The Punjab and Haryana High Court has quashed a criminal complaint against a company director in an alleged ₹15.44 crore fake input tax credit case because the DGGI Gurugram failed to arraign the company—the entity alleged to have fraudulently availed the ITC—as an accused. The Court held that a director’s vicarious liability under Section 137 of the CGST Act cannot be invoked independently when the company allegedly responsible for the principal offence has not itself been prosecuted.

The Court held that where the alleged GST offence was committed by a company, its director could not be prosecuted solely on the basis of vicarious liability without arraigning the company itself as an accused.

However, the ruling does not amount to a finding that the alleged transactions were genuine or that no tax offence had occurred. The Court expressly left the authorities at liberty to initiate proceedings under Section 132 of the Central Goods and Services Tax Act, 2017, in accordance with law.

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Allegation of invoices without actual supply of goods

The Directorate General of GST Intelligence, Gurugram Zonal Unit, initiated an investigation after receiving intelligence that the company was allegedly availing inadmissible input tax credit.

According to the Department, searches conducted at the company’s registered premises led to the recovery of purchase invoices, transport documents and other allegedly incriminating records.

The investigation reportedly revealed that several suppliers shown in the company’s books were bogus or dummy concerns created only for issuing invoices without supplying goods. Some of those concerns were allegedly registered in the names of unsuspecting individuals without their knowledge or consent.

The Department alleged that Manoj Bansal, a director of the company, purchased lead metal from the open market in cash and without tax invoices. Corresponding invoices were allegedly procured through brokers from 31 non-existent or dummy firms to enable the company to claim input tax credit.

On this basis, the Department alleged that the company had fraudulently availed ITC of approximately ₹15.44 crore without receiving the goods covered by the invoices.

A complaint under Sections 132(1)(b) and 132(1)(c) of the CGST Act was consequently filed before the Chief Judicial Magistrate, Rohtak. Significantly, the complaint named Bansal as the accused in his individual capacity but did not array M/s Nikita Industries Private Limited as an accused.

Department described director as beneficiary and mastermind

The DGGI maintained that Bansal was not merely a passive or nominal director. It alleged that he was actively involved in the management and operations of the company, including its GST-related affairs, and was the beneficiary and mastermind of the fraudulent arrangement.

The Department contended that the alleged material collected during the investigation established his direct participation in procuring invoices without actual receipt of goods and in facilitating the availment of fraudulent ITC.

It was therefore argued that the director could be individually prosecuted notwithstanding the failure to make the company an accused.

The Department also informed the Court that a demand-cum-show cause notice under Section 74 of the CGST Act had been issued to the company and that the demand was confirmed by an adjudication order dated January 16, 2025. The company had challenged that order by filing an appeal under Section 107.

Director challenges maintainability of complaint

Bansal argued that the complaint was fundamentally defective because the ITC had been availed by the company, which was the “registered person” under the CGST Act.

He submitted that he was not independently registered under the Act and could not personally have availed the disputed credit. His alleged liability arose only because he was a director of the company.

Accordingly, it was argued that any criminal liability sought to be imposed upon him was vicarious in nature and could arise under Section 137 only when the company that allegedly committed the principal offence was also prosecuted.

Question before the High Court

The principal question before the High Court was whether a director could be prosecuted individually for offences under Sections 132(1)(b) and 132(1)(c) when the company alleged to have fraudulently availed the ITC had not been made an accused.

Section 137 provides that where an offence under the CGST Act is committed by a company, every person who was in charge of and responsible to the company for the conduct of its business, “as well as the company”, shall be deemed guilty of the offence.

It further covers situations where an offence is committed with the consent or connivance of, or is attributable to negligence on the part of, a director, manager, secretary or other officer.

Section 137 requires prosecution of the corporate offender

The High Court found Section 137 of the CGST Act to be materially similar to Section 141 of the Negotiable Instruments Act, which governs offences committed by companies in cheque-dishonour cases.

Relying on the Supreme Court’s decision in Aneeta Hada v. Godfather Travels and Tours Private Limited and other binding precedents, the Court held that commission of the offence by the company is an express condition precedent for imposing vicarious liability upon its officers.

Under such a statutory framework, arraigning the company as an accused is imperative. Directors and other responsible officers can be brought within the prosecution through the statutory principle of vicarious liability only when the principal corporate offender is also before the criminal court.

The High Court rejected the Department’s contention that the director could be prosecuted independently because he was allegedly the architect and beneficiary of the fraud.

It observed that the Department itself did not dispute that the disputed ITC was availed by M/s Nikita Industries Private Limited. The complaint also alleged that it was the company that claimed credit based on invoices issued by 31 firms.

Further, the show cause notice and adjudication proceedings had been initiated against the company, and it was the company that had filed the statutory appeal.

Registered company—not director—had availed ITC

The Court also examined Section 16 of the CGST Act, under which the entitlement to take input tax credit belongs to a registered person.

M/s Nikita Industries Private Limited was the registered person within the meaning of Section 2(94). The company, therefore, was the entity alleged to have availed and utilised the fraudulent ITC.

The director was being prosecuted because of his position in and alleged control over the company. His liability in the complaint was thus connected with the alleged corporate offence and could not be sustained independently after the company was omitted from the array of accused.

The Court consequently held that, unless the company was prosecuted, no vicarious liability could be fastened upon its director under Section 137.

Complaint and consequential proceedings quashed

Allowing the petition, the High Court quashed Complaint No. COMA-86-2021 dated February 5, 2021, pending before the Chief Judicial Magistrate, Rohtak, along with all consequential proceedings against the director.

Importantly, the Court did not close the door on prosecution altogether. It expressly clarified that the authorities remained free to proceed for offences under Section 132 of the CGST Act in accordance with law.

A copy of the judgment was also directed to be forwarded to the Additional Director General, DGGI, Gurugram Zonal Unit, for information and necessary action. 

Critical takeaways for GST investigation and prosecution officers

The decision underlines that strong evidence regarding fake invoices, cash purchases, non-existent suppliers or wrongful ITC cannot compensate for a complaint that does not satisfy the statutory structure of corporate criminal liability.

Before instituting prosecution involving a company and its officers, the complaint should clearly:

• Array the company or other taxable corporate entity as an accused where the principal offence is attributed to that entity.
• Identify the registered person that allegedly availed or utilised the disputed ITC.
• Specify the role of every director, manager, authorised signatory or other officer proposed to be prosecuted.
• State whether each person was in charge of and responsible for the conduct of the company’s business when the offence occurred.
• Record specific allegations of consent, connivance or negligence wherever Section 137(2) is invoked.
• Maintain consistency between the investigation report, show cause notice, adjudication record, sanction for prosecution and criminal complaint.
• Verify the array of accused and all foundational averments through a legal scrutiny checklist before filing the complaint.
• Avoid relying only on descriptions such as “mastermind” or “beneficiary”; the complaint must connect those allegations with the ingredients of Sections 132 and 137.

Procedure is not a dispensable technicality

The quashing of a prosecution concerning alleged ITC fraud of ₹15.44 crore may appear frustrating from an enforcement perspective. Nevertheless, criminal liability—particularly vicarious criminal liability—must be created and enforced strictly in the manner prescribed by the statute.

The omission in this case was not merely an incorrect date, clerical defect or formatting error. The Department failed to prosecute the very juristic person alleged to have availed the fraudulent credit. Since the director’s liability was linked to the company’s alleged offence, the absence of the company went to the legal foundation of the prosecution.

The judgment therefore does not suggest that procedural requirements should shield tax fraud. Instead, it demonstrates that procedure protects the legitimacy of enforcement itself. For investigating officers, the practical message is clear: an otherwise evidence-heavy prosecution can fail at the threshold if the correct accused are not identified and arraigned in accordance with Section 137.

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