Facts of the Case

  • The petitioners, Mayank Bansal and Nadar Hussain, are partners of $M/s$ Quantum Infratech, a partnership firm engaged in the business of constructing residential buildings.
  • Following an investigation by the DGGI Guwahati Zonal Unit, a Show Cause Notice (SCN) was issued on August 3, 2024, to the firm and its partners under Section 74(1) read with Section 122(1A) and Section 122(3)(a) of the CGST/Assam GST Act, 2017.
  • The investigation alleged significant GST evasion on the supply of construction services to landowners, liabilities under the reverse charge mechanism for the transfer of development rights, and the wrongful availment of ineligible Input Tax Credit (ITC) spanning the period from July 2017 to March 2023.
  • Specific allegations were made that the partners actively suppressed turnover, collected undisclosed amounts in cash from customers without issuing tax invoices, and personally retained the benefits arising from these tax-evasive transactions.
  • An Order-in-Original dated February 4, 2025, was passed, imposing personal penalties on the partners equivalent to the tax evaded by the firm. This adjudication was subsequently upheld by the Appellate Authority via a common Order-in-Appeal dated August 26, 2025.

Issues Involved

  1. Whether partners of a partnership firm (where the firm is the primary "taxable person") can be personally penalized under Section 122(1A) of the CGST Act, 2017.
  2. Whether the provisions of Section 122(1A), which were brought into force with effect from January 1, 2021, can be applied to tax evasion periods prior to its enforcement date (i.e., July 2017 to December 2020).

Petitioner’s Arguments

  • Non-Taxable Person Exemption: The petitioners argued that the primary infractions under Section 122(1) clauses (i), (ii), (vii), and (ix) can only be committed by a "taxable person". Since the partnership firm ($M/s$ Quantum Infratech) is the registered taxable entity, personal penalties under Section 122(1A) cannot extend to individuals who are merely partners. They heavily relied on the Bombay High Court rulings in Shantanu Sanjay Hundekari and Amit Manilal Haria to back this position.
  • Prospectivity of Penal Provision: The petitioners further argued that Section 122(1A) was introduced via the Finance Act, 2020, effective only from January 1, 2021. They contended that penalizing them for periods preceding January 1, 2021, violates the constitutional protections against the retrospective application of penal laws under Article 20(1) of the Constitution of India.

Respondent’s Arguments

  • Distinction in Statutory Definitions: The revenue argued that the legislature deliberately differentiated the terminology within Section 122. While Section 122(1) uses the phrase "taxable person," Section 122(1A) explicitly targets "any person" who retains the transaction's benefit and at whose instance it was conducted. Restricting this to the taxable entity would defeat the legislative intent.
  • Corporate Veil/Juridical Reality: The revenue underscored that inanimate juridical entities like firms or companies cannot perform physical acts of fraud or cash collection on their own; such deeds are executed by the natural minds controlling them. They cited the Delhi High Court ruling in Gurudas Mallik Thakur to support this interpretation.
  • Civil Adjudication vs. Criminal Offense: Regarding retroactivity, the revenue contended that Section 122(1A) does not create a new category of tax violation but simply identifies the beneficiary of existing infractions. Citing the Delhi High Court's ruling in Bhupender Kumar, they maintained that as long as the SCN was issued post-enactment, the provision is validly applicable.

Court Order / Findings

  • Interpretation of "Any Person": The Gauhati High Court explicitly departed from the Bombay High Court's views in Shantanu Sanjay Hundekari and Amit Manilal Haria. The Court observed that holding Section 122(1A) applicable only to the taxable person would render the sub-section entirely otiose and nugatory. It validated that the twin conditions were met: the petitioners retained the transaction benefits and orchestrated them.
  • Constitutional Validity of Civil Penalties: The Court ruled that Article 20(1) of the Constitution applies strictly to criminal offenses and convictions, not to civil tax adjudications and monetary penalties. Relying on the landmark Supreme Court Constitution Bench decision in Jawala Ram Vs. State of Pepsu, the Court ruled that civil penalties for tax infractions do not attract the bar against retroactivity.
  • Final Directions: The High Court resolved the jurisdictional issues against the petitioners but granted them liberty to file statutory appeals on the merits/quantum of the penalty before the Appellate Tribunal within 30 days, protecting them from coercive actions during this interim timeline.

Important Clarification

  • The Court clarified that it only settled the jurisdictional competence of the revenue authorities to levy such penalties. The factual issues regarding whether the partners actually retained the benefits or if the transactions were executed at their personal instance remain open for challenge on merits before the Appellate Tribunal.

Section Involved

  • Section 122(1A) of the Central Goods and Services Tax Act, 2017 (and corresponding provisions of the Assam Goods and Services Tax Act, 2017).
  • Section 122(1) [Clauses (i), (ii), (vii), and (ix)] of the CGST Act, 2017.
  • Section 2(84), 2(94), and 2(107) (Definitions of Person, Registered Person, and Taxable Person).
  • Article 20(1) of the Constitution of India.

Link to download the order - https://mytaxexpert.co.in/uploads/1783060334_323compressed.pdf

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