The Bombay High Court has delivered a landmark ruling clarifying the limits of personal liability under the CGST Act, holding that employees cannot be penalized under Section 122(1A) merely for holding managerial positions in a company accused of fraudulent ITC claims. The judgment reinforces the principle that penal provisions must be strictly construed and cannot be extended by judicial inference.
Background & Facts
The Dispute
The petitioners - Amit Manilal Haria, Hiren Uday Gada, and Atul Hirji Maru - served as Chief Financial Officer, Chief Executive Officer, and Joint Managing Director respectively of M/s. Shemaroo Entertainment Limited. The Revenue alleged that the company availed and passed on ineligible Input Tax Credit (ITC) amounting to over Rs. 133 crores through fake invoices, without actual supply of goods or services. Based on this, the Joint Commissioner imposed a penalty of Rs. 1,33,60,60,889/- on each petitioner under Section 122(1A) of the CGST Act, 2017, equivalent to the alleged ITC fraud.
Procedural History
- 5 September 2023: Search operations conducted at Shemaroo’s premises and four other firms under Section 67(2) of the CGST Act.
- 6 September 2023: Petitioners were summoned, their statements recorded, and they were arrested under Section 132(1)(b) and 132(1)(c).
- 7 September 2023: Petitioners granted bail; their statements before CGST authorities were retracted in court.
- 2 August 2024: Show cause notices issued to petitioners under Section 122(1A) for FY 2017-18 to 2021-22.
- 1 February 2025: Impugned order passed imposing penalties of over Rs. 133 crores each on petitioners.
- 5 February 2025: Electronic summary of order issued in Form DRC-07.
- 25 February 2026: Writ petition decided by Bombay High Court.
Relief Sought
The petitioners sought quashing of the impugned order on grounds of lack of jurisdiction, retrospective application of law, violation of natural justice, and disproportionate penalty. They argued that as employees, they were not taxable persons under Section 2(107) and had not retained any benefit from the alleged transactions.
The Legal Issue
The central question was whether Section 122(1A) of the CGST Act permits imposition of personal penalties on employees of a company who are not registered taxable persons, merely because they held managerial positions during alleged fraudulent ITC transactions.
Arguments Presented
For the Petitioner
The petitioners relied on Shantanu Sanjay Hundekari v. Union of India, where the Bombay High Court held that Section 122(1A) applies only to taxable persons who retain the benefit of fraudulent transactions. They argued:
- They were not registered under the CGST Act and hence not "taxable persons" as defined in Section 2(107).
- The provision requires two conditions: (i) retention of benefit, and (ii) being at whose instance the transaction was conducted. Neither was established against them.
- The penalty was imposed for FY 2017-18 to 2021-22, but Section 122(1A) came into force only on 1 January 2021, making its application to earlier years retrospective and unconstitutional under Article 20(1).
- The cumulative penalty of Rs. 400 crores was grossly disproportionate and violated principles of natural justice.
For the Respondent
The Revenue contended:
- The term "any person" in Section 122(1A) includes employees under Section 2(84).
- Petitioners, as controlling officers, were responsible for the fraudulent scheme and thus liable under the provision.
- The decision in Shantanu Hundekari was distinguishable as the petitioner therein was a junior employee, whereas the present petitioners held top executive positions.
- The consolidated show cause notice covering multiple years was valid under Section 74(10).
- The penalty amount was statutorily mandated and not subject to discretion.
The Court's Analysis
The Court undertook a detailed textual and contextual analysis of Section 122 and its sub-sections. It emphasized that Section 122(1) applies exclusively to "taxable persons" as defined in Section 2(107) - those registered or liable to be registered under the Act. The Court observed that Section 122(1A), while using the phrase "any person," must be read in conjunction with Section 122(1), which governs the underlying offences.
"The opening words of sub-section (1A) when it uses the words 'any person', it would be required to be understood in the context of a 'taxable person' as sub-section (1) itself applies to a taxable person."
The Court held that Section 122(1A) is not a standalone provision for vicarious liability. It requires two cumulative conditions: (1) the person must retain the benefit of a transaction covered under clauses (i), (ii), (vii), or (ix) of Section 122(1), and (2) the transaction must have been conducted at their instance. Neither condition was satisfied against the petitioners.
The Court further noted that the impugned order contained no findings that the petitioners personally benefited from the ITC fraud, nor that they were the architects of the scheme. The Revenue’s reliance on Bharat Parihar was rejected as it dealt with non-taxable persons in different contexts, not managerial employees.
The Court also held that applying Section 122(1A) to transactions occurring before 1 January 2021 violated Article 20(1) of the Constitution, as penal provisions cannot be applied retrospectively. The decision in Shantanu Hundekari was affirmed as binding precedent, and the Supreme Court’s dismissal of the SLP confirmed its correctness.
The Verdict
The petitioners won. The Court held that Section 122(1A) of the CGST Act cannot be invoked against employees who are not taxable persons and have not retained any benefit from fraudulent transactions. The impugned order imposing penalties of over Rs. 133 crores each was quashed as without jurisdiction, ultra vires, and violative of Article 20(1).
What This Means For Similar Cases
Personal Liability Requires Direct Benefit
- Practitioners must establish that the individual retained a direct financial benefit from the fraudulent transaction before invoking Section 122(1A).
- Mere managerial position, control over operations, or failure to prevent fraud is insufficient to attract personal liability.
- Evidence of personal enrichment, bank transfers, or direct use of ITC proceeds must be adduced.
No Vicarious Liability Under CGST Act
- The judgment explicitly rejects the doctrine of vicarious liability in tax penalty proceedings.
- Revenue authorities cannot treat employees as "alter egos" of the company to impose penalties.
- Any show cause notice against employees under Section 122(1A) must clearly articulate how the individual satisfies both conditions of the provision.
Retrospective Application Is Unconstitutional
- Penalties under Section 122(1A) cannot be imposed for periods prior to 1 January 2021.
- Assessments covering pre-2021 periods must be based on provisions in force at the time, such as Section 122(1) or Section 74.
- Practitioners should challenge any notice or order applying Section 122(1A) to pre-2021 transactions as unconstitutional.
