Penalty quashed u/s 129 of CGST Act for solely relying on supplier’s statement

The Hon’ble Calcutta High Court in Sandip Kumar Pandey & Anr. v. Assistant Commissioner of State Tax & Ors. [2025 (8) TMI 1536 - CALCUTTA HIGH COURT] quashed penalty imposed under  Section 129(1)(b) of the Central Goods Service Tax Act, 2017(“the  CGST Act”), holding that the Department erred in treating the supplier’s denial of business operations as “gospel truth” without conducting any verification and none of the situations signify necessary intention to evade tax, which is pre-condition for invoking of  Section 129,  CGST Act.

Facts:

Sandip Kumar Pandey (“the Appellant”), engaged in garment trading, purchased goods from M/s. Ghosh Enterprises under a tax invoice accompanied by a valid e-way bill. The consignment was intercepted by the State Tax authorities under  Section 68 of  CGST Act read with (“r/w”) Rule 138A of West Bengal Goods & Service Tax (“WBGST”) Rules,2017 for verification of genuineness.

The Department (“the Respondent”) relied solely on the statement of Supplier, who denied operating the business under the GSTIN, and issued a Show Cause Notice (“SCN”) under  Section 129(3) of the  CGST Act alleging transportation of goods without valid documents. Without further verification, the Respondent imposed penalty under  Section 129(1)(b) of the  CGST Act.

Aggrieved by the order, the Appellants approached the High Court in W.P. (C) 9544 of 2025 - 2025 (5) TMI 1604 - CALCUTTA HIGH COURT, which directed them to avail Appellate remedy by order dated May 7, 2025, as certain findings were factual in nature and Appellate remedy in the case wasn’t exhausted. Hence, this present intra-court appeal was preferred.

Issues:

1. Whether denial of opportunity to rebut the supplier’s statement amounted to violation of principles of natural justice?
2. Whether the department was capable in establishing the intention to evade tax which is pre-requisite for invoking the  Section 129 of the  CGST Act?

Held:

The Hon’ble Calcutta High Court in 2025 (8) TMI 1536 - CALCUTTA HIGH COURTheld as under:

• Held that, absence of Petitioner’s statement and failure to put him on notice regarding the supplier’s stand amounted to violation of Principle of Natural Justice (Audi Alteram Partem) ultimately leading to render the penalty order unsustainable.
• Opined that, the Respondent erred by treating the supplier’s denial as sole truth without conducting independent verification, thereby vitiating the proceedings.
• Noted that, intention to evade tax is a precondition for invoking  Section 129 of  CGST Act, which was absent in the present case. Reliance was also placed on Central Board of Indirect Taxes and Customs (“CBIC”)Circular No. 76/50/2018-GST, dated December 31, 2018, clarifying ownership of goods for purposes of  Section 129,  CGST Act.
• Observed that, at the time of interception, the GSTIN of the supplier, M/s. Ghosh Enterprises, was active, and the transporter carried requisite documents as per  Section 68 of  CGST Act r/w  Rule 138A ofWBGST Rules clearly demonstrating compliance, negating all possible assumptions regarding intention to evade tax.
• Directed that, the penalty was set aside and the Department will refund the penalty amount within eight weeks.

Our Comments:

The Calcutta High Court rightly pointed out the scope of statutory compliance which is of utmost importance in administrative proceeding. Principles of Natural Justice must be adhered to in such proceedings to make it fair and acceptable to the person whose interests are aligned. The Court also clarified that suspicion alone cannot justify penalty proceedings.

This ruling resonates with earlier pronouncements such as Assistant Commissioner v. Satyam Shivam Papers Pvt. Ltd. 2022 (1) TMI 954 - SC Order, where Courts held that penalty under  Section 129 of Telangana Goods & Service Tax Act, 2017 cannot be sustained absent clear proof of tax evasion or intent.

The ruling the balance towards substantive compliance and natural justice, reiterating that  Section 129 of  CGST Act is not a revenue recovery mechanism but a penal provision that demands strict proof of contravention coupled with intent to evade tax. The Court’s insistence on independent verification before imposing penalty protects bona fide taxpayers from arbitrary detention and strengthens procedural safeguards under the GST regime.

This judgment is likely to influence future cases by narrowing the scope of  Section 129,  CGST Act to instances of proven evasion, ensuring that genuine business transactions are not penalized due to unverified third-party statements.

Relevant Provision:

 Section 129,  CGST Act- Detention, seizure and release of goods and conveyances in transit. —

(1) Notwithstanding anything contained in this Act, where any person transports any goods or stores any goods while they are in transit in contravention of the provisions of this Act or the rules made thereunder, all such goods and conveyance used as a means of transport for carrying the said goods and documents relating to such goods and conveyance shall be liable to detention or seizure and after detention or seizure, shall be released,––

(a) on payment of the applicable tax and penalty equal to one hundred per cent. of the tax payable on such goods and, in case of exempted goods, on payment of an amount equal to two per cent. of the value of goods or twenty-five thousand rupees, whichever is less, where the owner of the goods comes forward for payment of such tax and penalty;

(b) on payment of the applicable tax and penalty equal to the fifty per cent. of the value of the goods reduced by the tax amount paid thereon and, in case of exempted goods, on payment of an amount equal to five per cent. of the value of goods or twenty-five thousand rupees, whichever is less, where the owner of the goods does not come forward for payment of such tax and penalty;

(c) upon furnishing a security equivalent to the amount payable under clause (a) or clause (b) in such form and manner as may be prescribed: Provided that no such goods or conveyance shall be detained or seized without serving an order of detention or seizure on the person transporting the goods.

(3) The proper officer detaining or seizing goods or conveyances shall issue a notice specifying the tax and penalty payable and thereafter, pass an order for payment of tax and penalty under clause (a) or clause (b) or clause (c).

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