• Dated 10^th February, 2025

Supreme Court Backs Bombay High Court Ruling, Shields Employees from Personal Liability for Company Tax Debts

The Supreme Court recently, dismissed the Revenue's appeal, reaffirming Bombay High Court's judgment that employees and authorized signatories cannot be held personally liable for penalties under the CGST Act, emphasizing that tax liabilities should be imposed on the company itself.

Background of the Case:

The petitioner, Shantanu Sanjay Hundekari, was employed as a Senior Tax Operations Manager with Maersk Line India Pvt. Ltd. (MLIPL), a company acting as the steamer agent for Maersk A/S, a Denmark-based shipping company. The DGGI, Ahmedabad Zonal Unit, investigated Maersk A/S for alleged ₹3,731 crore tax evasion through wrongful Input Tax Credit (ITC) claims amounting to ₹3,731 crores.

A Show Cause Notice (SCN) dated 19 September 2023 was issued under Section 74 of the CGST Act, 2017, alleging that the petitioner retained the benefit of fraudulent ITC and was responsible for Maersk's business operations. The SCN sought to impose a penalty equivalent to the disputed tax under Section 122(1A) and held the petitioner personally liable under Section 137 (Offences by Companies) of the CGST Act.

Petitioner's Arguments:

The petitioner filed a writ petition before the Bombay High Court challenging the Show Cause Notice (SCN) dated 19 September 2023 on the following grounds:

• Wrongful Imposition of Liability: The petitioner, an employee, was not a taxable person under the CGST Act. The SCN incorrectly alleged that the petitioner retained the benefit of fraudulent Input Tax Credit (ITC), despite there being no personal financial gain involved. The petitioner neither availed nor retained the benefit of ITC personally. Section 122(1A) applies solely to taxable persons who benefit from fraudulent transactions, which was not the case in this instance.
• Misapplication of Section 122(1A) and Section 137: The SCN incorrectly invoked provisions meant for company officials responsible for tax evasion. The petitioner was not in charge of Maersk's business operations, nor did the petitioner have authority over its financial decisions. Simply holding a Power of Attorney (PoA) for GST compliance does not make an employee liable under Section 137 of the CGST Act.

Respondent's Arguments:

The Respondent, represented by the Union of India and the Directorate General of GST Intelligence (DGGI), presented the following arguments:

• Role of the Petitioner in GST Compliance: The petitioner, as a Senior Tax Manager with a Power of Attorney for Maersk, was responsible for overseeing tax filings and ITC claims. Since the fraudulent ITC claims occurred under the petitioner's supervision, he should be held liable for the same.
• Applicability of Section 122(1A) and Liability Under Section 137 (Offences by Companies):The respondent argued that any person who retains the benefit of fraudulent ITC, even if they do not directly receive the financial gain, is liable for penalties under Section 122(1A). Furthermore, as the petitioner was involved in decision-making regarding tax compliance matters, he cannot evade responsibility under Section 137, which holds individuals accountable for offences committed by companies.

Bombay High Court's Ruling:

The court held that:-

• Section 122(1A) applies solely to a "taxable person" who retains ITC benefits, which the petitioner did not. As an employee, the petitioner could not be held liable for ITC claimed by a corporate entity.
• The SCN wrongly assumed the petitioner was in charge of the company's business operations. Holding a Power of Attorney for GST compliance does not make an employee liable for tax fraud. Vicarious liability could not be imposed on the petitioner without direct involvement in the offence.
• The SCN improperly combined tax recovery provisions under Section 74 with penal provisions under Sections 122 and 137, rendering it legally invalid. The ₹3,731 crore penalty was arbitrary and disproportionate, and the SCN was seen as an abuse of power aimed at pressuring the petitioner rather than resolving a legitimate tax dispute.

The court set aside the SCN, ruling that the petitioner could not be held liable for company's alleged tax violations. The writ petition was allowed, and the petitioner was relieved of all liabilities.

Supreme Court's Ruling:

The Revenue department filed a Special Leave Petition, seeking to challenge the Bombay High Court's ruling. However, the Supreme Court recently upheld the High Court's decision, affirming that employees and authorized signatories cannot be personally liable for penalties under Sections 122(1-A) and 137 of the CGST Act. The Supreme Court dismissed the Revenue's appeal, reiterating that tax liabilities should be imposed on the company itself, not its employees, unless explicitly stated by law. Consequently, the Special Leave Petition was dismissed.

Comments:

The Supreme Court's ruling has significant implications for corporate taxation and employee liability under GST laws. It establishes that employees, including those holding Power of Attorney, cannot be arbitrarily held responsible for a company's tax violations unless they directly benefit or make financial decisions. This protects mid-level employees and tax professionals from unjustified prosecution and ensures that liability remains with those actually controlling business operations. The judgment also reinforces that tax authorities, including the DGGI, must issue Show Cause Notices with clear legal and factual justification, preventing their misuse as tools of intimidation. Going forward, this decision will safeguard employees from excessive penalties and wrongful prosecution while ensuring fair and transparent tax enforcement in corporate India.

Author: Debanjan Ranu

Edited By: 

Shantanu Sanjay Hundekari Vs Union of India & Ors. [Writ Petition (L) No. 30198 of 2023]

Union Of India & Ors. Petitioner(S) Vs Shantanu Sanjay Hundekari&Anr. [Special Leave Petition (Civil) Diary No.55427/2024]