O.Alagarsamy vs. The District Manager

Held

The Court held that the impugned orders were passed arbitrarily and in violation of the principles of natural justice. Firstly, the Court found that the District Manager failed to conduct a domestic enquiry as contemplated under Clause 6 of the Prevention and Detention of Fraudulent Acts in Tamil Nadu State Marketing Corporation Limited, 2014, before imposing the penalty. The Court noted that the issue of whether the amount was a shortage or after-sales amount could only be determined through a proper enquiry. Secondly, the Court held that the imposition of GST on the penalty was illegal. The Court observed that Section 7(1)(d) of the GST Act, which was cited, was omitted with effect from February 1, 2019, and therefore not in force. Even if Section 7(1A) was considered, the Court found it inapplicable as the penalty was imposed in a disciplinary proceeding against an employee, not in the course of trade or commerce. The Court reasoned that GST is leviable on penalties imposed in trade or commerce, not on disciplinary penalties. Therefore, the imposition of GST was illegal. The Court set aside the impugned orders and allowed the writ petitions, directing the District Manager to conduct a domestic enquiry and pass a fresh decision in accordance with the procedure.

Facts

The petitioners, employees of TASMAC shops, challenged orders from the District Manager of TASMAC imposing penalties, interest, and GST on alleged shortages of sale amounts. The shortages arose due to the nationwide lockdown announced on March 24, 2020, which mandated shops to close by 6:00 p.m. Petitioners argued that due to the rush of customers and the inability to close accounts after 6:00 p.m. as per normal procedure, the sale proceeds from 4:00 p.m. to 6:00 p.m. were kept in the shop locker and later deposited. The TASMAC management, however, treated this as a shortage and issued show cause notices, subsequently imposing penalties and GST without conducting a domestic inquiry as required by TASMAC's internal procedures.

Key Issues

1. Whether the impugned orders imposing penalty, interest, and GST were passed in violation of the principles of natural justice and TASMAC's internal investigation procedure, specifically Clause 6 of the Prevention and Detention of Fraudulent Acts in Tamil Nadu State Marketing Corporation Limited, 2014, by failing to conduct a domestic enquiry? (Question of law and fact) 2. Whether the imposition of GST on the penalty amount was legally sustainable under the GST Act, 2017? (Question of law) Petitioner's Arguments: The petitioners contended that the District Manager imposed penalties without conducting a domestic inquiry, which is contrary to Clause 6 of the TASMAC's Prevention and Detention of Fraudulent Acts, 2014. They argued that the amounts were not shortages but after-sales amounts due to the lockdown rush and the inability to remit them on time. Furthermore, they argued that the imposition of GST on penalties levied in a disciplinary proceeding was illegal, as Section 7(1)(d) of the GST Act was omitted and Section 7(1A) was not applicable to disciplinary penalties. Revenue/State's Arguments: The respondents (TASMAC) contended that the amounts were indeed shortages and not after-sales amounts. They argued that the penalty was imposed as per the demand notice, and GST was levied on this shortage amount. They relied on Section 7(1A) of the GST Act, 2017, read with Rule 5(e) of the Rules, to justify the imposition of GST, arguing that the petitioner refrained from performing their duty to prevent the shortage.