2025 (7) TMI 626 - HC - GST

Violation of principles of natural justice - non-issuance of notice u/s 122(1A) of the CGST Act - imposition of penalty - non-satisfaction of twin conditions under Section 122(1A) of the CGST Act - mastermind of the alleged transactions - fraudulent availment of ITC - HELD THAT - A perusal of the SCN reveals the malaise of availment of fraudulent ITC from and passing on of the same to non-existent firms and entities. A perusal of the SCN clearly contains all the allegations against the four individuals including the Petitioner. The statement of the Petitioner was also recorded and the gist of the said statement is also set out in the said SCN. A perusal of the statements would show that the Petitioner was all along aware that he was supporting Mr. Sanjay Sehgal in creating fake firms. The exact role which hemay have played during this process is a factual analysis which this Court cannot undertake in a writ petition - The Petitioner was thus fully aware and enabled the creation of these fake firms and was aware that ITC was being fraudulently availed of. The Petitioner being a GST consultant who was also earlier working with the Delhi GST Department has clearly made use of his knowledge and assisted Mr. Sehgal in setting up these fake firms. Since the Petitioner has chosen not to rebut the allegations that he was benefitted from the transactions he cannot today seek to argue and he did not derive any benefit from the said transactions - The manner in which fraudulent ITC has been availed would also show that it was a continuous process and not a one time act of the parties involved. Under such circumstances Section 122(1A) of the CGST Act was clearly applicable. This Court is not inclined to entertain the present writ petition. However since the impugned order is of 21st January 2025 this Court is of the view that though limitation period has expired he can be given an opportunity to avail of his appellate remedy in accordance with law under Section 107 of the CGST Act 2017. Petition disposed off.

Summary

The core legal questions considered in this judgment include: (1) Whether a penalty under Section 122(1A) of the CGST Act, 2017 could be imposed on the petitioner despite no specific show cause notice being issued under that provision; (2) Whether the petitioner, as a GST consultant, could be held liable for aiding and abetting the creation and operation of fake firms used for fraudulent availment and passing of input tax credit (ITC); (3) Whether Section 122(1A) of the CGST Act applies retrospectively to transactions prior to its enactment; (4) Whether the petitioner's failure to file a reply to the show cause notice (SCN) affects the imposition of penalty; and (5) Whether the writ jurisdiction is appropriate for adjudicating complex factual issues involving fraudulent ITC availment.

Regarding the applicability of Section 122(1A) of the CGST Act, the Court examined the legal framework which mandates that penalties for certain offences under the CGST Act can only be imposed after issuance of a show cause notice specifying the grounds under that section. The petitioner contended that no notice was issued under Section 122(1A), thus penalty under this provision could not be imposed. The Court, however, noted that the SCN explicitly contemplated penalties under Section 122, including Section 122(1A), as reflected in paragraph 19.4.1 of the SCN. The Court interpreted this as sufficient compliance with procedural requirements, holding that the penalty was correctly invoked. The Court also referred to precedents emphasizing that final orders cannot be based on grounds not contained in the SCN, but found the SCN here sufficiently detailed to include Section 122(1A) allegations.

On the petitioner's role and liability, the Court analyzed extensive evidence including statements recorded under Section 70 of the CGST Act, documents seized during searches, and digital evidence. The petitioner admitted to registering multiple firms using PAN cards and other documents provided by the mastermind, and handing over login credentials to the mastermind who operated these firms for fraudulent transactions. The mastermind himself admitted to directing the petitioner and others to create and operate fake firms for issuing invoices without actual supply of goods or services, leading to fraudulent availment and passing of ITC. The Court applied the law relating to aiding and abetting under Sections 122 and 137 of the CGST Act, concluding that the petitioner was complicit and had knowledge of the fraudulent scheme. The petitioner's claim of being a mere consultant and receiving only nominal commission was rejected as implausible given the scale of the fraud and the petitioner's active involvement.

Regarding the retrospective application of Section 122(1A), the Court observed that the SCN was issued on 8th March 2024 when the provision was already in force. The Court held that the provision applies to all transactions under investigation at the time of issuance of the SCN, including those prior to its enactment, as the fraudulent availment of ITC was a continuous process. This interpretation aligns with legislative intent to curb fraudulent activities effectively.

The Court also addressed the petitioner's failure to file a reply to the SCN. It emphasized that the petitioner had the opportunity to rebut the allegations and demonstrate lack of benefit from the transactions but chose silence. This failure weakened the petitioner's position, and the Court held that such silence cannot be used to later contest the findings. The Court noted that the petitioner's rationale for not replying-expectation of a maximum penalty of Rs. 25,000 under Section 123-was not a sufficient basis to avoid contesting the SCN.

On the appropriateness of writ jurisdiction, the Court relied on its earlier decision in a similar matter involving fraudulent ITC availment, where it was held that writ jurisdiction is not suitable for adjudicating complex factual disputes requiring detailed evidence and analysis. The Court reiterated that such matters are better suited to appellate forums established under the CGST Act, to avoid multiplicity of litigation and conflicting findings. The Court thus declined to interfere in the writ petition but allowed the petitioner to file an appeal under Section 107 of the CGST Act within one month with requisite pre-deposit, notwithstanding the expiry of limitation period, directing that the appeal be adjudicated on merits.

In conclusion, the Court upheld the imposition of penalties under Section 122(1A) and related provisions of the CGST Act on the petitioner, finding that the SCN adequately specified the grounds, the petitioner was complicit in the fraudulent scheme, and the retrospective application of the provision was valid. The petitioner's failure to respond to the SCN was held against him. The Court declined to exercise writ jurisdiction over the matter due to its factual complexity and directed the petitioner to pursue appellate remedies.

Significant holdings include the following verbatim reasoning: "Section 122(1A) of the CGST Act would clearly be covered in the broader provision of Section 122 of the CGST Act which is clearly mentioned in the show cause notice." Further, "The SCN was issued on 8th March, 2024. The law has been clearly amended to also implicate such individuals who may be involved in such fraudulent transactions and the said law cannot be set at naught by holding the same to not be retrospectively applicable to transactions which took place prior to the date when the law was enacted." Also, "The persons, who are involved in such transactions, cannot be allowed to try different remedies before different forums, inasmuch as the same would also result in multiplicity of litigation and could also lead to contradictory findings of different Forums, Tribunals and Courts."

Core principles established are: (a) Penalties under Section 122(1A) can be imposed if the SCN sufficiently indicates the provision, even if not separately issued under that exact subsection; (b) Active facilitation and enabling of fake firms for fraudulent ITC attracts penalty under CGST provisions; (c) Retrospective application of penalty provisions is valid when the SCN is issued after enactment; (d) Failure to respond to SCN weakens defense against penalty; and (e) Writ jurisdiction is not appropriate for complex GST fraud disputes, which must be adjudicated through statutory appellate mechanisms.

The final determinations are that the impugned order imposing penalty on the petitioner is legally sustainable, the petitioner's grounds challenging the penalty under Section 122(1A) and his role in the fraud are to be examined in appeal, and the writ petition is dismissed with liberty to file an appeal within the prescribed extended period.