Goods & Services Tax (GST) in IndiaPenalty under GST: Section 122 Proceedings Independent of Section 74 – Allahabad HC Upholds Key Distinction

Analysis in Light of the Allahabad HC Decision in Patanjali Ayurved Ltd. v. Union of India (2025):

Framing of Issues

1. Jurisdiction of Proper Officer: Whether the proper officer under the CGST Act can independently adjudicate penalties under Section 122 for standalone contraventions (e.g., fake invoicing) without a pre-requisite tax determination under Section 73/74 of the CGST Act,2017.
2. Non-Abatement of Penalty Proceedings: Whether the conclusion of Section 74 proceedings (tax recovery) automatically terminates penalty proceedings under Section 122 of the CGST Act,2017, for distinct statutory breaches unrelated to tax evasion, such as issuance of fake invoices.

Issue 1. Jurisdiction of Proper Officer to Adjudicate Penalties under Section 122

Statutory Scheme and Legislative Intent:

• Section 74 (Tax Recovery): Operates under Chapter XV (Demands and Recovery), focusing on tax evasion. Penalties here are remedial-deterrent, tied to tax liability.
• Section 122 (Standalone Penalties): Falls under Chapter XIX (Offences and Penalties), targeting specific contraventions (e.g., fake invoicing under Section 122(1)(ii)) irrespective of tax evasion. The court emphasized that Section 122 is a self-contained provision addressing breaches distinct from tax liability.

Court’s Reasoning:

• Civil Liability vs. Prosecution: The HC distinguished civil penalties (adjudicated administratively under Section 122) from criminal prosecution (under Sections 132–138). Penalties under Section 122 are civil liabilities aimed at deterrence, not criminal punishment requiring mens rea.
• Rule 142 CGST Rules: Explicitly integrates Section 122 proceedings into the adjudicatory framework, empowering the proper officer to issue notices and pass orders. The omission of “proper officer” in Section 122 is immaterial, as the provision’s placement in the statutory machinery (e.g., Form GST DRC-01/07) confirms GST authorities’ jurisdiction.
• Precedent: The court cited the ratio laid down by the SC in Gujarat Travancore Agency v. CIT (1989) to affirm that tax penalties are coercive civil obligations, not criminal fines.

The proper officer retains jurisdiction to impose penalties under Section 122 independently of Section 74, as the former targets procedural/qualitative breaches (e.g., fake invoices) distinct from tax evasion.

Issue 2. Non-Abatement of Section 122 Proceedings Post-Closure of Section 74

Explanation 1(ii) to Section 74:

• Scope: Concludes penalty proceedings against co-noticees (e.g., recipients of fake invoices) if Section 73/74 proceedings against the main person (e.g., issuer of invoices) are closed.
• Exception for Independent Offences: Penalties under Section 122 for standalone offences (e.g., fake invoicing, circular trading) do not abate, even if Section 74 proceedings conclude.

Factual Context in Patanjali:

• Section 74 Closure: The Uttarakhand unit was exonerated under Section 74 due to insufficient evidence linking suppliers to tax evasion.
• Section 122 Continuation: The Haryana and Maharashtra units faced penalties under Section 122(1)(ii)/(vii) for issuing fake invoices and circular trading offences requiring no tax determination.

Court’s Interpretation:

• Separate Offences Doctrine: The HC stressed that Section 122 penalizes acts per se unlawful (e.g., fake invoices), irrespective of tax liability. Such contraventions are independent statutory breaches, surviving even if tax demands under Section 74 fail.
• Legislative Intent: The GST framework allows parallel mechanisms i.e Section 74 for revenue recovery and Section 122 for combating fraud through deterrence.

Closure of Section 74 proceedings does not abate Section 122 penalties for standalone offences like fake invoicing, as they address distinct statutory objectives.

Key Legal Principles from the Judgment

• Distinct Objectives:Section 74: Revenue recovery with penalties tied to tax evasion.Section 122: Punitive action for procedural/substantive breaches (e.g., fake invoices), independent of tax liability.
• Civil Nature of Penalties: Penalties under tax statutes (like Section 122) are civil liabilities, adjudicated administratively (not criminally), as reaffirmed by Standard Chartered Bank v. Directorate of Enforcement (2006).
• Legislative Machinery: Rule 142 and the CGST Act’s structure confirm that Section 122 penalties are adjudicated by GST authorities, not criminal courts.

Final Ruling: The Allahabad HC dismissed Patanjali’s writ petition, upholding the independence of Section 122 proceedings and reinforcing the GST regime’s dual mechanism: tax recovery (Section 74) and deterrence of fraud (Section 122).

This decision underscores the legislature’s intent to empower GST authorities to penalize fraudulent practices (e.g., fake invoicing) independently, ensuring robust enforcement while maintaining procedural fairness.

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