2025 (6) TMI 115 - HC - GST

Power of Proper Officer/Adjudicating Officer to adjudicate on the penalty provision provided u/s 122 of the CGST Act - dropping of proceedings under Section 74 of the CGST Act 2017 will ipso facto abate the proceedings under Section 122 of the CGST Act or not. HELD THAT - The word offence does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence. Similarly penalty is a slippery word and the same has to be understood in the context in which it is used in a given statute. In ordinary parlance the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. However there would be circumstances for certain offences penalty may not be imposed and the same may be punishable by incarceration. Penalty may be imposed in cases where there is a simple violation of a law or for omission to do a particular act without there being any mens rea. On the other hand penalty may also be imposed for serious contravention of the law with or without mens rea that may amount to an offence for the purpose of deterrence and punishment. A statute may provide for further punishment by prosecution for the same offence/contravention if the legislature deems it necessary. The Supreme Court in Sanjeev Coke Mfg. Co. v. Bharat Coking Coal Ltd. 1982 (12) TMI 220 - SUPREME COURT relied upon by the petitioner has held that once the statute leaves the parliament Court is the sole authority to interpret what the parliament intends through the language of the statute and other permissible aids. Both Sections 74 and 122 being charging sections are required to be interpreted strictly and plain meaning to the word used therein should be provided by the courts. An absurd interpretation that makes the charging sections unworkable should be avoided. This does not mean that a person who is not liable to tax or to penalty should be roped into the charging provision simpliciter to curb evasion of taxes. However the court is allowed to look at all the provision of the statute to bring about a harmonious construction and come to an interpretation which could make the statute workable. A word may have several meanings and the court may choose the meaning that could harmonise the entire statute instead of putting a meaning that would be contrary to the intention of the Legislature. In Sukhpal Singh Bal 2005 (9) TMI 633 - SUPREME COURT the Supreme Court while pondering the vires of penalty imposed under Section 10(3) of the Uttar Pradesh Motor Vehicles Taxation Act 1997 in relation to the object behind imposing penalty in tax statutes has held that the penalty provision is enacted to protect public revenue and deter tax evasion while serving a compensatory role for breaches of statutory tax duties. Thus penalty may be imposed in cases where men rea is a requirement. It is the scheme of a particular statute that shall determine whether for imposition of penalty there is a requirement for men rea or not. However when a taxing statute speaks of prosecution for those offences mens rea or guilty intent is a sine qua non . It is clear that there may be scenarios where a proceeding under Section 73/74 of the CGST Act may get concluded against the main person but the penalty proceedings under Section 122 of the CGST Act for issue of fake invoices by the main person may stand independent of the proceedings under Section 74 and therefore those proceedings under Section 122 would not abate as per the explanation 1(ii) of Section 74. Conclusion - Section 122 of the CGST Act is a provision specifically for imposition of penalty to be adjudicated by the proper officer while the provisions from Sections 132 to 138 deal with prosecution to be done by the criminal courts. Moreover conclusion of proceedings on the main person under Section 74 of the CGST Act shall not ipso facto abate the proceedings under Section 122 of the CGST Act proposed to be imposed on the main person. The scheme of the CGST Act read with CGST Rules lead one to the inescapable conclusion that the arguments raised by the petitioner though innovative and thought provoking are fallacious as the interpretation given by the petitioner would lead to obfuscation of the very purpose and objective of the CGST Act. In light of the same the contentions of the petitioner cannot be countenanced and are accordingly rejected. Petition dismissed.

Summary

The core legal questions considered by the Court are:

(I) Whether the "Proper Officer/Adjudicating Officer" has the power to adjudicate on the penalty provision under Section 122 of the Central Goods and Services Tax (CGST) Act, 2017;

(II) Whether the dropping of proceedings under Section 74 of the CGST Act against the main person automatically results in abatement of proceedings under Section 122 of the CGST Act against the same person.

Issue-wise detailed analysis:

Issue (I): Power of Proper Officer to Adjudicate Penalty under Section 122 CGST Act

Relevant legal framework and precedents: Section 122 of the CGST Act enumerates twenty-one specific offences attracting penalty, distinct from Sections 73 and 74 which deal with determination of tax not paid or short paid due to fraud or wilful misstatement. Section 74 proceedings are initiated by a proper officer, who also issues show cause notices and adjudicates penalties under that section. Section 122 is located in Chapter XIX titled 'Offences and Penalties', alongside Section 132 which provides for punishment for certain offences by criminal courts, subject to prior sanction of the Commissioner as per Section 132(6) and Section 134.

Supreme Court precedents such as Standard Chartered Bank, Shiv Dutt Rai Fateh Chand, Gujarat Travancore Agency, and M.C.T.M. Corporation Pvt. Ltd. have clarified the distinction between penalty and punishment, emphasizing that penalty in tax statutes is generally a civil liability, remedial and coercive in nature, and does not necessarily require mens rea or criminal trial. The definition of 'offence' under the General Clauses Act and CrPC includes acts or omissions made punishable by law, but the presence of penalty does not ipso facto convert a provision into criminal proceedings.

Court's interpretation and reasoning: The Court analyzed the scheme of the CGST Act, noting that Section 122 imposes penalty for various contraventions, some involving mens rea, others not. It distinguished Section 122 penalties from Section 132 punishments, the latter requiring prosecution in criminal courts with prior sanction. The absence of any reference to 'proper officer' in Section 122 was examined in light of Explanation 1(ii) to Section 74, which contemplates that the proper officer initiating proceedings under Sections 73 and 74 also initiates proceedings under Sections 122 and 125. Further, Rule 142 of the CGST Rules mandates that proper officers issue notices and orders under Section 122, indicating legislative intent for departmental adjudication.

The Court rejected the petitioner's argument that penalty under Section 122 is criminal in nature and requires trial in criminal courts. It held that the penal provisions under Section 122 are adjudicatory and civil in nature, designed to deter unlawful acts related to tax evasion without necessitating criminal prosecution. The Court emphasized that the presence of mens rea in some sub-clauses of Section 122 does not convert the entire provision into a criminal offence, as civil penalties may also require mens rea. The legislative scheme clearly separates civil penalties under Section 122 from criminal punishments under Section 132, the latter being more serious and requiring prior sanction and criminal trial.

Key evidence and findings: The Court relied on the statutory text, legislative intent, CBIC Circulars, and authoritative judicial precedents to conclude that proper officers have the power to adjudicate penalties under Section 122. The procedural framework under the CGST Rules further supported this conclusion.

Application of law to facts: The petitioner's contention that penalty under Section 122 cannot be adjudicated by the department was rejected as inconsistent with the statutory scheme and practical administration of GST laws. The Court found no merit in the argument that Section 122 penalties require criminal trial.

Treatment of competing arguments: The petitioner's arguments based on the heading of Section 122, the absence of reference to proper officer, reliance on definitions of offence under CrPC, and the need for predicate offence under Sections 73/74 were considered but found unpersuasive. The respondents' submissions emphasizing the civil nature of penalty, legislative scheme, and practical considerations were accepted.

Conclusion: The Court held that the proper officer/adjudicating officer has the power to adjudicate penalty under Section 122 of the CGST Act and that these proceedings are not criminal prosecutions requiring trial in criminal courts.

Issue (II): Effect of Dropping Proceedings under Section 74 on Proceedings under Section 122

Relevant legal framework and precedents: Explanation 1(ii) to Section 74 of the CGST Act states that where proceedings against the main person under Section 73 or 74 have been concluded, the proceedings against all persons liable to pay penalty under Sections 122 and 125 are deemed to be concluded. However, Explanation 1(i) excludes proceedings under Section 132 from this deeming provision.

CBIC Circular No. 171/03/2022-GST clarifies that contraventions under Sections 73/74 need not necessarily overlap with offences under Section 122. Supreme Court judgments emphasize the distinct nature of penalties under different provisions.

Court's interpretation and reasoning: The Court interpreted Explanation 1(ii) to mean that the abatement of proceedings under Section 74 against the main person results in abatement of penalty proceedings under Section 122 only against other persons liable to pay penalty, not necessarily the main person. The Court explained through hypothetical examples that the same person may be liable under different provisions for different contraventions. Therefore, dropping proceedings under Section 74 does not ipso facto abate proceedings under Section 122 against the main person.

Key evidence and findings: The Court relied on the statutory language, circulars, and practical examples to demonstrate the independence of proceedings under Sections 74 and 122.

Application of law to facts: In the present case, the department dropped proceedings under Section 74 against the petitioner's units in Haryana and Maharashtra but continued penalty proceedings under Section 122 against them. The Court held this approach consistent with the statutory scheme.

Treatment of competing arguments: The petitioner's argument that abatement under Section 74 should lead to abatement under Section 122 was rejected as inconsistent with the statutory scheme and legislative intent.

Conclusion: Dropping proceedings under Section 74 does not automatically abate proceedings under Section 122 against the same person, as they relate to different offences and penalties.

Significant holdings:

"The word 'offence' does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence."

"Penalty may be imposed in cases where there is a simple violation of a law or for omission to do a particular act without there being any mens rea. On the other hand, penalty may also be imposed for serious contravention of the law with or without mens rea that may amount to an offence for the purpose of deterrence and punishment."

"The penal provisions under Section 122 of the CGST Act are adjudicatory and civil in nature, designed to deter unlawful acts related to tax evasion without necessitating criminal prosecution."

"The proper officer/adjudicating officer has the power to adjudicate penalty under Section 122 of the CGST Act and these proceedings are not criminal prosecutions requiring trial in criminal courts."

"Dropping of proceedings under Section 74 of the CGST Act against the main person does not ipso facto abate the proceedings under Section 122 of the CGST Act against the same person, as these relate to different offences and penalties."

"Explanation 1(ii) to Section 74 of the CGST Act contemplates that conclusion of proceedings against the main person under Section 73 or 74 shall conclude proceedings against other persons liable to pay penalty under Sections 122 and 125, but not necessarily the main person."

"The legislative scheme clearly separates civil penalties under Section 122 from criminal punishments under Section 132, the latter being more serious and requiring prior sanction and criminal trial."

"Rule 142 of the CGST Rules mandates that proper officers issue notices and orders under Section 122, indicating legislative intent for departmental adjudication."

"The absence of any reference to 'proper officer' in Section 122 is not determinative of the nature of proceedings and does not imply that Section 122 proceedings are criminal prosecutions."

"The object of the legislature in levying penalty under tax statutes is deterrence against tax evasion and protection of public revenue."

Accordingly, the writ petition challenging the imposition of penalty under Section 122 was dismissed, and the respondent authorities were directed to continue the proceedings under Section 122 in accordance with the show cause notice.