JANUARY 30, 2025

By CA Hunny Munjal

1. Introduction:

The Bombay High Court and subsequently, the Supreme Court examined the legal validity of a show cause notice ('SCN') issued under Section 74 of the Central Goods and Services Tax Act, 2017 ('CGST Act'), targeting employees of a company for alleged tax evasion by their employer. This article critically analyses the judgments that led to the removal of penalties imposed on employees and explores their implications on the jurisdictional limits under Sections 74, 122(1A), and 137 of the CGST Act.

2. Case Background:

The case revolved around an SCN issued to employees of Maersk Line India Pvt. Ltd. (MLIPL), including the Taxation Manager, alleging vicarious liability for the company's purported tax evasion. The SCN, invoking Section-122(1A) and 137, sought penalties amounting to Rs.3,731 crores. The employees challenged the SCN before the Bombay High Court, which quashed it, a decision later affirmed by the Supreme Court.

3. Bombay High Court's Judgment in the case of SHANTANU SANJAY HUNDEKARI Vs. Union of India 2024-TIOL-518-HC-MUM-GST

- Jurisdictional Overreach: The High Court held that the SCN was issued without jurisdiction. Section - 74 pertains to "Demands and Recovery" and does not authorize proceedings for penalties under Section 137, which falls within the "Offences and Penalties" chapter.

- Section 122(1A) Analysis: The Court clarified that Section - 122(1A) applies to "taxable or registered person" within the meaning of Section - 2(94) of the CGST Act and further, such taxable or registered person should be retaining benefits of fraudulent transactions. Employees, being neither taxable person nor beneficiaries, were beyond its scope. The absence of allegations or evidence that the employees retained any benefit rendered the invocation of this section untenable.

- Inapplicability of Section 137: The Court observed that Section - 137 imposes liability on individuals only if offences are committed with their consent, connivance, or negligence. The SCN lacked any allegations substantiating such involvement by the employees. The attempt to mix penal provisions with recovery mechanisms under Section - 74 was deemed legally unsustainable.

- Principle of Vicarious Liability: The Court underscored that vicarious liability in taxation law must be explicitly established through statutory provisions. Merely holding positions of responsibility in the company does not suffice to attract penalties under Section - 137 without concrete evidence of culpability.

- Observations on Revenue's Conduct: The Court criticized the SCN as an attempt to intimidate employees, noting that the penalty sought was highly disproportionate and unconscionable. It held that such actions undermine the fairness expected in tax administration.

The High Court quashed the SCN, holding it to be arbitrary, illegal, and without jurisdiction.

4. Supreme Court's Affirmation in the case of UNION OF INDIA & ORS Vs. SHANTANU SANJAY HUNDEKARI & ANR. ETC. SPECIAL LEAVE PETITION (CIVIL) Diary No.55427/2024 [2025-TIOL-05-SC-GST]

- Upholding High Court Judgment: The Supreme Court dismissed the Special Leave Petition ('SLP') filed by the Revenue, concurring with the High Court's findings.

- Preservation of Legal Questions: While affirming the High Court's decision, the Supreme Court kept the larger legal questions regarding Sections 122(1A) and 137 open for future adjudication.

Outcome: The Supreme Court's ruling reinforced the Bombay High Court's decision, effectively nullifying the penalties imposed on the employees.

5. Legal Analysis:

- Separation of Recovery and Penal Provisions: The judgments underscore the importance of maintaining a clear distinction between recovery proceedings under Section 74 and penal provisions under Sections 122(1A) and 137. Mixing these jurisdictions undermines the statutory framework of the CGST Act.

- Burden of Proof in Penal Actions: The rulings highlight that penal provisions require specific allegations and evidence of culpability. Broad and unspecific accusations cannot form the basis for penalties.

- Protection of Employee Rights: The judgments reaffirm that employees cannot be held liable for the employer's actions without clear evidence of personal involvement or benefit. This principle safeguards individuals from arbitrary and disproportionate penal actions.

6. Implications for Tax Administration:

- Enhanced Accountability: The rulings serve as a cautionary tale for tax authorities to exercise their powers judiciously and within the bounds of law.

- Judicial Precedent: These judgments set a strong precedent, reinforcing the need for precise and evidence-based invocation of penal provisions under the CGST Act.

- Focus on Fairness: The judgments promote fairness and proportionality in tax administration, ensuring that individuals are not unduly penalized for corporate liabilities.

7. Conclusion

By quashing the SCN, the judiciary has upheld the sanctity of statutory provisions and protected individuals from unwarranted penal actions. These rulings are a critical reference point for ensuring lawful and equitable enforcement of GST laws.

[The views expressed are strictly personal.]