No Benefit, No Liability: Bombay HC Draws the Line on Employee Penalties under GST - A Critical Analysis of Shantanu Sanjay Hundekari v. Union of India [Bombay HC]

Abstract

The Bombay High Court, in Shantanu Sanjay Hundekari, Vikas Agarwal, Yogesh Agarwal, Mamta Gupta Versus Union of India, through Secretary, Ministry of Finance, New Delhi., State of Maharashtra, Joint Director, Director General of Goods and Service Tax Intelligence, Gujarat. The Additional/Joint Commissioner, Thane Commissionerate - 2024 (3) TMI 1277 - BOMBAY HIGH COURT, has delivered a significant ruling delineating the limits of employee liability under the CGST Act, 2017. The Court examined the applicability of Section 122(1A) (penalty for specified offences) and Section 137 (offences by companies), holding that employees cannot be subjected to penal consequences in the absence of statutory preconditions such as taxable person status, retention of benefit, and demonstrable control over business affairs. The judgment further clarifies that civil tax adjudication proceedings under Section 74 cannot be conflated with criminal liability provisions, thereby reinforcing jurisdictional discipline and safeguarding against administrative overreach.

1. Introduction

The GST regime, while aimed at ensuring tax compliance, has increasingly witnessed instances where employees and authorised representatives are impleaded in enforcement proceedings involving substantial tax demands. This raises a fundamental question regarding the extent of personal liability of employees for corporate tax defaults.

The present ruling addresses this issue by examining whether employees can be penalised under Section 122(1A) and prosecuted under Section 137, particularly where the alleged tax liability pertains exclusively to the company.

2. Factual Background

The petitioners were employees and authorised representatives of a multinational shipping group. A show cause notice (SCN) was issued under Section 74 of the CGST Act, alleging wrongful availment and distribution of Input Tax Credit (ITC) by the company.

Significantly, the SCN proposed:

• Imposition of penalty equivalent to Rs. 3,731 crores on employees
• Invocation of Section 122(1A) (penalty) and Section 137 (offences by companies)

The petitioners challenged the SCN on the ground that:

• They were neither taxable persons nor beneficiaries of the alleged transactions
• The invocation of penal provisions was without jurisdiction

3. Statutory Framework

3.1 Section 122(1A), CGST Act

Provides for penalty where:

• A person retains benefit of specified fraudulent transactions; and
• Such transactions are conducted at his instance

3.2 Section 137, CGST Act

Deals with offences by companies and extends liability to:

• Persons in charge of and responsible for conduct of business
• Requires criminal prosecution framework

3.3 Section 74, CGST Act

Governs:

• Determination of tax
• Civil consequences (tax, interest, penalty)

4. Issues Before the Court

1. Whether Section 122(1A) can be invoked against employees not being taxable persons
2. Whether retention of benefit is a sine qua non for penalty
3. Whether Section 137 can be invoked through a demand-cum-show cause notice under Section 74
4. Whether GST law recognises vicarious liability of employees

5. Judicial Findings

5.1 Inapplicability of Section 122(1A) to Employees

The Court held that Section 122(1A) must be interpreted in conjunction with:

• Section 2(107): 'Taxable person'
• Offences specified in Section 122(1)

Accordingly:

• Only a taxable/registered person can fall within its ambit
• Employees, in their individual capacity, do not qualify as such

Further, the Court emphasised that:

• Retention of benefit is a mandatory condition
• No material existed to establish that the petitioners derived any personal benefit

Hence, invocation of Section 122(1A) was held to be without jurisdiction.

5.2 Requirement of 'Retention of Benefit'

The Court clarified that:

• Mere involvement in compliance or facilitation does not suffice
• There must be direct and identifiable economic benefit

Absence of such benefit renders the provision inapplicable.

5.3 Improper Invocation of Section 137

The Court distinguished between:

It held that:

• Section 137 cannot be invoked through Section 74 proceedings
• Penal prosecution must follow separate statutory procedure

The SCN was found to be legally flawed due to intermixing of distinct jurisdictions.

5.4 No Vicarious Liability under GST

A key doctrinal finding of the Court is that the CGST Act does not recognise vicarious liability of employees unless expressly provided.

Accordingly:

• Liability cannot be fastened solely based on employment
• Specific statutory conditions must be satisfied

5.5 Jurisdictional Defect and Abuse of Process

The Court observed that:

• The SCN lacked jurisdictional foundation
• Essential ingredients of invoked provisions were absent
• The penalty proposed was grossly disproportionate

The SCN was therefore quashed as arbitrary, without jurisdiction and vitiated by non-application of mind.

6. Ratio Decidendi

1. Section 122(1A) applies only where:
   • The person is a taxable person
   • There is retention of benefit
   • Transactions are conducted at his instance
2. Section 137:
   • Operates in the domain of criminal law
   • Cannot be invoked through civil adjudication proceedings
3. GST law does not impose automatic vicarious liability on employees

7. Suggestions to Government

• Define scope of 'any person' under Section 122(1A)
• Clarify concept of 'benefit retention'
• Provide explicit framework for vicarious liability, if intended

• Issue CBIC circular clarifying

11. Conclusion

The Bombay High Court has laid down a clear and authoritative principle that:

• Penal provisions under GST cannot be invoked in the absence of statutory prerequisites
• Employees cannot be made liable for corporate defaults without explicit legal basis
• Civil and criminal proceedings must remain distinct and non-overlapping

This judgment serves as a critical precedent in ensuring that GST enforcement remains legally sustainable, proportionate, and consistent with constitutional principles.

By: CA. Chitresh Gupta

Mobile: 99103 67918

https://www.linkedin.com/in/ca-chitresh-gupta-22795920/