Director cannot Be Penalised Without Personal Involvement in Service Tax Evasion: CESTAT [Read Order]

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) at Mumbai ruled that a director cannot be penalized without proof that the director was in charge of the company's business and knowingly took part in evading service tax.

The department imposed a personal penalty of Rs. 1 lakh on Ali Akbar Ratansi (the appellant) under Section 78A while deciding a service tax case against the company. The service tax demand against the company was about Rs. 1.93 crore and related to the period from 2012-13 to 2017-18 (up to June 2017).

The appellant had stopped being a director in October 2017. The show cause notice was issued later, in September 2020. He also said the final order did not explain how he was responsible for the company's work or how he knowingly broke the rules.

The department said the show cause notice itself blamed the directors for handling legal duties and for deliberately not paying service tax.

The department pointed to the final order, which said the company was a regular defaulter, did not file returns, and did not pay tax even after it was caught. Because of this, the department said the directors were also responsible and should pay the penalty under Section 78A of the Finance Act.

The single-member bench, led by C.J. Mathew (Technical Member), said that the company's non-payment of service tax was not being challenged in this appeal. The tribunal said Section 78A needs specific things.

First, the director must be in charge of the company's business and secondly, must knowingly be involved in the wrongdoing.

The tribunal found that the show cause notice only made general blames and did not explain how the appellant was personally involved in the evasion. The tribunal also said the final order did not show any real facts or proof that the appellant knowingly took part in the wrongdoing.

The findings seemed to come mostly from the show cause notice itself, without any separate check. The tribunal made it clear that just being a director is not enough to put a personal penalty under Section 78A of the Finance Act.

Since there were no specific blames or proof about the appellant's knowing involvement and responsibility for the business, the tribunal said the penalty could not stand. The CESTAT cancelled the Rs. 1 lakh penalty on the appellant.