Personal Penalty Under Section 122(1A) CGST Act: Bombay High Court Protects Company Officers from Automatic GST Liability

The decision of the Hon’ble Bombay High Court in Amit Manilal Haria & Ors. v. Joint Commissioner, CGST & Central Excise has substantially reshaped the understanding of how Section 122(1A) of the Central Goods and Services Tax Act, 2017 can be applied to directors and senior management of companies.

By scrutinizing the scope, timing, and conditions attached to Section 122(1A), the Court has drawn a clear line between a company’s GST exposure and the personal liability of its officers. This ruling is particularly significant in the backdrop of aggressive enforcement in alleged fake invoice and inadmissible ITC cases.

Essence of the Ruling

The Bombay High Court held that:

  • Authorities cannot treat directors, CEOs, CFOs and other officers as automatically liable under Section 122(1A) simply because GST proceedings are initiated against the company.
  • Before fastening personal penalty, Revenue must conclusively establish both of the following:
    • The concerned individual retained the benefit of the questioned transaction; and
    • The impugned transaction was carried out at that individual’s instance.
  • The CGST framework does not create a general doctrine of vicarious liability under Section 122; mere designation or seniority does not result in automatic liability.
  • Section 122(1A) became effective from 1 January 2021 and cannot be invoked for earlier periods, as that would violate the protection against retrospective penal provisions under Article 20(1) of the Constitution.
  • Personal penalties aggregating to more than ₹400 crore imposed on company officials, without clear findings of personal benefit or causative role, were held to be unsustainable in law and disproportionate in quantum.

Factual Matrix

Allegations Against the Company

The Department alleged that a company had:

  • Availed ineligible input tax credit (ITC); and
  • Issued fake invoices without corresponding supplies of goods/services;

leading to wrongful availment and passing on of ITC.

Based on this, proceedings were launched against the company as taxable person, and parallel actions were initiated against key managerial persons.

Proceedings Against Company Officials

Show cause notices were issued to senior management personnel, including:

  • The Chief Financial Officer (CFO)
  • The Chief Executive Officer (CEO)
  • The Joint Managing Director

The adjudicating authority invoked Section 122(1A) and imposed a personal penalty of about ₹133.60 crore on each individual, resulting in a combined demand of over ₹400 crore solely at the individual level.

The Department’s core premise was that these officers:

  • Benefited from transactions involving fake invoices and wrong ITC; and
  • Played a key role in execution of such transactions.

Consequently, the officials of M/s. Shemaroo Entertainment Limited approached the Hon’ble Bombay High Court to challenge the adjudication order imposing personal penalty under Section 122(1A).

The High Court examined, inter alia, the following pivotal issues:

  1. Can directors and senior employees be penalized under Section 122(1A) in addition to the penalty on the taxable person under Section 122(1), merely because the company is alleged to have availed inadmissible ITC or dealt in fake invoices, without establishing:

    • That such individuals retained the benefit of the disputed transactions; and
    • That these transactions were carried out at their instance?

  2. Can Section 122(1A), which came into force on 1 January 2021, be applied to transactions pertaining to earlier tax periods such as July 2017 onwards?

Petitioners’ Principal Contentions

1. Jurisdictional Overreach: Demand Lies Against the Taxable Person, Not Employees

The petitioners argued that: