Tax evasion under CGST Act – Liability of Employees

In March 2024, the Hon’ble Bombay High Court (High Court) has delved into the issue of liability of employees in cases of tax evasion under the Central Goods & Services Tax Act (CGST Act). In this judgement, the High Court had set aside the show cause notice issued to the employees of the company alleging that they have availed personal benefits of Input Tax Credit (ITC) and levied a penalty of INR 3,731 crores. Later, the Revenue filed a special leave petition before the Hon’ble Supreme Court challenging the judgement of the High Court. 

Recently, the Hon’ble Supreme Court in the case of Union of India v. Shantanu Sanjay Hundekari & Anr.,^[I] upheld the decision of the Bombay High Court and ruled that penalty should not be imposed on such employees. 

In this article, we will discuss the ruling of the Supreme Court. 

Facts

The respondent i.e., Shantanu Sanjay Hundekari was appointed as Taxation Manager at M/s. Maersk Line India Private Limited (Company), a foreign company, which has no employees or fixed establishment in India. Although, the Company has employed respondent and several other individuals solely for the purpose of representing and acting on its behalf in tax matters. 

The respondent was rendering assistance to the Company in tax compliances including Goods & Services Tax (GST) and held the power of attorney to represent the Company before the tax authorities. Additionally, the respondent volunteered to assist the investigation initiated against the Company by responding to the summons, presenting evidence and furnishing list of witnesses. The investigation was initiated based on the allegation of wrongful utilization and distribution of input tax credit (ITC) of INR 1,561 crores, however, the ITC was legitimately claimed. 

The show cause notice making allegations against the Company incidentally invoked the provisions under section 122(1A) and section 137 of CGST Act, alleging that the employees of the Company are involved in tax evasion in relation to utilization and distribution of ITC. In furtherance to this, show cause notices were issued to the respondent and other employees to pay a penalty of INR 3,731 crore. 

The respondent contended that in the absence of any suggestion that personal benefits have been availed by him, the said provisions cannot be invoked. Additionally, the respondent was assisting in investigations because he was the power of attorney holder for one of the tax matters, however he did not have any in-depth legal understanding of the GST laws or its interpretation, thereby having a limited scope of work. 

In response to this, a writ petition was filed before the High Court, wherein the show cause notices issued against the employees of the Company was set aside. Consequently, this special leave petition was filed before the Supreme Court.

Issue

Whether the provisions of section 122(1A) and section 137 of the CGST Act can be invoked to issue show notice against the respondent, who is merely an employee and power of attorney holder of the Company? 

Ruling of the High Court 

A person can be a taxable person if he is registered or liable to be registered under the section 22 or 24 of the CGST Act, who would be in a legal position, to retain the benefit of tax on the transaction and at whose instance such transaction is conducted. 

The respondent, who is a mere employee of the Company cannot fall within the purview of section 122(1A) of the CGST Act as the respondent cannot be a ‘taxable’ or a ‘registered person’ within the meaning and purview of the CGST Act so as to retain such benefits, as specified under the provision. This is because the respondent was acting on behalf of the Company and rendering assistance in tax compliance related matters, none of the transactions of the Company were conducted at the instance of the respondent in any manner. Accordingly, section 122(1A) cannot be invoked against the respondent. 

The show cause notice was issued under section 74 which falls under chapter XV of the CGST Act pertaining to “Demands and Recovery”. Section 74 provides for “Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful misstatement or suppression of facts”. Therefore, section 74 is certainly not a penal provision, whereas section 137 falls under chapter XIX providing for “offences and penalties”. 

Accordingly, it was ruled that penal provisions under section 137 cannot be invoked against the respondent, when the show cause notice is itself a demand cum show cause notice, issued with the intent to demand and determine any tax not paid or short paid or erroneously refunded or ITC wrongly utilized or availed. Therefore, no penalty can be attributed pursuant to such show cause notice issued to the Company. 

Conclusion

The Supreme Court upheld the aforementioned reasoning of the High Court and ruled that the respondent being a mere employee of the Company cannot be fastened with liability of INR 3732 crore. However, the question of law regarding interpretation of section 122(1A) and section 137 is kept open. The special leave petition was dismissed. 

In conclusion it was held that mere designation will not make a person vicariously liable. Further, similar principles were also upheld in relation to other laws including securities law and companies act.

On the other hand, the Hon’ble Supreme Court has very interestingly and pertinently deprecated the practice of invoking penalty provisions under the demand cum show cause notice, which has been an age-old practice by tax authorities to invoke such penalty provisions without actually initiating any prosecution in this respect. Any proceedings for imposition of penalty must meet the requirements of principles of natural justice including but not limited to giving the accused a right to be heard. However, most proceedings by tax authorities are quasi-judicial, seldom fulfilling these requirements. Such an observation by the Hon’ble Supreme Court could bring many such notices under scrutiny for the violations.

Our Thoughts

This judgment clearly demonstrates that the provisions of the CGST Act were inapplicable to the respondent. The Supreme Court ruled in favor of the respondent, highlighting jurisdictional errors and the disproportionate nature of the penalties imposed by the Revenue. The case underscores the critical need for precision in the application of tax laws and reinforces the principle of fairness in taxation, safeguarding individuals against arbitrary actions by tax authorities. This decision serves as a pivotal legal precedent, illuminating the complexities associated with tax penalties and emphasizing the essential need for strict adherence to jurisdictional principles. However, the Supreme Court has left the question of law open, which will result in interpretational issues and cause uncertainty in such matters.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause. 

^[i] SLP (C) Diary No.55427/2024

^[ii] [2009] 9 S.C.R. 1144