A DETAILED LEGAL ANALYSIS OF GST PENALTY PROCEEDINGS UNDER SECTION 122 CGST ACT.
(M/S PATANJALI AYURVED LTD. VERSUS UNION OF INDIA AND OTHERS - ALLAHABAD HIGH COURT)
This case involves M/s Patanjali Ayurved Ltd., a well-known FMCG manufacturer, which approached the High Court by filing a writ petition under Article 226 of the Constitution of India. Patanjali challenged a Show Cause Notice dated 19th April 2024, issued by the Directorate General of GST Intelligence (DGGI), Ghaziabad, which demanded a huge penalty of ₹2,735 crore under Section 122(1)(ii) and (vii) of the CGST Act. These provisions relate to issuing invoices without supplying goods and availing Input Tax Credit (ITC) without actually receiving goods. Patanjali requested the court to cancel this notice, especially since the tax demand under Section 74 had already been dropped earlier by the tax authorities.
The facts of the case began when DGGI started an investigation against certain Delhi-based firms (M/s SG Agro India and M/s Magic Traders) due to suspicious GST activity like very high ITC claims without matching income tax records. This led the department to investigate several other companies, including Patanjali’s three manufacturing units located in Haridwar (Uttarakhand), Sonipat (Haryana), and Ahmednagar (Maharashtra). The authorities alleged that Patanjali was involved in circular trading, which means raising invoices and claiming ITC without actual movement of goods. A common show cause notice was issued for all three units, covering the period from April 2018 to March 2022.
After Patanjali responded, the tax department conducted a detailed investigation and dropped all demands under Section 74 for the Uttarakhand unit through an adjudication order dated 10 January 2025. The department found that Patanjali had valid documentation for purchase and sale of goods, stock records matched, suppliers had affirmed transactions on affidavit, and tax was duly paid. The department accepted that no fraud or suppression of facts had occurred. However, for the other two units (Haryana and Maharashtra), though no tax was demanded, the department still wanted to impose penalties under Section 122 claiming that ITC was availed without receipt of goods and invoices were issued without actual supply.
Patanjali, represented by Senior Advocate Arvind Datar, argued that Section 122 is criminal in nature, meaning it deals with offences that need to go through proper criminal trial before a magistrate. He pointed out that terms like wilful suppression, aiding and abetting, and mens rea (guilty mind) are usually found in criminal laws. He emphasized that such penalties should not be imposed by tax officers in administrative proceedings but only after a court trial. Patanjali further argued that since the Section 74 demand was dropped, penalty under Section 122 should also automatically fall, as both were linked to the same transaction. Datar referred to several Supreme Court cases and legal dictionaries to prove that words like “offence” and “penalty” are used in criminal law and must be treated accordingly.
On the other side, the Government, represented by Additional Solicitor General N. Venkatraman, defended the penalty under Section 122. He clarified that Section 122 imposes civil penalties, not criminal punishment. Civil penalties can be imposed directly by proper GST officers after following due process; they do not require a criminal trial. He explained that Section 132 of the CGST Act deals with criminal offences and provides for jail or prosecution, while Section 122 is purely to penalize procedural and invoice-related violations, whether or not tax is ultimately payable. He said it was possible for a taxpayer to escape tax demand under Section 74 but still be penalized under Section 122 if he has violated the rules, such as availing fake ITC or issuing bogus invoices.
The Government also relied on Explanation 1(ii) to Section 74, which says that if proceedings under Section 74 are completed against the main person and tax is paid, then penalty proceedings under Section 122 and 125 may also be considered concluded. But in this case, since Patanjali had not paid any penalty and proceedings against the Haryana and Maharashtra units were not dropped under Section 74 (only not pursued), Section 122 proceedings were still valid.
After hearing both sides in detail, the High Court analyzed definitions of “offence” and “penalty” from legal dictionaries and previous court rulings. The Court observed that just because a section mentions "offence" or "penalty," it doesn’t automatically become a criminal matter. Whether something is civil or criminal depends on the intent of the law. The Court also examined the CGST Act and found that Section 132 clearly deals with criminal offences and requires prosecution through courts, while Section 122 is meant to impose civil penalties by GST officers. It held that Section 122 is a preventive, administrative measure to curb GST fraud and ensure compliance, and not a criminal punishment. It also clarified that GST officers are legally empowered to issue notices and adjudicate penalties under Section 122, even in cases where the tax demand under Section 74 has been dropped.
In conclusion, the High Court rejected Patanjali’s plea and allowed the penalty proceedings under Section 122 to continue. It upheld that the tax authorities have the power to impose penalties for issuing invoices without supply and availing ITC without receipt of goods, even if the actual tax demand is not sustainable. The case sets an important precedent, confirming that Section 122 operates independently of Section 74.
