S.Magesh vs. The District Manager

Held

The Court held that the respondent acted arbitrarily and in violation of the principles of natural justice by imposing the penalty without conducting a domestic enquiry as contemplated by the TASMAC Code. The Court found that the procedure adopted by the respondent was not in accordance with the Code, making the decision-making process illegal and liable to be quashed. Regarding the GST imposition, the Court found it illegal on two grounds. Firstly, Section 7(1)(d) of the GST Act, under which the notice was purportedly issued, was omitted with effect from 01.02.2019, rendering the notice without legal basis. Secondly, even if Section 7(1A) were applicable, the Court held that GST is leviable on penalties imposed in the course of trade or commerce, not on penalties imposed in disciplinary proceedings against an employee. Therefore, the imposition of GST on the penalty was illegal. The Court quashed the impugned order and allowed the petitioner to approach the respondent for a domestic enquiry if advised.

Facts

The petitioner, S. Magesh, a Supervisor at TASMAC Shop No. 810, challenged an order dated 17.11.2020 by the District Manager, Tamil Nadu State Marketing Corporation Limited (TASMAC), Tenkasi District. The order imposed penalty, interest, and GST on a shortage amount discovered during stock inventory after the transfer of goods from the shop to a godown for safe custody. The shortage was allegedly found after the petitioner had closed the shop early on 24.03.2020 due to a nationwide lockdown announcement, preventing him from completing stock registers and remitting sales proceeds on time. The petitioner contended the amount was 'after sales' and not a shortage, and that the respondent failed to conduct a domestic enquiry as per the TASMAC Code of Prevention and Detection of Fraudulent Acts, 2014.

Key Issues

1. Whether the respondent erred by imposing penalty, interest, and GST without conducting a domestic enquiry as mandated by Clause 6(e) of the Code of Prevention and Detection of Fraudulent Acts in Tamil Nadu State Marketing Corporation Limited, 2014, especially when the petitioner disputed the nature of the amount as a shortage? 2. Whether the imposition of GST on the penalty levied in a disciplinary proceeding against an employee is legally sustainable under the GST Act, 2017? Petitioner's arguments: The respondent failed to follow the prescribed investigation procedure under Clause 6 of the TASMAC Code by not conducting a domestic enquiry to ascertain whether the amount was indeed a shortage or 'after sales' amount, and by not providing the petitioner with an opportunity for personal hearing. The petitioner also argued that the imposition of GST on a penalty from a disciplinary proceeding is illegal. Respondent's arguments: The respondent contended that the amount was a shortage and issued a demand notice, leading to the petitioner's remittance of the amount with interest and GST. The respondent relied on Section 7(1)(d) and later Section 7(1A) of the GST Act, 2017, and Rule 5(e) of the relevant rules for imposing GST.