The imposition of penalties under Section 122 of the CGST Act is a frequent occurrence in tax-related notices, but recent judicial rulings suggest that these penalties are often misapplied. High Courts across India have consistently ruled in favor of the assessees, highlighting the department’s overreach in applying this provision. In this blog, we explore five landmark cases that illustrate the misuse of Section 122 and provide clarity on the legal standing of such penalties.
1. Shantanu Sanjay Hundekari vs Union of India – Bombay High Court
Citation: (2024) 17 CENTAX 18
In this case, the petitioner, an employee of MLIPL (a Maersk group company), was wrongly penalized under Section 122(1A). The Bombay High Court ruled that since the petitioner was neither a taxable nor a registered person under the CGST Act, invoking Section 122(1A) was entirely without jurisdiction. Consequently, any show cause notice demanding tax and penalties under this section was deemed invalid.
Key Takeaway: The court’s decision reinforces that Section 122(1A) should not be used against individuals who do not fall within its purview.
2. Shree Om Steels vs Additional Commissioner Grade-2 – Allahabad High Court
Citation: (2024) 21 CENTAX 19
During a survey conducted under Section 67 of the UPGST Act, excess goods were discovered at the premises of Shree Om Steels. The department issued a notice under Section 130, read with Section 122, for the confiscation of goods and imposition of penalties. The Allahabad High Court ruled that even if excess stock was found, proceedings under Section 130 could not be initiated. The demand for tax must be quantified and raised under Section 73 or 74 of the CGST Act. The court set aside the impugned orders.
Key Takeaway: This ruling clarifies that Section 130 cannot be invoked simply because excess stock is found; the correct procedure must be followed under Sections 73 or 74.
3. Faruk Rathore vs Dy. Commissioner, CGST, Bikaner – Rajasthan High Court
Citation: (2024) 18 CENTAX 375
In this case, the petitioner’s goods were detained because the E-way bill had expired. The Rajasthan High Court noted that there was no fraudulent intention on the part of the petitioner and that the penalty under Section 129 was inappropriate. Instead, a token penalty of Rs. 10,000 was imposed under Section 122.
Key Takeaway: The ruling emphasizes that penalties should be proportionate and not punitive when there is no evidence of fraud or intent to evade tax.
4. Girish and Company vs State of Uttar Pradesh – Allahabad High Court
Citation: (2024) 15 CENTAX 291
Girish and Company faced penalties for not downloading the E-way bill due to confusion caused by frequent changes in notifications. The Allahabad High Court ruled that imposing the maximum penalty without specific allegations was unjustified. A lesser penalty under Section 122 was more appropriate.
Key Takeaway: The court highlighted the importance of considering the context and intent before imposing penalties, particularly when the confusion is caused by regulatory changes.
5. Greenstar Fertilizers Ltd vs Joint Commissioner (Appeals), GST and Central Excise, Coimbatore Circuit Office, Madurai
Citation: (2024) 19 CENTAX 324
Greenstar Fertilizers Ltd was penalized for wrongful availment of input tax credit (ITC). However, the Madurai Bench of the High Court found that since there was no evidence of fraud or misstatement and the credit was reversed promptly, the imposition of a higher penalty under Section 74 was inappropriate. Instead, a nominal penalty of Rs. 10,000 under Section 122 was imposed.
Key Takeaway: This case illustrates that when fraud is not proven, higher penalties under Section 74 are unjustified, and a lower penalty under Section 122 is more suitable.
Conclusion
The above cases underscore the importance of correctly applying penalties under Section 122 of the CGST Act. High Courts have consistently ruled in favor of assessees where the penalties were misapplied, emphasizing that the law must be followed meticulously. Businesses and individuals should be aware of these rulings to better understand their rights and the limitations of the department’s authority.