For several years after the introduction of the Goods and Services Tax (GST) regime, a persistent anxiety shadowed GST investigations. Whenever allegations of fake invoicing, wrongful availment of Input Tax Credit (ITC), or tax evasion were leveled against a company, the spotlight routinely expanded beyond the corporate entity to target its directors, Chief Financial Officers (CFOs), and Chief Executive Officers (CEOs).
For corporate executives in India, compliance increasingly felt less like a protective framework and more like a personal liability trap. The rationale driving revenue authorities was understandable as corporate decisions are, after all, implemented by individuals. This is precisely what happened to the Joint Managing Director, CEO and CFO of Shemaroo Entertainment Limited, and it is what the Bombay High Court has now firmly put to rest.
However, a fundamental legal question remained unresolved: Can an employee, director, or officer be personally penalized merely because the company is alleged to have violated GST law?
What Happened/Case
A search was conducted in September 2023 against four firms linked to Shemaroo. Based on statements recorded during that search, the investigation extended to the Company. The petitioners were arrested, granted bail and promptly retracted their statements before a Magistrate. Two years later on 1st February 2025, an Order in original was passed imposing a penalty of Rs. 133.60 crores on each of the three officers under section 122(1A) of the CGST Act, equivalent to the entire alleged wrongful ITC availed and passed on by the company. The officers challenged the order before the Bombay High Court.
The Legal Question: The “Taxable Person”
Section 122 of the CGST Act prescribes penalties for specified offences, such as issuing invoices without a supply of goods or services or wrongfully availing ITC. Sub-section (1A), introduced with effect from January 1, 2021, extends this framework by stating that “any person” who retains the benefit of specified transactions and at whose instance they are conducted may also face penalties.
Section 122(1A) of the CGST Act, inserted with effect from 1st January 2021, reads:
Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instances such transactions is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.
At first glance, the expression “any person” appears broad enough to pierce the corporate veil. The department read ‘any person’ broadly, arguing that since the officers controlled and managed the company, they were personally liable. However, the Bombay High Court rejected a literal interpretation, opting instead to read the provision within the structural harmony of the statute.
By anchoring Section 122(1A) directly to the violations listed under Section 122(1), the Court established a vital distinction:
- The Target is the Registered Entity: The core violations under the Act are explicitly attributable to a “taxable person”—defined under Section 2(107) as an entity registered or legally liable to be registered under GST.
- Management is Not the Taxable Entity: Salaried corporate executives acting within their professional mandates do not hold independent GST registrations; the company does. Consequently, corporate omissions cannot be copied and pasted onto individual employee ledger sheets without clear statutory justification.
The Court’s Interpretation: Essential Conditions
The High Court observed that invoking Section 122(1A) against an individual requires satisfying a strict, dual burden of proof. Authorities must demonstrate that:
First – Section 122(1A) cannot be read in isolation from section 122(1A). Since the predicate offences in sub-section (1) – issuing invoices without supply, availing ITC without receipt of goods, distributing credit in contravention of Section 20 can only be committed by a registered taxable entity, the ‘any person’ in sub-section (1A) must be understood in that same context. An unregistered individual cannot avail input tax credit; the entire statutory mechanism is built around the taxable entity.
Second- Even if provisions were applicable, the Court held it imposes a strict dual burden- the authority must show that the person:
- personally retained the benefit of the transaction and
- the transactions was conducted at that person’s instance
The Court held that both conditions must exist simultaneously. Mere involvement in management, supervision, or the routine execution of corporate functions is legally insufficient to satisfy these requirements. In the Shemaroo case, the Bench called out the total lack of evidence in the department’s order, noting that there was no finding to show that any of the executives had personally pocketed or retained a single rupee from the disputed transactions. Here, the impugned order contained no finding whatsoever that any of three officers had personally retained any financial benefit.
Third – Section 122(1A) came into force on 1st January 2021, yet the show cause notice covered transactions from July 2017. The Court invoked Article 20(1) of the Constitution, which prohibits penalising a person under a law that did not exist when the alleged conduct occurred.
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Reaffirming the Principle Against Automatic Vicarious Liability
One of the most significant aspects of the judgment is its absolute rejection of automatic vicarious liability under the GST framework.
In corporate law, a company possesses a legal identity separate from its directors and employees. The Court noted that neither Section 122 nor Section 137 of the CGST Act creates an unrestricted mechanism for imposing personal penalties upon employees solely on account of their designation.
The Bombay High Court heavily relied upon its earlier decision in Shantanu Sanjay Hundekari v. Union of India, where a Senior Tax Operations Manger of Maersk Line India faced a personal penalty demand of Rs.3731 crores , the entirety of Maersk’s alleged tax liability. The Bombay High Court quashed that show cause noticed as jurisdictionally invalid and the Supreme Court dismissed the Revenue’s Special Leave Petition. Shemaroo confirms it is now a settled principle: there is no vicarious liability under Section 122 of CGST Act, and a corporate designation cannot substitute for individual statutory culpability.
The Constitutional Guardrail Against Retrospective Penalties
The judgment also addresses the temporal scope of Section 122(1A). While the department’s Show Cause Notice sought to penalize transactions from period 2017, the provision itself only came into force prospectively on January 1, 2021.
Invoking Article 20(1) of the Constitution of India, the High Court reminded the revenue department that a penal provision cannot ordinarily be applied retrospectively. An individual cannot be subjected to a penalty under a law that was not in force when the alleged conduct occurred. This finding serves as an important reminder that GST enforcement powers remain subject to strict constitutional safeguards.
Conclusion : A Measured Approach to Corporate Accountability
The Shemaroo judgment is timely and important one. It restores the basic principle that penalty jurisdiction must be grounded in law and supported by facts specific to the person being penalised. A company’s tax default does not become an officer’s personal liability by virtue of their seniority. The Bombay High Court has drawn that line with clarity. Revenue authorities and practitioners advising senior officers at companies under GST scrutiny would do well to read this judgement carefully.
Ultimately, the Bombay High Court has reaffirmed a foundational principle of legal accountability: liability must follow evidence, not designation. As enforcement actions increasingly target management personnel, this judgment will serve as the premier reference point defining the boundaries of personal liability under India’s indirect tax regime.
