Key Ruling Explains Director Liability for GST Fraud Under Section 122(1A) of CGST Act

byRajveer Singh •7:00 AM

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📜  Key Ruling Explains Director Liability for GST Fraud Under Section 122(1A) of CGST Act

In a landmark ruling delivered by the High Court of Delhi on April 23, 2025, the issue of directors' legal responsibility under the Goods and Services Tax (GST) regime was enunciated at length. The case of Gurudas Mallik Thakur vs Commissioner of CGST & Anr. deliberated upon critical issues on the question of personal liability of company officials when a company is alleged to have violated the provisions of GST law. The said judgment is of immense importance to the professionals and the legal fraternity in the field of taxation because it delineates the ambit of penal provisions applicable to persons holding managerial positions in corporate entities.

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⚙️ Background of the Case

Both Mr. Gurudas Mallik Thakur and Mr. Dinesh Kumar Raghav formerly served as Directors of M/s Planman HR Private Limited. The company was said to be running a manpower recruitment service. The petitions are meant to challenge an Order-in-Original that manifested as a result of the issuance of a show-cause notice dated April 21, 2023. The petitioner challenged the order of the Commissioner of Central Goods and Services Tax (CGST) which imposed huge demands and penalties on them.

According to the CGST authorities, upon investigation, these suspicious activities surfaced, wherein it was recorded that the company had availed ineligible CENVAT credit to the tune of about ₹22.41 crores. Further, the company evidence of filing its returns under GST was also faulty. The filing of returns was said to be improper, with filing of GSTR-1Monthly returns only till February 2019 and GSTR-3B returns only till December 2018. Thus, it was concluded that the company grossly underreported its liability under GST.

🛃 Key Allegations by the Tax Department

The central allegation by the Department was that M/s Planman HR Pvt. Ltd. deliberately avoided fulfilling its GST obligations. The company, it was claimed, had not only failed to file mandatory GST returns for several months but also engaged in the wrongful availing of Input Tax Credit (ITC) without the actual receipt of goods or services.

When questioned, the directors reportedly attributed operational control to Mr. Arindam Chaudhary, the promoter and majority shareholder, and to Mr. Varun Khanna, the company's CEO. Statements recorded from the involved individuals showed a pattern of shifting responsibility, with none of the key personnel accepting direct liability for the compliance failures.

In light of this, the CGST Department invoked provisions of the CGST Act to initiate recovery proceedings. The adjudicating authority imposed tax demands, interest, and penalties on both the company and its key officers, including the petitioners.

🗒 Penalties Imposed Under the Impugned Order

The adjudicating authority issued a detailed order confirming the following liabilities:

GST Short Payment: A confirmed demand of ₹40.61 crores under Section 74(9) of the CGST Act, read with corresponding provisions of the Delhi GST Act and IGST Act.
Inadmissible ITC: A recovery of ₹35.42 lakhs claimed to be wrongly availed by the company.
Interest: Additional interest liabilities calculated under Section 50 of the CGST Act.
Penalties on Company: Equal amounts to the tax demands were levied as penalties on the company.
Personal Penalties: Fines of ₹25,000 were imposed on each director and the CEO under Section 125, and further penalties of ₹35.42 lakhs each were levied under Section 122(1A).

📢 Petitioners' Defense and Legal Contentions

Representing the petitioners, Advocate Mr. Rajesh Mahna argued that his clients, being mere directors and not taxable entities themselves, could not be subjected to penal action under Sections 122 and 122(1A) of the CGST Act. He cited decisions from the Bombay High Court—particularly the case of Amit Manilal Haria v. Joint Commissioner of CGST & CE—to support the contention that employees or directors who do not benefit directly from the alleged transactions should not be held liable.

The petitioners asserted that they had resigned from their directorial positions in 2020, prior to the enactment of Section 122(1A) on January 1, 2021. As such, they argued that they should not be retrospectively penalized under a provision that was not in force during their tenure.

⚖️ Court’s Evaluation and Legal Reasoning

The statutory framework was thoroughly examined by the Delhi High Court. It pointed out that the CGST Act makes a clear distinction between "any person" and "taxable person." While Section 122(1) addresses offenses committed by taxable individuals, Section 122(1A) targets anyone who initiates or keeps profits from fraudulent GST activities.
In this regard, the Court stressed that the definition of "person" provided by Section 2(84) of the CGST Act is broad and includes people, businesses, and even artificial juridical entities. As a result, directors who might have an impact on or profit from the transactions in question were included in the definition of "any person" in Section 122(1A).

💡 Legal Provisions Interpreted

Section 122 – Penalty for Offenses

Subsection (1) applies to registered taxable persons.
Subsection (1A) holds any individual accountable if they benefit from or orchestrate the listed offenses, even if they are not registered under GST.

Section 83 – Provisional Attachment

Grants the Commissioner the authority to provisionally attach assets of either a taxable person or any person covered under Section 122(1A), in order to safeguard revenue.

The Court concurred with the interpretation laid out in the Bharat Parihar case by the Bombay High Court, which held that the term "any person" in Section 122(1A) is deliberately inclusive to address the growing complexities of GST fraud.

🧰 Conclusion and Directions Issued by the Court

While the Delhi High Court refrained from quashing the impugned order in its entirety, it directed the Department to facilitate a mechanism for filing appeals by persons who are not registered under GST. The Court ordered the Department to communicate this mechanism within two weeks, and the petitioners were granted 30 days thereafter to file their appeals.

It was further clarified that any delay arising from the unavailability of a filing mechanism would not bar the appeal on the grounds of limitation. The Court also stated that manual filing in physical form would be allowed if the Department failed to respond within 15 days.

In doing so, the Court struck a balance between upholding statutory accountability and ensuring access to justice for individuals implicated in complex corporate tax disputes.

This judgment serves as a vital precedent in clarifying the scope of director liability under the CGST Act, reinforcing the legal obligations of individuals in key managerial positions, and ensuring that procedural fairness is upheld when invoking penal provisions under GST law.

Tags: Case Laws GST