Director's prosecution for service tax defaults quashed as amended provisions cannot apply retrospectively to past offences

The Telangana HC quashed prosecution proceedings against a company director for service tax defaults under Finance Act, 1994. The case involved tax defaults from 2011-16 with prosecution launched in 2018. During proceedings, the company underwent liquidation under IBC, with NCLT ordering closure after assets were sold as going concern and liabilities extinguished. The HC held that subsequent amendments to law cannot apply retrospectively to punish past acts, citing SC precedent in Ghanashyam Mishra case. The court ruled that amended provisions enacted after launching proceedings cannot be used to prosecute the accused for prior offences, allowing the petition and quashing criminal proceedings.

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Issues Involved:
1. Non-compliance with service tax payment and misclassification of services.
2. Liability of the petitioner (accused No. 2) for the company's service tax evasion.
3. Validity of prosecution without issuing a show cause notice to the petitioner.
4. Impact of liquidation and insolvency proceedings on the continuation of prosecution.
5. Applicability of Section 32A of the Insolvency and Bankruptcy Code, 2016 on the prosecution.

Summary:

Non-compliance with Service Tax Payment and Misclassification of Services:
The petitioner, Chairman and Managing Director of M/s. ICSA (India) Ltd. (accused No. 1), faced allegations of non-compliance with service tax payment and misclassification of services for the period 2011-12 to 2015-16, resulting in a shortfall of Rs. 34,28,85,410/-. The Anti Evasion Wing conducted a detailed investigation, leading to a show cause notice dated 21.12.2016 and a subsequent order dated 31.03.2017.

Liability of the Petitioner for the Company's Service Tax Evasion:
The petitioner was held responsible for the company's business conduct and alleged to have committed offenses punishable under Section 89 of the Finance Act, 1994, read with Section 9 and 9AA of the Central Excise Act, 1944. The prosecution was initiated based on administrative approval and necessary sanction by the Chief Commissioner of Central Tax & Customs.

Validity of Prosecution Without Issuing a Show Cause Notice to the Petitioner:
The petitioner contended that no show cause notice was issued to him before launching the prosecution, which is a procedural requirement. The petitioner argued that he was not responsible for the day-to-day activities of the company and that the order in original dated 31.03.2017 was based on assumptions and surmises.

Impact of Liquidation and Insolvency Proceedings on the Continuation of Prosecution:
The petitioner argued that the company's liquidation under the Insolvency and Bankruptcy Code, 2016, extinguished all liabilities, including service tax dues, and therefore, the prosecution should not continue. The National Company Law Tribunal, Hyderabad Bench-II, closed the liquidation proceedings, stating that all liabilities were extinguished after the distribution of assets.

Applicability of Section 32A of the Insolvency and Bankruptcy Code, 2016 on the Prosecution:
The petitioner relied on judgments indicating that post-insolvency, the liability for offenses committed prior to the insolvency process ceases. However, the respondent argued that Section 32A provides exclusions and exceptions, holding individuals responsible for offenses committed by the corporate debtor.

Court's Decision:
The court held that the petitioner could not be punished under the amended provisions that came into existence after the period of assessment. The laws or amendments made shall be prospective in nature and not retrospective. Consequently, the writ petition was allowed, and the proceedings against the petitioner in C.C. No. 124 of 2018 were quashed.

Conclusion:
The court quashed the proceedings against the petitioner, emphasizing that amendments and laws cannot be applied retrospectively to punish individuals for past acts. Pending miscellaneous applications were also closed.

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