The Goods and Services Tax (GST) regime is nearing its tenth anniversary, but certain provisions of the GST law continue to be subject to judicial scrutiny and interpretation. One such provision is Section 122(1A) of the Central Goods and Services Tax (CGST) Act, which has been a point of contention between the tax department and taxpayers.
Introduction of Section 122(1A)
Section 122(1A) was inserted into the CGST Act with effect from January 1, 2021, and it empowers the tax department to impose a penalty on “any person” who has retained the benefit of transactions covered under specified clauses of Section 122(1) of the CGST Act. The department has been invoking this provision to impose penalties on partners, directors, employees, etc. of a company or firm, even for periods prior to January 1, 2021.
These actions have been challenged before various courts, which have been asked to consider two key issues: the imposition of penalties on partners, employees, directors, etc. under Section 122(1A) of the CGST Act, and whether such a penalty can be imposed retrospectively, i.e., for periods before the provision came into effect.
Judicial Interpretations
The Bombay High Court has ruled in favor of the taxpayers, holding that the expression “any person” under Section 122(1A) must be read in the context of “taxable person” as provided in Section 122(1) of the CGST Act. This means that a penalty under Section 122(1A) cannot be imposed on directors, employees, partners, etc. in their individual capacity. The court also held that Section 122(1A) would apply prospectively, i.e., from January 1, 2021, and not retrospectively.
In contrast, the Delhi High Court has differed with the Bombay High Court, holding that a penalty under Section 122(1A) can be imposed on any person, including individuals, as the term “person” is wider than the term “taxable person”. The Delhi High Court has also upheld the retrospective applicability of Section 122(1A), even for periods before the provision came into effect.
The Gauhati High Court has recently agreed with the Delhi High Court, upholding the imposition of a penalty on partners under Section 122(1A) from a retrospective date.
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Legislative Intent and Jurisprudence
It is notable that the legislature inserted Section 122(1A) only with effect from January 1, 2021, despite having the power to amend provisions retrospectively. This suggests that the legislative intent was to apply the provision prospectively, and not retrospectively. Furthermore, the settled jurisprudence is that penal provisions should be construed strictly and should not be applied retrospectively, unless the legislative intent indicates otherwise.
The judgments of the Delhi High Court and Gauhati High Court have expanded the scope of Section 122(1A), but this expansive interpretation appears to be contrary to the clear legislative intent and settled jurisprudence.
Before imposing a penalty under Section 122(1A), the tax department will have to demonstrate that the person sought to be penalized had “retained the benefit” of a transaction and “at his instance” the said transaction was conducted. The department will have to produce sufficient evidence to establish this fact, and the person sought to be penalized will also have the opportunity to demonstrate that there was no retention of benefit on their part.
Implications and Future Directions
The contradictory decisions of the different high courts have created uncertainty and confusion, and it will be interesting to see how the Supreme Court resolves this issue. In the meantime, taxpayers and the tax department will have to deal with the complexities of Section 122(1A) and its application, both prospectively and retrospectively.
For individuals and businesses affected by this provision, it is essential to understand the implications of Section 122(1A) and to be prepared to respond to any penalty notices or proceedings initiated by the tax department. They may need to seek professional advice and representation to ensure that their rights and interests are protected.
Ultimately, the resolution of this issue will have significant implications for taxpayers and the tax department, and it is key that the Supreme Court provides clarity on the interpretation of Section 122(1A).
