Supreme Court stays ₹273.5 crore GST penalty on Patanjali

The Supreme Court on Friday stayed the recovery of a ₹273.5 crore Goods and Services Tax (GST) penalty imposed on Patanjali Ayurved Limited, while agreeing to examine the company’s challenge to a recent Allahabad High Court judgment that had upheld the penalty [Patanjali Ayurved Vs Union of India]..A Bench of Justices PS Narasimha and AS Chandurkar issued notice to the Union government and the Directorate General of Goods and Services Tax Intelligence (DGGI) on Patanjali’s appeal. The Court directed that the penalty would remain stayed until further orders..The penalty proceedings stemmed from an investigation initiated by the DGGI into alleged irregularities in Patanjali’s transactions. According to the department, information was received about suspicious dealings with entities that had high Input Tax Credit (ITC) utilisation but no income tax credentials.Investigators alleged that Patanjali, acting as the “main person”, was involved in circular trading of tax invoices without any actual supply of goods. This resulted in wrongful availment and passing on of ITC, the department claimed.On April 19, 2024, the DGGI issued a show cause notice proposing a penalty of ₹273.51 crore under Section 122(1), clauses (ii) and (vii) of the Central Goods and Services Tax Act, 2017 (CGST Act)..Subsequently, in an adjudication order dated January 10, 2025, the department dropped tax demands raised under Section 74 of the CGST Act. It recorded that for all commodities, the quantities sold were always greater than the quantities purchased from suppliers and that all ITC availed was further passed on by Patanjali.However, authorities decided to proceed with penalty proceedings under Section 122, maintaining that these were independent of the dropped tax demand..Patanjali challenged the penalty before the Allahabad High Court, arguing that penalties under Section 122 were criminal in nature and could be imposed only after a trial before a criminal court, not by departmental officers. The company also contended that once the Section 74 proceedings were dropped, the penalty could not survive.On May 29, a Bench of Justices Shekhar B Saraf and Vipin Chandra Dixit dismissed the petition. The Court held that penalty proceedings under Section 122 are civil in nature and can be adjudicated by proper officers. It relied on the Supreme Court’s decision in Gujarat Travancore Agency, which distinguished between civil obligations for tax delinquencies and criminal penalties.The Court also referred to Explanation 1(ii) to Section 74 and Rule 142(1)(a) of the CGST Rules to hold that proper officers are empowered to issue show cause notices and adjudicate penalties under Section 122. It further ruled that the dropping of Section 74 proceedings did not automatically terminate Section 122 proceedings since they dealt with contraventions of a different nature..Patanjali then approached the Supreme Court against the High Court order. The appeal raised questions on the scope and nature of penalties under Section 122, the jurisdiction of GST officers to impose them and the effect of quashing related tax demands under Section 74.During the hearing today, the top court issued notice to the respondents and granted an interim stay on the recovery of the ₹273.5 crore penalty..Patanjali was represented by Senior Advocate Arvind P Datar and advocate Raj Kishor Choudhary