PENALTY UNDER SECTION 122.

[Sadanand Bulbule]

The GST Law is constantly evolving itself accommodating the needs of changing times by providing new provisions and deleting the redundant one. So also the business evolves and this practice will never stop. The on-going monitoring process by the Government in consultation with the stakeholders on regular basis sprouts insertion and deletion of provisions to the GST Law. The bottom-line of such consultation process is to safeguard the revenue and the honest business.

2. However no tax regime is perfect and it cannot be also.  As the law gets evolved on the same pace, the anti-evasion elements will also evolve searching different modes to break the law. In any business, there are talented cheaters or master-minds to distress the revenue with all their strength. However such efforts are strong, initially they enjoy being successful. But at the end of the game, they get trapped under the octopus provisions of the GST Law. So the GST law is much wiser and wider, it does not forget, forgive such cheaters and finally dumps them in the live furnaces of the Act. The wheel of time will decide the right furnace for the wrong person to punish.

3. This is the universal footing for framing penal provisions under the GST Act, like any other economic statutes. In the financial administration, it is necessary to make a qualitative leap in the fight against tax evasion and to focus checks on high-risk taxpayers. So normally the authorities perform their duties with undaunting spirit to derive the best results. To achieve this, the authorities have to ensure that, the facts are like diamonds to reflect their inner infinity towards the safety of revenue and the honest tax payers too.  Therefore the GST Act has various penal provisions in its pool to deal with, particularly the fraudsters and  the technical non-compliants in general.

4.  Before moving to the provisions of Section 122, it is worth to note the judgement dated August 4, 1969 of the Hon‘ble Supreme Court has held in the case of HINDUSTAN STEEL LIMITED VERSUS STATE OF ORISSA [1969 (8) TMI 31 - SUPREME COURT] and other similar judgments, that the liability to pay penalty does not arise merely upon proof of default. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty shall not be ordinarily imposed unless the party acted deliberately in defiance of law or is found guilty of conduct, contumacious or dishonest or acted in conscious disregard of its obligation.

5. The GST Act has provided many penal provisions to punish the guilty. This has raised many questions as to when is the right time and who is the right authority to invoke the penal provisions of Section 122, whether before, during or after adjudication process? In this backdrop, here are my expressions.

6. Section 122 includes wide-ranging offences attracting different amount of penalty as fixed therein. Basically Section 122(1) (i) to (xxi) provides for levy of penalty on proven tax evasion events, false/forged tax invoices, wilful defaults, unlawful refunds and other such allied fraudulent activities. It also provides penalty under Section 122(2) & (3) for the activities which induce the offenders culminating in the anti-revenue activities.

7. Although such provisions have been commonly indicated under Section 122, the Inspecting Officer needs to check the sustainability of its jurisdiction thereunder to levy penalty at any time of its choice. It is gathered that inspecting authorities intimidate by issuing notices more particularly under Section 122(1) much before the adjudication under Section 73 or 74 of the Act.

8. Nevertheless the inspecting authority may levy penalty in respect of administrative and technical offences clearly classified under Section 122. Looking at the object of the Act, even if the inspecting authorities issue notices under Section 122(1) for tax evasion related offences, they do not get fructified in view of the deeming Explanation-ii appended to Section 74 and Section 75(13) which specifically restricts the levy of double penalty for the same offence.  Since the proven tax evasion cases are liable for adjudication under Section 73 or 74, the principle of double jeopardy discreetly comes into place.

 9. Couple of relevant provisions governing the penalties under the GST Act, 2017 are reproduced hereunder for ready reference.

Section 74.

Explanation 1.- For the purposes of section 73 and this section,-

(i) xxxxxxx.

(ii) where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against the main person have been concluded under section 73 or section 74, the proceedings against all the persons liable to pay penalty under sections 122 and 125 are deemed to be concluded.

Section 75 (13) Where any penalty is imposed under section 73 or section 74, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act.

10. Thus there is precise deeming provision under Section 73 and 74 and distinct prohibition  imposed under Section 75(13) to invoke the specific provisions under Section 122 in the case of proven frauds, illegalities, irregularities and improprieties. So notice under Section 122(1) cannot be issued very casually, much less confirming it, as the penal provisions of the Act are categorized and the interconnected situations are also crystallised to invoke them by the right authority at the right time, depending upon its necessity, if any.

11. Under the GST Act, the Inspecting Officer may observe some discrepancies under a given set of circumstances. But in such observation, only observation exists but not conclusion. Observation differs from observer to observer based on its own “limited knowledge”. The limited knowledge of the observer, therefore, may be superfluous and may not be the reality to conclude the “superfluous comments” the way he/she wishes. Thus some one’s comment need not be the absolute fact to be acceptable by all like vibrant brightness of 12 noon Sun. So the appetite for judicious understanding of the facts and law is indispensable during inspection/investigation. Many a times in anger, one may attack mirror.

12. Article 265 of the Constitution reads as under: “No tax shall be levied or collected except by authority of law.”  Underlining this principle, the intent of the law makers is to get the due amount of tax, penalty and interest under the Act via Section 73 or 74, by authority of law, as much peacefully as possible on real time basis and thereby keeping full stop for all likely litigations at once. Thus adjudication aims for win-win situation. As such there is no concept of double penal action for the same offence, once by way of penalty under Section 73 or 74 and again by way of penalty under Section 122. There may be some exceptional contingencies where penalty under Section 122 may be imposed, in case the adjudicatory proceedings under Section 73 or 74 are not plausible. Or the essential ingredients to invoke the jurisdiction under Section 73 or 74 are not established. It depends upon the facts and circumstances of each case, so it cannot be generalised.

13. Further from perusal of Section 75(4) of the Act, it is evident that opportunity of personal hearing has to be granted by authorities under the Act where either a request is received from the person chargeable with tax or penalty for opportunity of hearing or where any adverse decision is contemplated against such person. Thus, prima facie, it appears that where an adverse decision is contemplated against the person, such a person even need not request for opportunity of hearing and implicitly mandatory for the authority concerned to afford an opportunity of personal hearing before passing an order adverse to such person.

         In any quasi-judicial proceedings, its sustainability is more important than success. Many a times, success is clueless. However sustainability is the ultimate result of strong foundational facts and it is the victory, irrespective of which side it leans. Sustainability of facts constantly travels in the final destination of law i.e., closer to justice.

16. High Court Ruling on Section 122.

The Hon’ble High Court of Karnataka in its judgement dated 17/02/2021 rendered in the case of TINTON RIVER PALMS, VERSUS STATE OF KARNATAKA, THE COMMISSIONER OF COMMERCIAL TAXES, THE ASST. COMMISSIONER OF COMMERCIAL TAXES (ENF) - 1, MANGALORE [2021 (3) TMI 1154 - KARNATAKA HIGH COURT] while deciding the petition challenging the notice issued under Section 122(1), has held as under:

          “The status of the case to the enforcement authority is closed as soon as the report is submitted. The notice issued under Section 122(1) of the Act was merely to appraise the tax payer about the observations made and the liability arising thereof. No adjudication proceeding to create a legal demand is initiated, nor will be initiated”.

17.CONCLUSION.

It is undisputed that, determination of tax, penalty and interest essentially is under the authority of law and therefore, the adjudication under Section 73 & 74 of the GST Act shall be concluded first. Then the deemed conclusion of penal provisions under Section 122 as provided under Section 75(13) of the GST Act would ensue naturally. In other words, despite separate notices are issued under Section 122 of the Act, penalty cannot be levied much before the adjudication. On the other hand, once the adjudication is concluded invoking Section 73 or 74, it would attain the basics of “absolute composite order” culminating in the deemed conclusion of proceedings under Section 122 of the Act.

18. SUGGESTION:

A.Evidence is the natural & beautiful soul of taxation law and the Proper Officer to calibrate them with standardised modes is the “adjudicating authority”. Given the unique features of adjudication provisions, careful consideration must be given to ensuring such provisions are exercised with a baseline understanding the entirety of other governing provisions.

B.GST Law does not believe in blind, unsustainable and wishful assessments and consequently the law not in favour of unnecessary luxury litigations. Therefore the inspecting authorities, without intimidating to levy penalty under Section 122 are obliged to transfer transparent inputs on what the adjudicating authority need to focus while determining the correctness of such findings and to adjudicate judicially under Section 73 or 74 read with Section 75 which concurrently takes care of penal provisions under Section 122.This is the quantum shift from mundane assessment to facts-driven adjudication regime.  

C. Further adjudication is the base to impose punishment with imprisonment and fine on prosecution under Section 132. However it is subject to compounding of offences under Section 138, either before or after the institution of prosecution. So let the sphere of transparent adjudication start rolling , which in turn will answer all the prospective questions.