BACKGROUNDThe petitioners are partners of M/s Quantum Infratech, a partnership firm engaged in construction of residential buildings, which is the "taxable person." Following an investigation alleging GST evasion (on construction services to landowners, reverse charge on transfer of development rights, and ineligible ITC for July 2017 to March 2023), penalty equivalent to the tax evaded was imposed on each partner under Section 122(1A). The partners challenged this on two jurisdictional grounds — that 122(1A) penalty can only fall on the taxable person, and that it cannot apply retrospectively for the pre-01.01.2021 period. FACTSA Show Cause Notice was issued on 03.08.2024 to the firm, both petitioners, and the accountant under Section 74(1) read with Sections 122(1A) and 122(3)(a). Specific allegations against each partner were made at paragraphs 9.6 and 9.7 of the SCN — that they retained the benefit of transactions and at their instance such transactions (suppression of turnover, supply without invoices, collection of undisclosed cash) were conducted. The petitioners did not submit any reply to these specific allegations, though they appeared for personal hearing. The Order-in-Original dated 04.02.2025 found both partners liable under Section 122(1A) to the extent of the evaded tax, and the Order-in-Appeal dated 26.08.2025 dismissed all appeals. Two points were framed for determination: (i) whether the partners of the taxable firm can be imposed penalty under Section 122(1A); and (ii) if (i) is decided against them, whether Section 122(1A) can apply for the period prior to 01.01.2021. The petitioners relied on the Bombay High Court rulings in Shantanu Sanjay Hundekari and Amit Manilal Haria (penalty only on taxable person; no retrospective application), while the Revenue relied on the distinct statutory use of "taxable person," "any person," and "registered person," and on the Delhi High Court rulings in Gurudas Mallik Thakur and Bhupender Kumar. COURT OBSERVATIONS (Verbatim)On who can be penalised under Section 122(1A):"True, if the taxable person is the sole proprietor or an individual who solely is responsible for the commission of the violations contained in Clauses (i), (ii), (vii) and (ix) of Section 122(1) of the Act of 2017, then the taxable person would be the person as mentioned in Sub-Section (1A) of Section 122 of the Act of 2017. But let this Court take the example of a Company, LLP, Partnership Firm, or any juridical person which is the taxable person. Can the Company, LLP, Partnership Firm or any juridical person on its own without the involvement of a natural person commit the violations as mentioned in clauses (i), (ii), (vii) and (ix) of Section 122(1) of the Act of 2017. The answer would be a simple 'No'." (Para 36)"Therefore with great respect, this Court cannot agree with the proposition of law laid down by the learned Division Bench of the Bombay High Court in Shantanu Sanjay Hundekari (supra) and Amit Manilal Haria (supra)... if accepted, it would render the provision of Sub-Section (1A) of Section 122 of the Act of 2017 otiose and nugatory." (Paras 37–38)On retrospective application:"Therefore Section 122(1A) of the Act of 2017 do not create any independent violation nor does it enlarges the violations contemplated under Section 122(1) of the Act of 2017. The legislative intent behind Section 122(1A) of the Act of 2017 is solely to identify the person at whose instance the violations took place and if the person had retained the benefits, the person would be liable to a penalty as mentioned therein." (Para 50)"...there being no new violations created by Section 122(1A) of the Act of 2017, there is no question of the said Sub-Section to be applied retrospectively." (Para 51)"...the learned Division Bench of the Bombay High Court failed to take note of the difference between an offence and penalty in respect to a civil adjudication while applying Article 20(1) of the Constitution." (Para 52)"Section 122(1A) of the Act of 2017 is complementary to Section 122(1) of the Act of 2017. Section 122(1A) of the Act of 2017 would not spring into action and until violations of Clauses (i), (ii), (vii) and (ix) of Section 122(1) of the Act of 2017 by the taxable person is adjudicated upon. Under such circumstances, the question of applying Section 122(1A) of the Act of 2017 retrospectively or not does not arise." (Para 53) FINAL VERDICT 👎Both jurisdictional issues decided against the petitioners — penalty under Section 122(1A) can be imposed on partners (not only the taxable firm), and it applies even for transactions prior to 01.01.2021. Writ petitions disposed of with liberty to appeal before the Appellate Tribunal within 30 days, interim protection continued, and the question of quantum/findings of fact left open. CASES REFERREDAlso Noted/Relied on by the Court:Mukesh Kumar Garg v. Union of India & Ors. — 2025 SCC OnLine Del 3324 (SLP (Civil) No.18178/2025 pending; SC stayed recovery on 04.08.2025 subject to 25% deposit)Jawala Ram & Ors. v. State of Pepsu (Constitution Bench, on the offence-vs-penalty distinction under Article 20(1)) — 1961 SCC OnLine SC 47  

BackgroundSurya Businees Private Limited, registered under CGST/AGST Act, 2017, had its returns for the period 2017-18 (July 2017 to March 2018) selected for audit under Section 65 of the AGST Act, 2017. A notice dated 27-09-2022 was issued requiring production of books of accounts. After audit, observations under Rule 101(4) of AGST Rules, 2017 were issued vide communication dated 29-05-2023, raising issues of short payment of tax, suppression of turnover and un-reconciled turnover. The petitioner replied on 07-06-2023 clarifying all observations. The audit report under Section 65(6) was thereafter issued. All objections on short payment of tax and suppression of turnover were dropped based on the petitioner's clarifications. Only interest of Rs. 1,34,580/- on account of late payment of tax was confirmed. The petitioner paid the said interest and intimated the authorities vide communication dated 19-06-2023, seeking closure of the matter. Despite this, the respondent No. 2 after approximately three months issued a fresh Show Cause Notice dated 28-09-2023 in Form GST DRC-01 under Section 73(1) of the CGST/AGST Act, 2017 for the same period 2017-18, alleging short payment of GST of Rs. 64,25,694/- and wrongful availment of ITC of Rs. 1,68,052/- under Section 17(5). The petitioner challenged this SCN before the Gauhati High Court.Court Observations (Verbatim)"The impugned show-cause notice pertains to the same subject matter and the period for which a detailed audit under Section 65 of the Act of 2017, was already carried out by the authorities and wherein no discrepancy was found concerning any short payment of tax or wrongful availment of ITC.""The said exercise having been carried out by the respondent authorities and there being no allegation that the petitioner for the purpose had not furnished all the requisite documents/records, the issuance of the impugned notice, without a circumstance as envisaged under Sub-Section (7) of Section 65 arising in the matter, in the considered view of this Court undermines the audit process carried out and renders the same redundant.""The petitioner having discharged his liabilities as ascertained during the audit proceeding, the impugned show-cause notice for the same very purpose would not be maintainable.""The said factors basing on which a notice under Section 73 of the Act of 2017, is permissible to be so issued, not being found to have arisen in the case of the petitioner, herein, in the audit report submitted by the respondent authorities, the petitioner having discharged its liability as determined, the proceeding initiated under Section 73 of the Act of 2017 in the facts and circumstances arising in the present matter would not be sustainable.""The comprehensive audit for the period having been carried out and no discrepancy having been found, therein, issuance of show-cause notice under Section 73 of the Act of 2017, without the situation envisaged under Sub-Section (7) of Section 65 arising in the matter, in the considered view of this Court renders the impugned show-cause liable to be interfered with.""In the present case this Court having found both the issues involved in the impugned show-cause notice to have been duly considered during the process of audit assessment carried out under the provision of Section 65 of the Act of 2017, the circumstances as envisaged under Sub-Section (7) of Section 65 of the Act of 2017, not arising in the matter, the show-cause notice dated 28-09-2023, was not permissible to be so issued to the petitioner, herein."Final VerdictThe Show Cause Notice dated 28-09-2023 issued under Section 73 of the CGST/AGST Act, 2017 was quashed and set aside. The Writ Petition was allowed in favour of the petitioner.Instructions / Circulars ReferredReferenceDetailsInstruction No. 13/2023-GST dated 26-12-2023Issued by Principal Commissioner of State Tax-cum-Commissioner of Taxes, Assam — stipulating that where audit proceedings have been completed, notices again issued using IIT Big Data Software need to be droppedKey Statutory Provisions InterpretedProvisionRelevanceSection 2(13) CGST/AGST Act, 2017Definition of 'Audit' — comprehensive verification of turnover, taxes, refunds and ITCSection 65(1) AGST Act, 2017Audit by tax authoritiesSection 65(6) AGST Act, 2017Issuance of final audit reportSection 65(7) AGST Act, 2017Trigger condition for initiating proceedings under Section 73/74 post-auditSection 73(1) CGST/AGST Act, 2017Determination of tax not paid / short paid — basis of impugned SCNRule 101(4) AGST Rules, 2017Audit observations issued to taxpayer

BackgroundA batch of writ petitions was filed by multiple registered dealers before the Gauhati High Court challenging the constitutional validity of Sections 16(2)(c) and 16(2)(d) of the CGST Act, 2017 and the Assam GST Act, 2017, along with show cause notices issued to the petitioners. The core grievance in all the petitions was common — the Department sought to deny ITC to purchasing dealers on the ground that their respective selling dealers had failed to deposit the tax collected from them into the Government Treasury, despite the purchasing dealers having entered into genuine and bona fide transactions supported by valid tax invoices issued by validly registered selling dealers. FactsThe petitioners, being registered dealers, had purchased goods from registered selling dealers who had issued tax invoices in accordance with the provisions of the GST law. The purchasing dealers had duly paid the tax component to the selling dealers as part of their purchase transactions. However, the selling dealers failed to deposit the said tax into the Government Treasury. On this basis, the Department issued show cause notices to the purchasing dealers proposing to deny ITC claimed by them. The petitioners challenged both the constitutional validity of Sections 16(2)(c) and 16(2)(d) of the CGST Act, 2017 and the Assam GST Act, 2017, as well as the show cause notices and consequential orders issued thereunder. The senior counsel for the petitioners submitted that the controversy was squarely covered by the judgment of the Delhi High Court in On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors. (2017 SCC OnLine Del 11286), wherein it was held that a purchasing dealer cannot be punished for the act of the selling dealer who failed to deposit tax collected. The respondents' counsel could not dispute that the controversy was covered by the said Delhi High Court judgment. Court Observations (Verbatim — Crucial Extracts)Delhi High Court in On Quest Merchandising India Private Limited v. Government of NCT of Delhi & Ors. (as quoted and adopted by the Gauhati High Court):"Applying the law explained in the above decisions, it can be safely concluded in the present case that there is a singular failure by the Legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution." — Para 39"The court respectfully concurs with the above analysis and holds that in the present case, the purchasing dealer is being asked to do the impossible, i.e., to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealers and therefore avoid transacting with such selling dealers. Alternatively, what section 9(2)(g) of the DVAT Act requires the purchasing dealer to do is that after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC. Indeed section 9(2)(g) of the DVAT Act places an onerous burden on a bona fide purchasing dealer." — Para 41"The court hereby holds that the expression 'dealer or class of dealers' occurring in section 9(2)(g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression 'dealer or class of dealers' in section 9(2)(g) is 'read down' in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution." — Para 53"The result of such reading down would be that the Department is precluded from invoking section 9(2)(g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under section 40A of the DVAT Act." — Para 54Supreme Court Order on SLP (as quoted by the Gauhati High Court):"On hearing learned Additional Solicitor General appearing for the petitioner, we are not inclined to interfere with the impugned order. The special leave petition is dismissed."Gauhati High Court's Own Conclusion:"Having gone through the above referred judgments, we are of the view that the controversy raised in this batch of writ petitions is squarely covered by the decision of the Delhi High Court in the case of On Quest Merchandising India Private Limited (supra). Hence, the show cause notices impugned in the present writ petitions and the consequential orders are set aside. However, the Department is free to act in those cases, where the purchase transactions are not bona fide, in accordance with law." Final VerdictThe Gauhati High Court disposed of the batch of writ petitions by setting aside all show cause notices and consequential orders issued to the purchasing dealers. It was held that the controversy was squarely covered by the Delhi High Court judgment in On Quest Merchandising (supra) affirmed by the Supreme Court, and that ITC cannot be denied to bona fide purchasing dealers for the default of the selling dealer in depositing tax. However, the Department was expressly granted liberty to proceed against those purchasing dealers where the purchase transactions are found to be not bona fide.