Allahabad High Court Rejects Patanjali's Plea Against ₹273.5 Crore GST Penalty

The Allahabad High Court has directed continuation of proceedings under Section 122 of the Central Goods and Services Tax Act, 2017 against M/s Patanjali Ayurved limited's 3 plants even though proceedings under Section 74 of the Act have been dropped against them.

The bench of Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit held 

“Under the present GST regime, persons who are not liable to pay tax under Sections 73/74 of the CGST Act may very well be liable for penalties as described in the twenty-one sub-sections of Section 122(1) and under sub-sections 122(2) and 122(3).”

The Court held that penalty under Section 74 of the CGST Act is for non-payment of tax or where tax had been short paid or erroneously refunded or where ITC has been wrongly availed of or utilised which is very specific whereas under Section 122, penalties and actions are contemplated for different actions/omissions that amount to contraventions which may not necessarily be covered under Section 74 of the CGST Act . 

Factual Background

M/s Patanjali Ayurved limited's 3 manufacturing units in Haridwar (Uttarakhand), Sonipat (Haryana) and Ahmednagar (Maharashtra) are registered in different locations with same PAN numbers and different GST Numbers. A suspicion arose against M/s S.G Agro India Industry regarding tax liabilities of over 2 crores and wrongful utilization of input tax credit. Thereafter, investigation was conducted where the demand and show cause notice was issued against the petitioner. 

The show cause notice and demand was issued under Sections 74, 122 of CGST Act and Section 20 of Integrated Goods and Services Tax Act, 2017 for the tax period April 2018 to March 2022 alleging that petitioner was involved in circular trading where invoices were being generated but there was no actual supply of goods. 

Petitioner challenged this notice before the High Court and was granted interim protection with direction to the petitioner to file its reply to the show cause notice. Meanwhile, proceedings under Section 74 were dropped against the Sonipat and Ahmednagar plant of the petitioner, but proceedings against the Haridwar plant under Section 74 were to continue. However, the petitioner's Haridwar plant was eventually exonerated. Penal proceedings against all plants were still continuing. 

High Court Verdict

The Court questions before the High Court were whether the “Proper Officer/Adjudicating Officer” has the power to adjudicate on the penalty provision provided under Section 122 of the CGST Act and if the proceedings under Section 74 of the CGST Act, 2017 are dropped then will that ipso facto abate the proceedings under Section 122 of the CGST Act.

Differentiating between offence and penalty, the Court observed that offence is the transgression/ infringement of law meant for protection of public whereas penalty is the consequence that comes as a result of the transgression/ infringement of law.

“…. the word 'offence' does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. 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. Similarly, 'penalty' is a slippery word and the same has to be understood in the context in which it is used in a given statute. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State.”

The Court observed that Section 74 of the CGST Act is a provision with two stages: one, where it charges a person with tax by fixing liabilities and second, is machinery for determination of the tax liability to be imposed. Regarding Section 122, the Court observed that it a penal provision meant to deter the tax payers from committing offences mentioned therein. 

It held that no presumption can be applied while interpreting taxing statues and the same must be read as is. It held that there is no equity to be applied in tax. 

“However, in construing the machinery provisions for assessment and collection of the tax to make the machinery workable ut res valeat potius quam pereat, that is, the Court should avoid construction that would defeat the purpose of legislature behind enacting the particular legislation on the presumption that it was to bring about an effective result.”

The Court held that the while applying strict interpretation in tax cases, the Court must also harmoniously interpret the provisions to make the statue work. It held that serve penalty in tax cases was to deter assesee from evading tax liabilities which is in larger public interest according to the legislature. 

“An order made by an adjudicating authority under the statute with regard to penalty is not that of conviction but of determination of the breach of the civil obligation by the offender.”

The Court held that it is the scheme of the statue that for prosecution, there must be mens rea or guilty intent, though the same not be the case of mere imposition of penalty. 

The Court held that by virtue of opening words of Section 122, any taxable person could be subjected to proceedings under Section 122 even without initiating proceedings under Section 73/74 of the Act. Further, the Court held that punishment would also include penalty and is not restricted to only criminal prosecution.

“Upon a plain reading of Section 2(38) of the General Clauses Act, 1897, and Section 2(n) of CrPC it is clear that an offence is any act or omission made punishable by law for the time being in force. Punishment need not always be imposed by way of a criminal trial and it could very well be imposed by way of penalty.”

Observing that the penalties under Section 122 do not imply criminal prosectuion, the Court held 

“Powers under Section 74 of the CGST Act are 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 as the explanation provides for proceedings against the persons liable to pay penalty under Sections 122 and 125 are deemed to be concluded when the proceedings against the main person charged under Sections 73 and 74 are concluded.”

It held that even provision for provisional attachment of assesee's property and bank accounts is provided in Section 122(1A) which could not be possible if the assesee was being tried by a criminal court. 

Concluding that “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 Court held proceedings against Patanjali under Section 122 were maintainable despite dropping of proceedings under Section 74 of the CGST Act. 

Accordingly, the writ petition was dismissed. 

Case Title: M/s Patanjali Ayurved limited v. Union of India and Others