The Allahabad High Court has dismissed Patanjali Ayurved Limited’s plea challenging a GST penalty of ₹273.5 crore under Section 122 of the Central Goods and Services Tax (CGST) Act, 2017. The court ruled that penalty proceedings under Section 122 can proceed independently, even when tax-related proceedings under Section 74 have been dropped.
This case involved three Patanjali manufacturing units located in Haridwar (Uttarakhand), Sonipat (Haryana), and Ahmednagar (Maharashtra). These units had received a cumulative show-cause notice under Sections 74 and 122 of the CGST Act and Section 20 of the IGST Act for the period April 2018 to March 2022. Authorities alleged that Patanjali engaged in circular trading—generating tax invoices without actual supply of goods.
Initially, interim protection was granted by the Court, and Patanjali was allowed to file replies. Later, proceedings under Section 74 were dropped for all three units after detailed examination. However, penalty proceedings under Section 122 continued, which prompted Patanjali to approach the Court again.
The Court, led by Justices Shekhar B. Saraf and Vipin Chandra Dixit, clarified the distinction between tax evasion liabilities under Section 74 and penalty provisions under Section 122. The judges held:
“Under the present GST regime, persons not liable under Sections 73/74 may still be penalised under Section 122 for actions like issuing fake invoices or availing ineligible ITC.”
They emphasized that Section 122 is designed to penalize a wider range of offences—not limited to tax shortfalls or fraud, but including procedural contraventions like invoice manipulation and wrongful input tax credit.
“Punishment need not always be imposed through a criminal trial. It could be in the form of a penalty, as provided by statute.”
The Court cited Explanation 1(ii) to Section 74, which deems proceedings under Section 122 to be independent unless concluded alongside the main proceedings under Section 73/74. In Patanjali’s case, even though the tax demands were dropped, the issuance of fake invoices was seen as a standalone offence.
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Patanjali’s counsel argued that penalties under Section 122 are criminal in nature and should require a proper trial and conviction, but the Court disagreed. It ruled:
“An order made by an adjudicating authority regarding penalty is not a conviction, but a determination of civil breach.”
The Court also noted that under Section 122(1A), penalties could be applied to persons benefiting from wrongful transactions, even if not directly involved in the tax demand.
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“Section 122 proceedings can be initiated without any prior proceedings under Sections 73 or 74.”
The Court reaffirmed that tax laws are to be strictly interpreted, and machinery provisions must be read in a way that allows the law to be functional, not defeated.
In conclusion, the Court held that dropping Section 74 proceedings does not automatically nullify the penalties under Section 122, and thus, upheld the GST Intelligence’s penalty of ₹273.5 crore against Patanjali.
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Quote:
“The Court must harmoniously interpret tax statutes to make them work, as tax penalty is a tool to deter evasion, not merely to punish.”
Accordingly, the writ petition was dismissed.
Case Title: M/s Patanjali Ayurved Limited v. Union of India and Others
Judgment Pronounced: May 29, 2025
Bench: Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit
Counsel for Petitioner: Mr. Arvind P. Datar (Senior Advocate)
Counsel for Respondents: Mr. N. Venkatraman (Additional Solicitor General)
