Bombay High Court quashes penalties on company executives, holds Section 122(1A) applies to taxable persons only

A bench of Justices G. S. Kulkarni and Aarti Sathe heard a writ petition challenging an Order-in-Original dated 1 February 2025 by the Joint Commissioner, CGST & Central Excise, which had confirmed show-cause proceedings issued to M/s Shemaroo Entertainment Ltd. and, significantly, imposed penalties of Rs. 133,60,60,889/- each on three senior employees — the Joint Managing Director, the Chief Executive Officer and the Chief Financial Officer — under Section 122(1A) of the CGST Act.

The court allowed the petition and quashed the show-cause notices and the impugned order insofar as they applied to the petitioners. The High Court held that Section 122(1A) must be read in conjunction with sub‑section (1) of Section 122 and, therefore, the phrase "any person" in sub‑section (1A) had to be understood in the context of a "taxable person" contemplated by sub‑section (1). The court found no material to show that the petitioners, who were employees of the company, were taxable persons who "retained the benefit of a transaction" or at whose instance the impugned transactions were carried out. The Court, in its reasoning, observed: "We are of the clear opinion that the legislative intent of sub-section (1A) is quite clear, as necessarily clauses (i), (ii), (vii) or clause (ix) of sub-section (1) are required to be conjointly read with Section (1A), which itself stands incorporated in the provision. Hence, the opening words of sub-section (1A) when it uses the words 'any person', it would be required to be understood in the context of a 'taxable person' as sub-section (1) itself applies to a taxable person. In the absence of such interpretation, we find it difficult as to how the provisions of clauses (i), (ii), (vii) or clause (ix) of sub-section (1) of Section 122 can at all apply, so as to give effect and/or in invoking/implementing the provision of sub-section (1A) of Section 122 of the CGST Act." The court also relied on this Court's earlier decision in Shantanu Sanjay Hundekari, which the Supreme Court had declined to interfere with, noting that the Tribunal had held that employees who were not taxable persons could not be fastened with disproportionate personal liability.

Background The dispute arose after search and seizure operations carried out in September 2023 expanded from several firms to M/s Shemaroo Entertainment Ltd., following statements implicating transactions said to involve fake invoices and ineligible input tax credit (ITC). Summonses were issued and statements were recorded; the petitioners were arrested and later granted bail, with their earlier departmental statements retracted before the magistrate. The department issued a consolidated show-cause notice dated 2 August 2024 alleging wrongful availing and passing on of ITC for FY 2017‑18 to 2021‑22 (claimed amounts of about Rs. 70.25 crore and Rs. 63.35 crore respectively) and, by Order-in-Original dated 1 February 2025, imposed penalties under Section 122(1A) amounting to Rs. 133.60 crore each on the three employees.

Petitioners contended that they were not "taxable persons" under Section 2(107), that Section 122(1A) was prospective (coming into effect on 1 January 2021) and could not be retrospectively applied to periods before that date, and that the imposition of personal penalties on employees for company liabilities was disproportionate and unsustainable in law. The department maintained that Section 122(1A) was in force for the period covered by the notice and that the petitioners, by virtue of their managerial positions and statements, were responsible and liable under the provision. The High Court analysed Section 122 and related definitions in Section 2, concluded that sub‑section (1A) was necessarily to be read with sub‑section (1) (which addressed "taxable person"), and found no material showing that the petitioners retained personal benefit or fell within the statutory conception of a taxable person. The court further held that applying Section 122(1A) retrospectively to periods before 1 January 2021 was impermissible. The writ petition was allowed and the impugned orders against the petitioners were quashed; no costs were imposed.

Case Details: Case No.: WRIT PETITION NO. 5001 OF 2025 Case Title: 1. Amit Manilal Haria 2. Hiren Uday Gada 3. Atul Hirji Maru v. 1. The Joint Commissioner, CGST & Central Excise 2. The Superintendent, CGST & CX, Range‑V, Division V, Mumbai East Commissionerate Appearances: For the Petitioner(s): Mr. Abhishek A. Rastogi with Pooja M. Rastogi, Meenal Songire, Aarya More For the Respondent(s): Mr. Ram Ochani with Sangeeta Yadav