is irrelevant for imposing civil liability.

M.C.T. M. Corpn. (P) Ltd. (supra) on Mens Rea

• Court differentiates between adjudicatory and criminal proceedings, stating penalties in adjudicatory contexts are for civil obligation breaches, not criminal offences.
• Penalty proceedings under Section 23(1)(a) of FERA, 1947 are 'adjudicatory' in nature and character and are not "criminal proceedings ".
• It is thus the breach of a "civil obligation" which attracts 'penalty' under Section 23(1)(a), FERA, 1947.

Interpretation Principles and Penalties

• Cabot International Capital Corporation outlines that mens rea is essential for criminal offences but not for civil obligations; penalties for civil breaches don't require mens rea.
• The word 'penalty ' by itself will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravene or and the delinquency.
• Hindustan Herbal Cosmetics v. State Of U.P held that penalty in tax matters in some cases may require an element of mens rea.

Recent Supreme Court and High Court Views

• In CST v. Satyam Shivam Papers (P) Ltd, the Supreme Court emphasized that authorities must not presume tax evasion solely on procedural lapses without a valid reason, implying mens rea is needed.
• Veena Estate (P.) Limited v. Commissioner of Income Tax, the Bombay High Court upheld the view of Tribunal in imposing penalty against assessee for concealment of his income due to presence of mens rea.
• Madras High Court has upheld the findings of Tribunal wherein the Tribunal has imposed penalty upon the assessee under Section 271(1)(c) for concealment of non-agricultural land.

Summary of Tax Penalty Judgments

• Summaries of judgements on penalty for tax delinquency cases are that the object of severe penalty is to provide deterrence against tax evasion and civil proceedings do not require mens rea for penalty.
• Civil obligations do not require mens rea while some cases may require an element of mens rea.
• M/s Hindustan Herbal Cosmetics v. State Of U.P held that penalty in tax matters in some cases may require an element of mens rea.

Analysis of Petitioner's Submissions

• The court sets out to examine the arguments made by the petitioner's counsel.
• The crux of the argument of Mr. Arvind Datar on Issue (I) is that Section 122 of the CGST Act, 2017 specifically deals with 'offences' and therefore the same has to be read with Section 134 of the CGST Act.
• Furthermore, Section 4(2) of CrPC would not apply in the present case as a separate provision has been envisaged for the offences under Section 122 of the CGST Act by way of imposition of a penalty.

Evaluation of Arguments on 'Offences' and Penalties

• The court refutes the argument that Section 122 requires criminal court adjudication under Section 134, clarifying punishment under Section 122 is by penalty, not criminal trial.
• By referring to the notes on clauses of Section 122 of the CGST Act, the court emphasizes that in Chapter XIX there is no mention to any trial to be carried out before imposition of penalty under Section 122.
• It is seen that this provision empowers the GST Council to recommend waiver of any penalty referred to in Section 122, 123 and 125 or any late fee referred to in Section 147 of the CGST Act and upon such recommendation the Government may by notifications waive these penalties and late fees.

Distinction Between Section 122 and 132 of the CGST Act

• The court notes that Section 132 of the CGST Act on punishment for certain offences that these offences are far more serious in nature and therefore the legislature has chosen to impose criminal punishment for the same.
• One may also note that before imposing any such punishment, Section 132(6) specifically states that a person shall not be prosecuted for any of the offences provided in the section except with the previous sanction of the Commissioner and that requirement is clearly absent in Section 122 of the CGST Act.
• It is the scheme of a particular statute that shall determine whether for imposition of penalty there is a requirement for men rea or not and the statute emphasizes the importance of deterring evasion and protecting revenue.

Analysis of Proper Officer

• Section 74 of the CGST Act is undoubtedly exercised by a proper officer. 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.
• Section 83 of the CGST Act which categorically states that in certain events provisional attachment may be made by the revenue if the Commissioner is of the opinion that for the purpose of protecting the government revenue, he may by order in writing attach provisionally any property including bank accounts belonging to the taxable person or any person specified in Section 122(1A).
• 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 thereof electronically in form GST DRC-01.

Conclusion on Issue (I)

• A proper officer/adjudicating officer has the power to adjudicate on the penalty provision provided under Section 122 of the CGST Act.
• Furthermore, with regard to issue (II), the court emphasizes that the contravention under Section 73/74 need not necessarily be a contravention covered under Section 122 of the CGST Act.
• Explanation 1(ii) of Section 74 categorically states that when the proceedings against the main person under Section 73/74 are dropped then the proceedings under Section 122 against the other persons would also abate, however in a particular case when a show cause notice is issued against the main person under Section 73/74 and also against the main person under Section 122, dropping of proceedings under Section 73/74 would not automatically result in dropping of proceedings under Section 122 against the main person as the proceedings are with respect to contravention of two different offences.

Conclusion on Issue (II) and Final Decision

• There may be scenarios where a proceeding under Section 73/74 of the CGST Act may get concluded against the main person but the penalty proceedings under Section 122 of the CGST Act for issue of fake invoices by the main person may stand independent of the proceedings under Section 74, and therefore, those proceedings under Section 122 would not abate as per the explanation 1(ii) of Section 74.
• The proceeding under Section 122 of the CGST Act is to be adjudicated by the adjudicating officer and is not required to undergo prosecution and also abatement of proceedings under Section 74 of the CGST Act does not ipso facto abate the proceedings under Section 122 which are for completely different offences.
• The writ petition is dismissed and respondent authorities are directed to continue with the proceedings under Section 122 of the CGST Act.

 

How does this ruling affect companies facing similar penalty proceedings?

This ruling clarifies that proceedings under Section 122 of the CGST Act, which pertains to penalties for various offences including issuance of fake invoices and circular trading, are independent and distinct from proceedings under Section 74, which deal with tax evasion and fraud related to tax determination. Specifically, the court has held that the conclusion or abatement of proceedings under Section 74 does not automatically lead to the abatement of penalty proceedings under Section 122.

For companies facing similar penalty proceedings, this ruling implies:

1. Independent Adjudication: Penalty proceedings under Section 122 can continue and be adjudicated separately, regardless of the status of proceedings related to tax determination under Section 73/74. This means that even if a company successfully defends or resolves tax evasion charges, penalties under Section 122 may still be imposed if the offence is found to have occurred.
2. No Automatic Abatement: The judgment emphasizes that proceeding for offences like issuance of fake invoices or circular trading are for entirely different offences and are not automatically abated if proceedings under Section 74 are dropped or concluded.
3. Legal Clarification on Civil vs. Criminal Nature: The ruling underscores that penalties under Section 122 are civil in nature and are adjudicated by proper authorities, not criminal courts. However, the nature of offences can be complex, and penalty proceedings can run parallel to, or independently of, criminal proceedings.
4. Implications for Enforcement: Companies should prepare for the possibility that penalty notices can stand even if tax demands are not pursued or are dropped. As such, diligent compliance and proactive legal defence are necessary, considering that separate penalty proceedings can continue regardless of the outcome of tax evasion or fraud proceedings.
5. Impact on Strategy: The ruling indicates that companies cannot rely solely on the conclusion of tax-related proceedings to escape penalties for offences like issuing fake invoices; separate penalty adjudication under Section 122 can still be pursued, emphasizing the importance of addressing each proceeding on its own merits.

In essence, this decision reinforces the independent nature of penalty proceedings under Section 122 and highlights the need for companies to address these penalties separately from tax determination issues, influencing their legal and compliance strategies accordingly.

What are the legal distinctions between Sections 74 and 122 in GST law?

The legal distinctions between Sections 74 and 122 of the CGST Act are fundamental and pertain to their purpose, nature, and adjudication process:

1. Purpose and Nature:

• Section 74: It is a charging and machinery provision aimed at the determination and quantification of tax and penalties. It deals with tax demands arising from violations such as fraud, suppression of facts, or misstatements, and involves the process of issuing show-cause notices to finalize the tax liability and applicable penalties.
• Section 122: It is a penal provision designed to punish specific offences, including issuance of fake invoices, circular trading, or suppression of transaction facts, with penalties intended to serve as deterrents. It addresses offences and prescribes penalties for contraventions, distinct from tax determination.

2. Legal Nature:

• Section 74: Represents civil liability; the proceedings are adjudicatory and primarily involve quantification of tax and penalty. It is considered a charging provision, and the proceedings are conducted before proper officers following a structured process (like issuing notices, show cause, and adjudication).
• Section 122: It involves offences which are criminal in nature, possibly involving mens rea. Proceedings under this section can lead to penalties but also imply criminal liability, often leading to prosecutions in criminal courts for offences like issuing fake invoices or fraudulent claims.

3. Procedural Aspects:

• Section 74: The proceedings are administrative and involve show-cause notices, adjudication, and penalty determination by proper officers. It does not necessarily lead to criminal prosecution unless criminal offences are also involved.
• Section 122: Penalties under this section are civil in essence but are penalties for criminal offences; proceedings often involve criminal courts if the offences amount to criminal misconduct. It includes specific offences related to fake invoicing, issuance of invoices without supply, etc., where criminal prosecution can also be initiated.

4. Abatement and Appellate Proceedings:

• Section 74: When proceedings under Section 74 are finalized, it does not automatically abate proceedings under criminal laws or other offences.
• Section 122: The proceedings are independent and do not get automatically abated if proceedings under Section 74 are concluded or dropped, emphasizing their separate nature.

5. Legislative Intention:

• Section 74: Aimed at determining tax liabilities and enforcing compliance by civil means.
• Section 122: Aimed at punishing offences related to tax evasion and misconduct, with penalties serving as deterrents, and involving criminal law aspects.

In summary, Section 74 is primarily a civil, procedural provision for tax determination and penalties, whereas Section 122 is a penal provision that addresses offences related to fraudulent activities, potentially leading to criminal proceedings. Both serve different ends within the GST enforcement framework, with Section 74 focused on civil adjudication of tax liabilities, and Section 122 on penal sanctions for offences.

Summary of Case PATANJALI AYURVED LTD. versus UNION OF INDIA on Section 122 and Section 74 of the CGST Act

Writ Tax No. 1603 of 2024, decided on 29-5-2025

This landmark case clarifies the distinction and procedural autonomy between penalties under Section 122 and proceedings under Section 74 of the CGST Act. The Court emphasized that proceedings under Section 74 are civil in nature, aimed at determining tax liability, and are adjudicated by proper officers. In contrast, Section 122 pertains to criminal offences, such as issuing fake invoices or circular trading, and can lead to criminal prosecution.

A pivotal finding was that concluding proceedings under Section 74 does not automatically lead to abatement of penalty proceedings under Section 122. The Court clarified that these are separate and independent offences, with Section 122 being a penal/ criminal provision that is adjudicated by courts, while Section 74 is a civil adjudicatory process. This distinction is reinforced by procedural rules and the purpose of each section.

The case further clarified that penalties under Section 122 are civil liabilities that can be imposed even if proceedings related to tax evasion are dropped or concluded. The absence of reference to proper officers in Section 122 indicates it is a criminal offence, but penalties can still be civil in character. The Court rejected arguments suggesting that proceedings under Section 74 would automatically abate Section 122 cases, emphasizing that punitive actions for offences like issuing fake invoices remain separate.

This judgment underscores that taxpayers face dual proceedings: civil adjudication for penalties and criminal prosecution for offences. It highlights that adjudication of penalties does not depend on the outcome of tax liability assessments and stresses the need for companies to address each proceeding independently.