Gauhati HC upholds Penalty u/s 22(1A) of CGST Act on Partnership Firm’s GST Violation [Read Order]

The Gauhati High Court has upheld the validity of imposing penalties under Section 122(1A) of the Central Goods and Services Tax (CGST) Act, 2017, on partners of a firm involved in GST violations.

The case involved two writ petitions filed by partners of Mayank Bansal, partner M/S Quantum Infratech, challenging penalties imposed for GST evasion, specifically under Section 122(1A), which authorises penalties on persons who retain benefits from certain transactions.

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The petitioners contended that the penalties could only be imposed on the “taxable person,” i.e., the firm itself, and not on individual partners, and further argued that the law, introduced in 2020 and applicable from January 1, 2021, could not be applied retroactively to transactions from prior years.

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The Court examined the provisions of Section 122, which delineates penalties for various GST violations, including clauses (i) to (xxi), and analyzed the specific scope of Section 122(1A). It clarified that the law targets “any person” who retains benefits from transactions such as issuing false invoices, evading tax, or utilising input tax credits without proper receipt of goods or services, and that this “any person” includes individuals who, at the instance of such transactions, benefit from them, even if they are partners or other entities.

The Court rejected the narrow interpretation that only the “taxable person,” such as a registered company or partnership firm, could be penalized, pointing out that the law’s language and legislative intent encompass persons who derive benefits from the violations. It highlighted that the purpose of Section 122(1A) is to hold accountable those who profit from fraudulent or evasive transactions, regardless of their formal registration status.

Further, the Court addressed the issue of retrospective applicability. It noted that the law, which was inserted in 2020 and came into effect on January 1, 2021, could be lawfully applied to proceedings initiated after its enactment. Although theshow cause notices covered transactions from July 2017 onwards, the Court held that since the law was in force when the notices were issued, and the violations were part of a continuous process, the penalties could be imposed retroactively.

The single bench of Justice Devashis Baruah relied on precedents from higher courts, including the Delhi High Court and Supreme Court, which affirmed that penalties under civil tax laws can be applicable retrospectively when the law is in force at the time of issuance of notices or proceedings, and when the transactions are ongoing or part of a continuing course of conduct.

The judgment also reiterated that the law’s purpose is to deter fraudulent conduct and to hold persons who benefit from such transactions liable, even if they are partners or associates, and that the law’s language and legislative history support this interpretation.

Finally, the Court disposed of the writ petitions, affirming the legality of the penalties imposed under Section 122(1A). It directed the petitioners to file appeals before the appropriate Appellate Tribunal within 30 days, and clarified that the interim orders protecting them from coercive actions would remain in force until the appeals are decided.

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