ALLHABAD | 2ND JUNE 2025
On May 29, 2025, the Allahabad High Court dismissed Patanjali Ayurved Limited’s challenge to a ₹273.5 crore Goods and Services Tax (GST) penalty. The Court held that penalties under Section 122 of the CGST Act are civil in nature, and can be imposed through departmental proceedings without a criminal court trial.
A Division Bench comprising Justices Shekhar B. Saraf and Vipin Chandra Dixit delivered the verdict, rejecting Patanjali’s contention that the penalties amount to criminal liability.
“After detailed analysis, it is clear that the proceeding under Section 122 of the CGST Act is to be adjudicated by the adjudicating officer and is not required to undergo prosecution,” the Court ruled.
BACKGROUND: GST INVESTIGATION AND ALLEGATIONS AGAINST PATANJALI
Patanjali Ayurved Ltd. operates manufacturing units in Haridwar (Uttarakhand), Sonipat (Haryana), and Ahmednagar (Maharashtra). The company came under investigation after authorities received inputs regarding suspicious transactions involving firms with high Input Tax Credit (ITC) utilisation but no corresponding income tax records.
Investigators alleged that Patanjali was “acting as a main person, indulged in circular trading of tax invoices only on paper without actual supply of goods.”
On April 19, 2024, the Directorate General of Goods and Services Tax Intelligence (DGGI) issued a show cause notice under Section 122(1)(ii) and (vii) of the CGST Act, proposing a penalty of ₹273.51 crore.
SECTION 74 DROPPED, BUT SECTION 122 PENALTY CONTINUED
In a key development, the GST department dropped tax demands under Section 74 through an adjudication order on January 10, 2025, stating:
“For all the commodities, the quantities sold were always more than the quantities purchased from the suppliers, thereby making the observation that all the ITC which was availed in the impugned goods was further passed on by the petitioner.”
Despite this, the penalty proceedings under Section 122 continued, leading Patanjali to challenge the proceedings before the High Court. The company argued that such penalties were criminal in nature and required adjudication by criminal courts.
COURT’S ANALYSIS: SECTION 122 PENALTIES ARE CIVIL
The High Court conducted an in-depth analysis of the nature of penalties under the CGST Act and ruled that such proceedings are civil and can be adjudicated by the proper officer.
“The term ‘penalty’ has also been given a broad definition by the law dictionaries and the Supreme Court judgments wherein it is stated that the term ‘penalty’ is used very loosely in statutes in some cases and may be held to embrace all the consequences visited by law for an infringement of the law,” Justice Saraf observed.
Citing the Supreme Court’s ruling in the Gujarat Travancore Agency case, the Court noted:
“A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws.”
PROPER OFFICER EMPOWERED TO ADJUDICATE SECTION 122
The Court dismissed Patanjali’s argument that Section 122 doesn’t explicitly mention “proper officer”, stating:
“Explanation 1(ii) to Section 74 of the CGST Act clearly indicates that it is the proper officer who initiates the proceedings under Sections 73 and 74 is also the person who is initiating the proceedings under Sections 122 and 125,” the Court held.
It also emphasized that Rule 142(1)(a) of the CGST Rules mandates a proper officer to issue show cause notices and electronically furnish a summary (Form GST DRC-01) under multiple sections, including Section 122.
“The above clearly indicates the intention of the legislature that the proper officer is required to issue show cause and thereafter adjudicate and pass order under Section 122 of the CGST Act and nothing further remains in doubt.”
SECTION 74 AND 122 ARE INDEPENDENT PROVISIONS
On whether the dropping of proceedings under Section 74 should automatically lead to termination under Section 122, the Court ruled:
“The contravention under Section 73/74 need not necessarily be a contravention covered under Section 122 of the CGST Act and the proceedings are with respect to contravention of two different offences,” the Bench clarified.
PENALTY AIMED AT DETERRENCE, NOT PUNISHMENT
The Court concluded that the primary objective of Section 122 is deterrence against tax evasion, not criminal punishment:
“Deterrence is the main theme or object behind the imposition of penalty and, therefore, it is not possible to say that in the instant case the provision of Section 10(3) infringes Articles 14 and 19(1)(g) of the Constitution,” the Bench ruled, while dismissing Patanjali’s plea.
LEGAL REPRESENTATION
Patanjali Ayurved Ltd. was represented by Senior Advocate Arvind Datar with:
Ashwarya Sharma
Nishant Mishra
Devansh Srivastava
Kinjal Shrivastava
Vedika Nath
Yashonidhi Shukla
Central GST authorities were represented by Additional Solicitor General N. Venkataraman along with:
Parv Agarwal
NC Gupta
Gaurav Mahajan
