Patanjali Faces ₹273.5 Crore GST Penalty: Allahabad High Court Dismisses Legal Challenge

Allahabad High Court Dismisses Patanjali’s Plea Against ₹273.5 Crore GST Penalty

In a key ruling that underscores the enforcement power of the Goods and Services Tax (GST) framework in India, the Allahabad High Court has dismissed a writ petition filed by Patanjali Ayurved Limited, challenging a hefty penalty of ₹273.5 crore imposed by the GST authorities. The court clarified that such penalties are civil in nature and do not warrant criminal prosecution, thereby upholding the powers of GST officers to adjudicate and impose penalties under the Central Goods and Services Tax Act, 2017 (CGST Act).

This case has wide-reaching implications for companies across India and highlights the increasing scrutiny by the Directorate General of GST Intelligence (DGGI) on alleged circular trading and misuse of input tax credit (ITC).

🔍 Background of the Dispute

Patanjali Ayurved Ltd., a well-known consumer goods company co-founded by yoga guru Baba Ramdev, was investigated by the DGGI following reports of irregular transactions. The case stemmed from a nationwide investigation into firms showing high Input Tax Credit (ITC) utilisation with minimal or no income tax filings or actual movement of goods. These transactions were suspected to be fictitious and part of a circular trading network meant to inflate ITC claims without genuine supply of goods.

On April 19, 2024, the DGGI issued a show cause notice (SCN) to Patanjali, alleging violations under Section 122(1)(ii) and (vii) of the CGST Act, and proposing a civil penalty of ₹273.51 crore.

🚨 Key Allegation:

· Circular Trading: Issuing invoices without actual supply of goods.

· Fraudulent ITC Claims: Availing and passing on ineligible credit without genuine transactions.

· Violation of Section 122(1)(ii) and (vii): Pertaining to issuance of incorrect or false invoices.

While tax demands under Section 74 (fraudulent ITC) were dropped, the penalty proceedings continued under Section 122, which deals with civil penalties for various tax contraventions.

⚖️ Patanjali's Legal Stand

Patanjali approached the Allahabad High Court, arguing that:

· The proceedings under Section 122 were criminal in nature.

· Such proceedings required prosecution before a criminal court, not mere adjudication by a tax officer.

· The imposition of penalty without judicial scrutiny violated principles of natural justice.

Patanjali also contended that continuing with the penalty proceedings amounted to harassment and misuse of administrative powers by the GST department.

🧑‍⚖️ The High Court’s Verdict

The division bench comprising Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit dismissed the petition and upheld the departmental action.

🔑 Key Observations by the Court:

1. Civil Nature of Penalty: The court clarified that penalties under Section 122 are civil, not criminal. The use of the word “penalty” does not automatically imply criminal liability. It often refers to consequences meant to ensure compliance, not to punish in the traditional criminal sense.

2. Jurisdiction of Proper Officer: The court ruled that adjudicating officers under GST law have the authority to impose penalties. There is no requirement for a criminal trial or prosecution before such penalties can be enforced.

3. No Violation of Natural Justice: Since Patanjali had received a show cause notice and had the opportunity to respond, the court held that principles of natural justice were followed.

4. Statutory Provisions Support Civil Proceedings: The court cited Rule 142(1)(a) of the CGST Rules, which mandates serving of a summary of the show cause notice electronically in Form GST DRC-01, confirming the legality of the procedure adopted by the GST authorities.

5. Upholding Legislative Intent: The court emphasized that the CGST Act provides a clear mechanism for issuing penalties and adjudicating disputes through civil administrative channels, and this should be respected unless found contrary to constitutional principles.

📌 What is Section 122 of the CGST Act?

Section 122 outlines penalties for certain offences, including:

· Issuing invoices without supply of goods/services.

· Availing or utilizing ITC without actual receipt of goods/services.

· Furnishing false or incorrect information.

These offences can attract monetary penalties, typically up to ₹10,000 or the amount of tax evaded, whichever is higher.

📊 Impact on Patanjali and Indian Businesses

This judgment is a significant setback for Patanjali Ayurved, not just financially but reputationally as well. It places the company under the scanner for its alleged role in non-compliant GST practices.

For the wider industry, the ruling sends a clear message:

· GST Penalties Are Enforceable: Companies cannot avoid civil penalties by claiming criminal protections.

· Strict Scrutiny of ITC Claims: The GST regime is increasingly focusing on fraudulent ITC and fake invoicing.

· Compliance is Crucial: Businesses must maintain proper documentation, ensure actual movement of goods/services, and avoid circular trading practices.

📚 Precedent Value of the Judgment

The Allahabad High Court’s ruling sets a legal precedent for similar cases where companies may seek to dismiss tax penalties by labeling them as criminal prosecutions. It clarifies that tax authorities have full adjudicatory powers to assess and impose penalties under civil law, and this cannot be challenged unless there is a clear breach of constitutional provisions.

Legal experts believe that this judgment may now be cited in several pending GST penalty cases across different High Courts and Tribunals.

📌 Conclusion

The Allahabad High Court’s dismissal of Patanjali Ayurved's plea against the ₹273.5 crore GST penalty marks an important step in strengthening the enforcement mechanism of GST laws in India. It reiterates the power of tax officers to carry out investigations, issue penalties, and adjudicate civil tax violations without recourse to criminal proceedings.

As businesses continue to adapt to the evolving GST framework, this judgment serves as a critical reminder to maintain transparency and robust compliance mechanisms. Avoiding or challenging penalties without legal merit may no longer be a sustainable strategy.

✅ Key Takeaways:

Point	Details
Case	Patanjali Ayurved Ltd. vs Union of India & Others
Penalty	₹273.5 Crore
Act Involved	CGST Act, 2017 – Section 122
Nature of Penalty	Civil, not Criminal
Court's Ruling	Dismissed Patanjali’s plea
Implication	GST officers can impose civil penalties through adjudication

Patanjali Faces ₹273.5 Crore GST Penalty: Allahabad High Court Dismisses Legal Challenge