By Adv. Om Prakash Jha · GST Folio · October 2026
Personal penalty on directors, promoters, employees and “masterminds” of fake-invoice and bogus-ITC rackets has become one of the most litigated areas of GST. The source of that liability is Section 122(1A) of the CGST Act, 2017. On 29 September 2026, a Division Bench of the Delhi High Court in Parag Garg v. Commissioner, Adjudication, CGST Delhi West (W.P.(C) 13883/2026 and connected matters) settled two questions that had split the High Courts: who can be penalised under Section 122(1A), and from when.
🗣️ Saral bhasha mein samjhein
- Fake invoice ya bina maal ke ITC lene wale case mein ab company ke saath director, promoter ya asli beneficiary par bhi personal penalty lag sakti hai. Ye Section 122(1A) hai.
- Penalty utni hi hoti hai jitna tax ya ITC ka amount hai, yaani crores mein bhi ho sakti hai.
- Penalty ke liye do baatein saabit honi chahiye: (1) us vyakti ne fayda rakha, aur (2) transaction uske kehne par hua. Sirf director ka pad hone se penalty nahi lagti.
- Delhi High Court (29.09.2026): GST mein registered na ho tab bhi penalty lag sakti hai, lekin sirf 01.01.2021 ya uske baad ke transactions par.
- Yani 2017 se 2020 tak ke transactions par Section 122(1A) ki penalty tikti nahi, chahe notice baad mein aaya ho.
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1. The Provision
“(1A) Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.”
The four clauses of Section 122(1) to which sub-section (1A) is linked are:
| Clause of S. 122(1) | Contravention |
|---|---|
| (i) | Supply of goods/services without invoice, or issue of an incorrect or false invoice |
| (ii) | Issue of invoice or bill without supply of goods/services |
| (vii) | Taking or utilising ITC without actual receipt of goods/services, fully or partially |
| (ix) | Taking or distributing ITC in contravention of Section 20 (Input Service Distributor) or the rules |
2. Legislative History
- Inserted by Section 126 of the Finance Act, 2020, on the recommendation of the 38th GST Council meeting, and brought into force w.e.f. 01.01.2021.
- Unlike several other Finance Act, 2020 amendments that were made retrospective from 01.07.2017, no retrospective effect was given to Section 122(1A).
- Through the same legislative exercise, the opening words of Section 132(1) were amended from “Whoever commits” to “Whoever commits, or causes to commit and retain the benefits arising out of”. This brought the civil penalty and the criminal provision into alignment.
The mischief addressed: before the amendment, Section 122(1) reached only the “taxable person”, which is usually a company or a shell firm. The individuals who engineered the fraud and pocketed its proceeds stood outside the penalty net. Sub-section (1A) was enacted to close that gap.
3. Essential Ingredients: The Twin Test
Liability under Section 122(1A) is attracted only when both of the following conditions are independently established. They are conjunctive, not disjunctive:
- Retention of benefit: the person has retained the benefit of a transaction covered by clauses (i), (ii), (vii) or (ix) of Section 122(1); and
- Instance: the transaction was conducted at that person’s instance.
There is also a precondition: a contravention under one of the four clauses must first be established against the taxable person. Only then does the enquiry move to who retained the benefit and at whose instance the transaction was conducted. A designation alone (“director”, “employee”, “authorised signatory”) does not satisfy either limb.
4. Quantum of Penalty
An amount equivalent to the tax evaded or the ITC availed of or passed on. Unlike Section 122(1), there is no alternative minimum of ₹10,000. The penalty is a mirror of the amount involved, which is why individual penalties running into crores are common. For example, in the lead matter before the Delhi High Court, a penalty of ₹24.99 crore was imposed on each of three directors.
5. How Section 122(1A) Fits with Other Provisions
| Provision | Who is liable | Consequence |
|---|---|---|
| S. 122(1) | Taxable person | ₹10,000 or tax evaded / ITC involved, whichever is higher |
| S. 122(1A) | Any person who retains the benefit and at whose instance the transaction was conducted | Amount equal to tax evaded / ITC availed or passed on |
| S. 122(3)(a) | Any person who aids or abets the offences in S. 122(1) | Up to ₹25,000 |
| S. 132(1) | Whoever commits, or causes to commit and retains the benefit | Prosecution; imprisonment graded by amount (above ₹1 crore up to 1 year, above ₹2 crore up to 3 years, above ₹5 crore up to 5 years), with fine |
Clauses (i), (ii), (vii) and (ix) of Section 122(1) substantially correspond to clauses (a), (b), (c) and (e) of Section 132(1). The same fraudulent conduct can therefore expose an individual to both a civil penalty and prosecution.
6. The Judicial Conflict
Issue (i): Does “any person” mean only a taxable person?
- Wider view: Bharat Parihar v. State of Maharashtra (Bombay HC); Gurudas Mallik (Delhi HC); Mayank Bansal v. Union of India (Gauhati HC, 08.06.2026). These held that “any person” is deliberately distinct from “taxable person” and “registered person”, and reaches individuals who orchestrate fraud through a corporate vehicle.
- Narrower view: Shantanu Sanjay Hundekari v. Union of India and Amit Manilal Haria v. Joint Commissioner (Bombay HC). These held that the provision ordinarily concerns the taxable person, and that employees cannot be penalised without material showing personal retention of benefit and personal involvement. The Supreme Court dismissed the Department’s SLP in Hundekari on facts, keeping the legal question open.
Issue (ii): Can it apply to transactions before 01.01.2021?
- Date of SCN is the test: Bhupender Kumar (Delhi HC) and Mayank Bansal (Gauhati HC). These held that the provision only identifies the person liable for existing violations, that Article 20(1) does not apply to civil penalties, and that a continuing fraud spanning the cut-off date is covered.
- Date of transaction is the test: Amit Manilal Haria (Bombay HC). Invoking Article 20(1), it held that no penalty can be imposed for acts before the provision came into force.
7. The Law Now: Delhi High Court in Parag Garg (29.09.2026)
The Division Bench (Anil Kshetarpal and Bharat Parashar, JJ.) answered both questions in a batch of writ petitions in which directors had each been saddled with the full ITC amount as personal penalty:
Holding 1: “Any person” is not confined to a taxable person
The expression extends to every person, registered or not, who satisfies the twin test. The Court reasoned that a company, LLP or firm can act only through natural persons. Confining sub-section (1A) to the taxable person would render it “otiose in precisely those cases of corporate or organised fraud which it was intended to address”. Sub-section (3) of the same Section also uses “any person” without restriction. The Court declined to follow the narrower Bombay view on this issue.
Holding 2: The provision is prospective and the date of transaction governs
Section 122(1A) applies only to transactions or acts committed on or after 01.01.2021, irrespective of the date of the Show Cause Notice. Its reasons were:
- Section 132, amended through the same exercise, is confined by Article 20(1) to conduct on or after 01.01.2021. It would be incongruous to apply the corresponding monetary penalty to earlier conduct.
- The penalty, though civil in form, is “penal in consequence” and must bear a nexus with the date of the underlying act.
- Making liability depend on when the Department chooses to issue an SCN would let identical transactions attract different consequences, contrary to the principle nulla poena sine lege.
- The contrary observations in Bhupender Kumar were treated as obiter and made without reference to Article 20.
The Court entertained the writs despite the alternative remedy, because the questions were purely legal and recurring. It relegated the factual questions to the Appellate Authority under Section 107: whether each petitioner retained the benefit, whether the transactions were conducted at their instance, and whether the transactions fell before or after 01.01.2021. Appeals filed within 4 weeks of the judgment are not to be dismissed as time-barred.
8. Defence Checklist for Directors, Partners and Employees
- Period objection: map every invoice and ITC entry by date. Any portion before 01.01.2021 is outside Section 122(1A) (Parag Garg; Amit Manilal Haria).
- No predicate contravention: the penalty fails unless a violation under clause (i), (ii), (vii) or (ix) is first established against the taxable person.
- Retention of benefit not shown: demand specific evidence of money trail, shareholding, or withdrawals. Holding office is not benefit.
- “At whose instance” not shown: show the absence of any role in decision-making, signing, or dealing with suppliers. Dates of appointment or resignation are often decisive.
- Vague SCN: an SCN that does not attribute specific acts to the individual violates natural justice and is vulnerable on that ground alone.
- Duplication of penalty: imposing the full amount separately on the company and on each director, without individualised findings, can be challenged as arbitrary and disproportionate.
- Limitation and remedy: file the Section 107 appeal in time. Where a pure question of law arises, a writ remains maintainable.
9. Frequently Asked Questions
Can a director who is not registered under GST be penalised under Section 122(1A)?
Yes, as per the Delhi, Gauhati and (in Bharat Parihar) Bombay High Courts, provided both the retention-of-benefit and at-whose-instance conditions are proved against that director personally.
Does Section 122(1A) apply to fake invoices of 2017–2020?
Under Parag Garg (Delhi HC, 29.09.2026) and Amit Manilal Haria (Bombay HC), no. Only transactions on or after 01.01.2021 are covered, even if the SCN is issued later. The Gauhati High Court’s contrary view in Mayank Bansal means the position may vary by jurisdiction until the Supreme Court decides.
Is a salaried employee automatically liable?
No. Vicarious liability does not arise merely because the tax liability belongs to the employer. Personal retention of benefit and personal involvement must be established.
What is the amount of penalty?
An amount equal to the tax evaded or the ITC availed of or passed on. There is no fixed minimum.
Received a Show Cause Notice or Order under Section 122(1A)? GST Folio drafts SCN replies, Section 107 appeals and writ petitions on personal-penalty matters. Call/WhatsApp +91 8051331315 or email gstfolio@zohomail.in.
This article is for general information and does not constitute legal advice. Outcomes depend on facts and jurisdiction; the questions discussed may be taken to the Supreme Court.