The Delhi High Court has held that personal penalties under Section 122(1A) of the Central Goods and Services Tax Act, 2017 cannot be imposed for transactions or acts committed before January 1, 2021, irrespective of when the show cause notice was issued.

The bench of Justice Anil Kshetarpal and Justice Bharat Parashar clarified that the provision extends to persons who are neither registered nor liable to be registered under GST. However, liability arises only when two conditions are established: the person retained the benefit of the specified transaction, and the transaction was conducted at that person’s instance.

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A common show cause notice culminated in an adjudication order dated January 22, 2025 under Section 74 of the CGST Act. The adjudicating authority confirmed a demand based on allegations that the company had engaged in circular trading and irregularly availed input tax credit of ₹24,99,88,069 through invoices issued without an actual supply of goods.

Besides the demand and penalty against the company, the authority imposed separate personal penalties of ₹24,99,88,069 each on three individuals under Section 122(1A). It also imposed a penalty of ₹25,000 each under Section 125, on the ground that they had served as directors at different points in time.

The petitioners challenged the personal penalties, arguing that the notices and orders did not identify their individual roles in the alleged transactions or establish that they had retained any benefit.

The petitioners submitted that they were employee-directors rather than promoters or shareholders. According to their submissions, two of the directors were appointed only in August 2020, after the alleged transactions, while another had resigned on August 7, 2020.

They argued that the adjudicating authority had proceeded on the basis of their designation without establishing either personal retention of benefit or involvement in directing the transactions.

They also contended that the alleged transactions related to the period from July 2017 to March 2019, or at the highest up to August 30, 2020. Since Section 122(1A) came into force only on January 1, 2021, they maintained that a later show cause notice could not create liability under that provision for earlier conduct.

The petitioners further questioned the imposition of penalties equal to the entire disputed input tax credit separately on the company and each individual, without establishing an independent statutory basis for each person’s liability.

These factual objections were ultimately left for the statutory appellate authority to examine.

The GST authorities argued that the petitioners should pursue the statutory appeal mechanism rather than invoke the High Court’s writ jurisdiction.

On the application of Section 122(1A), the department submitted that fraudulent availment or passing on of input tax credit and issuance of invoices without supply were already prohibited under the CGST Act. It argued that the amendment addressed an existing statutory mischief by identifying the persons liable for the consequences of such transactions.

The Court nevertheless examined the legal questions because conflicting judicial interpretations had created uncertainty about the provision’s scope and its application to earlier transactions.

The Bench rejected the argument that Section 122(1A) can apply only to a “taxable person”.

It pointed out that Parliament used different expressions within Section 122. While Section 122(1) refers to a “taxable person”, Section 122(1A) uses “any person”, and Section 122(2) refers to “any registered person”.

The Court held that these differences were deliberate and had to be given their distinct meanings. Restricting “any person” to a taxable person would effectively insert words that Parliament had chosen not to use.

The Bench also referred to the broad definition of “person” under Section 2(84), which covers individuals, companies, firms, limited liability partnerships, trusts and other recognised entities.

Accordingly, the Court held that Section 122(1A) can reach a person who is neither registered nor liable to be registered under GST, provided the statutory conditions are satisfied.

The Court observed that fraudulent input tax credit transactions may be organised through fictitious or shell entities registered in the names of persons who have little connection with the underlying business.

Such entities may be created using the identities of drivers, domestic workers or other individuals, including persons whose identity documents have been misused. Meanwhile, those directing the transactions and retaining the financial benefits may operate behind the registered entities.

The Bench reasoned that restricting Section 122(1A) to the registered or taxable person could allow the actual organiser and beneficiary to escape liability.

It also relied on the legislative history, noting that the provision followed recommendations made at the 38th GST Council meeting to address fake invoicing and impose liability on the real beneficiaries of fraudulent transactions.

The Court emphasised that the broad expression “any person” does not dispense with the conditions governing personal liability.

First, the person must have retained the benefit of a transaction covered by clauses (i), (ii), (vii) or (ix) of Section 122(1). Second, the transaction must have been conducted at that person’s instance.

Both requirements must be independently established.

The Bench explained that the enquiry presupposes an established contravention under the specified clauses of Section 122(1). These concern transactions such as supply without an invoice, issuance of invoices without supply, wrongful availment or utilisation of input tax credit, and wrongful distribution of input tax credit.

Only after establishing the underlying contravention does the further enquiry arise into who retained its benefit and at whose instance it was conducted.

The ruling therefore requires an examination of the individual’s connection with the transaction and its benefits before imposing a penalty under Section 122(1A).

On the question of retrospective application, the Court held that Section 122(1A) operates prospectively from January 1, 2021.

The Bench rejected the view that the date of the show cause notice determines whether the provision can be invoked. It reasoned that a notice may be issued promptly or after a substantial delay. Making liability depend on that administrative step could result in identical transactions attracting different legal consequences merely because proceedings began at different times.

The Court held that the relevant date is the date of the underlying act or transaction.

Although Section 122(1A) imposes a monetary penalty and is civil in form, the Bench observed that its consequence is penal. A subsequent notice cannot change the date on which the alleged contravention occurred or enlarge the provision’s temporal operation.

Consequently, only acts or transactions occurring on or after January 1, 2021 can attract the penalty, subject to satisfaction of both statutory conditions.

The Bench considered differing interpretations adopted by the Delhi, Bombay and Gauhati High Courts.

On the meaning of “any person”, it agreed with the broader interpretation reflected in Gurudas Mallik and Mayank Bansal. It declined to follow the narrower interpretation in Shantanu Sanjay Hundekari and Amit Manilal Haria insofar as those decisions confined the provision to taxable persons.

The Court also noted that the Supreme Court’s dismissal of the special leave petition in Shantanu Sanjay Hundekari was based on the facts of that case, with the legal question expressly left open.

On retrospective application, however, the Bench agreed with the Bombay High Court’s reasoning in Amit Manilal Hariathat Section 122(1A) could not apply to acts committed before it came into force.

It declined to adopt the reasoning in Bhupender Kumar and Mayank Bansal that applicability could be tested by the date of the show cause notice. Regarding Bhupender Kumar, the Bench observed that Article 20 of the Constitution did not appear to have been brought to the earlier Bench’s attention and that the relevant observations appeared to be obiter, made while directing the parties to their statutory remedy.

The High Court confined its determination to the two legal questions. It did not decide whether any particular petitioner retained the benefit of a transaction, directed it, or participated in conduct occurring after January 1, 2021.

Those matters require examination of facts and evidence and were left to the appellate authority under Section 107.

The Court granted the petitioners liberty to file statutory appeals against the respective adjudication orders. It directed that appeals filed within four weeks of the judgment must not be dismissed on limitation grounds and must be considered on merits.

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