No Vicarious GST Prosecution Without the Company in the Dock

The Question Was Jurisdictional, Not Merely Factual

The Punjab and Haryana High Court judgment in Manoj Bansal Versus Deputy Director, Directorate of Goods and Services, Gurugram - 2026 (8) TMI 145 - PUNJAB AND HARYANA HIGH COURT, addresses an important issue in GST prosecution law. The allegation was serious. The Department alleged wrongful availment of input tax credit of about Rs.15.44 crores on the strength of invoices issued by alleged dummy or non-existent firms, without any actual supply of goods.

However, the legal issue before the High Court was not whether fake ITC had actually been availed. The Court was concerned with a more basic question. Could a Director be prosecuted alone when the alleged ITC offence was attributed to the company, but the company itself was not made an accused in the criminal complaint? This distinction is crucial. A court may be faced with serious allegations, but even serious allegations must travel through the correct legal route.

The complaint was filed against the petitioner, Manoj Bansal, in his individual capacity. The company, M/s NIPL, which was the registered person under GST and which had allegedly availed and utilised the disputed ITC, was not arraigned as an accused. At the same time, the record showed that the Department had issued a demand-cum-show cause notice under Section 74 of the CGST Act to M/s NIPL. The adjudication order was also against M/s NIPL, and the appeal under Section 107 was filed by M/s NIPL. These facts made the omission of the company from the prosecution highly significant.

Vicarious Criminal Liability Is an Exception, Not the Normal Rule

The starting point of criminal law is personal responsibility. Ordinarily, a person is punished for his own act, intention, participation or omission. Vicarious criminal liability is different. It makes one person liable for an offence committed by another because of a special statutory relationship. This is why vicarious liability in criminal law is not lightly presumed. It must be clearly created by statute and strictly applied according to the conditions laid down by the statute.

Section 137 of the CGST Act creates a statutory framework for offences by companies. Section 137(1) provides that where an offence under the Act is committed by a company, every person who, at the time of commission of the offence, was in charge of and responsible to the company for the conduct of its business, as well as the company, shall be deemed to be guilty and liable to be proceeded against and punished. Section 137(2) further addresses cases where the offence has been committed with the consent or connivance of, or due to negligence on the part of, any director, manager, secretary or other officer.

The important point is that Section 137 begins with an offence committed by a company. The company is not an incidental background fact. It is the principal statutory foundation. If the offence is alleged to have been committed by the company, the liability of the Director or officer arises because of his position and role in relation to that company. Therefore, where prosecution is based on vicarious liability, the complaint must respect the statutory sequence.

The Company's Offence Is the Gateway to Director's Liability

The High Court emphasised the words "as well as the company" in Section 137. These words are not decorative. They indicate that when the offence is committed by a company, the company is also to be treated as a guilty person for the purpose of prosecution. Only thereafter can the persons in charge of the company be brought within the net of vicarious liability, subject to proper pleadings and proof.

In the present case, the Department itself accepted that M/s NIPL was the entity which allegedly availed ITC of Rs.15.44 crores without actual supply of goods. The complaint also proceeded on the basis that the wrongful availment was by M/s NIPL. The petitioner was proceeded against because he was a Director of that company and was alleged to be involved in its affairs. Thus, the prosecution was essentially built on the alleged offence of the company.

Once this position was clear, the company could not be kept outside the complaint. The Director's alleged role may be relevant. His alleged active involvement may be relevant. But where the statutory basis is the company's offence and the Director's vicarious liability, the company must be before the criminal court. Without the company being arraigned as an accused, the Director alone cannot be made to carry the entire prosecution on a vicarious basis.

Strict Construction Protects the Discipline of Penal Law

The Court applied the principle of strict construction of penal statutes. Penal provisions affect liberty, reputation and carry criminal consequences. Therefore, they cannot be expanded by implication beyond the language used by the legislature. If a statute creates criminal liability in a particular manner, the prosecution must follow that manner.

This principle is especially important in GST prosecution matters. Section 132 of the CGST Act contains serious offences, including those relating to fake invoices and wrongful availment or utilisation of ITC. Conviction may lead to imprisonment, fine and serious reputational consequences. Therefore, while the Department has full power to prosecute genuine GST fraud, the prosecution complaint must be framed with legal precision.

The High Court did not treat the omission of the company as a minor technical defect. It treated it as a foundational defect because the entire case against the Director was connected to the alleged offence of the company. If the company is the registered person, the alleged availer of ITC, the noticee in adjudication, and the appellant in statutory appeal, its absence from prosecution cannot be ignored.

The Same Principle Under Company-Offence Provisions Was Applied

A major part of the judgment is the comparison between Section 137 of the CGST Act and Section 141 of the Negotiable Instruments Act, 1881. Section 141 addresses offences by companies in cheque dishonour cases. It also uses similar language and creates vicarious liability for persons who were in charge of and responsible to the company for the conduct of its business.

The High Court found both provisions pari materia, meaning broadly similar in structure and object. Accordingly, the settled principles laid down by the Supreme Court under Section 141 of the Negotiable Instruments Act were applied to interpret Section 137 of the CGST Act. This is an important method of legal interpretation. Where two provisions use similar language and deal with similar legal concepts, judicial interpretation of one may guide the interpretation of the other.

This does not mean that the Negotiable Instruments Act and the CGST Act are identical in all respects. Their subject matter is different. But the specific legal issue was the same: when an offence is alleged to have been committed by a company, can persons in charge be prosecuted without making the company an accused? On that issue, the Supreme Court's company-offence jurisprudence was directly relevant.

Arraigning the Company Is Imperative Where Liability Is Vicarious

The most important authority relied upon was Aneeta Hada Versus Godfather Travels & Tours (P.) Ltd. - 2012 (5) TMI 83 - Supreme Court. In that case, a three-Judge Bench of the Supreme Court held that for maintaining prosecution under Section 141 of the Negotiable Instruments Act, arraigning the company as an accused is imperative. The Supreme Court explained that the commission of an offence by the company is an express condition precedent to attract vicarious liability of others.

This principle is powerful because it recognises the separate legal personality of a company. A company is a juristic person. It can be prosecuted, and its reputation can be affected by criminal findings. If the allegation is that the company committed the offence, the company must be made an accused so that the prosecution is properly anchored. Directors and officers may then be proceeded against if the statutory conditions are satisfied.

The Punjab and Haryana High Court applied this principle to Section 137 of the CGST Act. The words "as well as the company" in Section 137 were treated as carrying the same legal effect. If the company can be prosecuted and the offence is alleged to have been committed by the company, then prosecution of the Director on vicarious liability cannot proceed without the company.

Later Supreme Court Rulings Kept the Rule Firm

The High Court also referred to later Supreme Court decisions that reaffirmed the same principle. In Anil Gupta Versus Star India Pvt. Ltd. & Another - 2014 (7) TMI 545 - Supreme Court, the Supreme Court quashed proceedings against an individual when the company was not before the Court. The decision followed the principle laid down in Aneeta Hada and made it clear that individual prosecution could not proceed independently where the statutory framework required the company to be an accused.

In HIMANSHU Versus B. SHIVAMURTHY & ANR. - 2019 (3) TMI 294 - Supreme Court, the Supreme Court again held that, in the absence of the company being arraigned as an accused, a complaint against the Director was not maintainable. The fact that the Director had signed the cheque on behalf of the company did not alter the position. The underlying logic is that where the act is attributed to the company, the company must be prosecuted, and the Director's liability follows under the statutory provision.

The Court also referred to Sharad Kumar Sanghi Versus Sangita Rane - 2015 (2) TMI 1117 - Supreme Court, where the Supreme Court quashed proceedings because the allegations were essentially against the company, but the company had not been made a party. Similarly, in DAYLE DE SOUZA Versus GOVERNMENT OF INDIA THROUGH DEPUTY CHIEF LABOUR COMMISSIONER (C) AND ANOTHER - 2021 (11) TMI 67 - Supreme Court, the same position was affirmed. These cases together show that the rule is not a narrow technicality under cheque law. It is a broader principle governing statutory vicarious criminal liability where the company is the principal alleged offender.

The Registered Person Framework Strengthened the Company's Central Role

The GST framework strengthened the conclusion. Section 16 of the CGST Act provides that every registered person is entitled to take credit of input tax charged on any supply of goods or services or both, subject to the conditions and restrictions prescribed under the Act. Section 2(94) defines "registered person" as a person registered under Section 25, excluding a person having a Unique Identity Number.

In the present case, M/s NIPL was the registered person. It was M/s NIPL that was allegedly shown as availing ITC. The petitioner, in his individual capacity, was not the registered person who had availed ITC under Section 16. This did not mean that a Director could never be prosecuted. But it did mean that the prosecution had to correctly recognise the company as the principal entity involved in the alleged GST offence.

The surrounding facts confirmed this position. The demand-cum-show cause notice under Section 74 was issued to M/s NIPL. The adjudication order was against M/s NIPL. The appeal under Section 107 was filed by M/s NIPL. Therefore, for adjudication purposes, the Department treated the company as the person chargeable and the entity involved in the alleged ITC irregularity. In such circumstances, the company's absence from the criminal complaint became legally untenable.

Allegation of Active Role Cannot Cure a Missing Principal Accused

The Department argued that the petitioner was the beneficiary and mastermind of the fraudulent arrangement. It was submitted that he was actively involved in the company's management and operations, including GST-related matters. The Department therefore contended that he could be prosecuted individually.

The High Court did not accept this argument as advanced. Allegations of active involvement may be relevant to determining the Director's role once the prosecution is properly framed. But they cannot dispense with the statutory requirement to arraign the company where the offence is alleged to have been committed by the company and the Director's liability is vicarious.

This distinction is crucial. A serious allegation does not relax the structure of a penal statute. If the Department wishes to prosecute the Director for his role in a company offence, it must bring the company into the prosecution and then plead and prove the Director's responsibility, consent, connivance or negligence, as the case may be. The prosecution cannot bypass the company and proceed only against the Director when the statutory foundation is the company's alleged offence.

Quashing Did Not Mean a Clean Chit on Merits

The High Court quashed the complaint bearing COMA-86-2021, dated 05.02.2021, titled Deputy Director v. Manoj Bansal, pending before the Chief Judicial Magistrate, Rohtak, along with all subsequent proceedings arising from it. The quashing was based on a legal defect in the prosecution, namely the prosecution of the Director alone without arraigning the company.

However, the Court also preserved the Department's liberty to proceed with the offence under Section 132 of the CGST Act in accordance with law. This clarification is significant. The judgment does not say that allegations of fake ITC are irrelevant. It does not decide that no offence was committed. It does not grant immunity from lawful prosecution. It only says that if prosecution is to be launched, it must be launched in the manner required by law.

This balance protects both sides. The taxpayer side is protected from a legally defective prosecution. The Department is not prevented from proceeding if the statutory requirements are properly followed. The judgment therefore reinforces lawful prosecution rather than weakening GST enforcement.

In essence, the ruling leaves a clear message. GST law may deal firmly with fake ITC offences, but prosecution must still begin with the correct accused. Where the company is alleged to have committed the offence, the Director's vicarious liability cannot be built by keeping the company outside the complaint.