The Punjab & Haryana High Court has held that a director cannot be prosecuted individually for alleged GST fraud if the company itself has not been arraigned as an accused. 

The bench of Justice Shalini Singh Nagpal quashed criminal proceedings initiated against a company director in connection with an alleged fraudulent Input Tax Credit (ITC) claim of ₹15.44 crore, while leaving the authorities free to initiate fresh proceedings in accordance with law. 

The case arose from a complaint filed by the Directorate General of Goods and Services Tax Intelligence (DGGI), Gurugram, alleging that M/s Nikita Industries Pvt. Ltd. (NIPL) had fraudulently availed and utilized Input Tax Credit amounting to approximately Rs. 15.44 crore on the basis of invoices issued by 31 non-existent firms without any actual supply of goods.

Following intelligence inputs, the DGGI conducted searches at the company’s premises and claimed to have recovered purchase invoices, transport documents, and other incriminating records. According to the investigation, the company allegedly purchased lead metal from the open market in cash without tax invoices and thereafter procured fake invoices from dummy entities solely to avail ITC illegally. 

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However, despite alleging that the company had fraudulently availed the ITC, the complaint was filed only against its director under Section 132 of the CGST Act without making the company itself an accused. 

The petitioner argued that he was not a “registered person” under the CGST Act and therefore could not himself avail Input Tax Credit. Under the GST framework, only a registered taxable person is entitled to claim ITC.

It was contended that the alleged wrongful ITC was claimed by the company, which was the registered person under the Act. Consequently, prosecution against the director alone, without impleading the company, was legally unsustainable.

The petitioner further relied upon several Supreme Court judgments interpreting Section 141 of the Negotiable Instruments Act, submitting that Section 137 of the CGST Act is materially identical and therefore requires prosecution of the company before its directors can be held vicariously liable. 

The DGGI defended the prosecution by asserting that the petitioner was not merely a nominal director but the principal architect behind the alleged fraud.

According to the department, he actively managed the affairs of the company, orchestrated the procurement of bogus invoices, and devised the mechanism through which fraudulent ITC was availed. The authorities maintained that his personal role justified prosecution even if the company had not been named as an accused.

The department also pointed out that a show cause notice had already been issued to the company under Section 74 of the CGST Act and that adjudication proceedings had culminated in an order confirming the tax demand, against which the company had preferred an appeal. 

The principal question before the High Court was: Can a director be prosecuted under Sections 132 and 137 of the CGST Act when the company alleged to have committed the GST offence has not itself been made an accused?

Justice Shalini Singh Nagpal analysed Section 137 of the CGST Act, which deals with offences committed by companies.

The Court observed that the provision specifically states that where an offence is committed by a company, both the company as well as every person in charge of and responsible for its business shall be deemed guilty. This language, according to the Court, closely mirrors Section 141 of the Negotiable Instruments Act governing corporate criminal liability. 

The High Court extensively relied upon the Supreme Court’s landmark decision in Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., wherein a three-judge bench held that prosecution of company officers cannot continue unless the company itself is arraigned as an accused.

The Court also referred to subsequent Supreme Court decisions including Anil Gupta v. Star India Pvt. Ltd., Himanshu v. B. Shivamurthy, Sharad Kumar Sanghi v. Sangita Rane, and Dayle De Souza v. Government of India. These judgments consistently reaffirm that corporate officers can be prosecuted only on the basis of vicarious liability after the company itself is prosecuted. 

The Court held that Section 137 of the CGST Act is pari materia with Section 141 of the Negotiable Instruments Act.

Since both provisions incorporate the concept of vicarious liability for offences committed by companies, the principles laid down by the Supreme Court under the Negotiable Instruments Act would equally govern prosecutions under the GST law.

The Court emphasized that penal statutes require strict interpretation and criminal liability cannot be expanded beyond what the statute expressly provides. 

Another important aspect noted by the Court was that under Section 16 of the CGST Act, only a registered person is entitled to avail Input Tax Credit.

In the present case, the registered person was M/s Nikita Industries Pvt. Ltd., not its director.

The Court also observed that the GST authorities themselves had issued the show cause notice and adjudication order against the company and that the company’s statutory appeal was pending before the appellate authority.

These facts clearly demonstrated that the alleged wrongful availment of ITC was attributed to the company itself. 

The High Court concluded that the alleged GST offence was committed by the company. The company was never made an accused in the criminal complaint. Vicarious liability against the director could arise only after prosecution of the company. Criminal proceedings against the director alone were therefore not maintainable.

Rejecting the department’s contention that the director could independently be prosecuted as the mastermind behind the alleged fraud, the Court held that such an argument had no legal basis in view of the settled law governing corporate criminal liability. 

The Punjab & Haryana High Court quashed the criminal complaint filed against the director along with all consequential proceedings pending before the Chief Judicial Magistrate, Rohtak.

The Court clarified that its decision would not prevent the GST authorities from initiating fresh prosecution under Section 132 of the CGST Act in accordance with law after complying with the statutory requirements. 

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