TaxTMI 
TaxTMI 
TaxTMI 
1. The Goods and Services Tax law was conceived as a system driven by self-assessment, transparency, and seamless credit. Penal provisions under the CGST Act, therefore, were never intended to operate as blunt instruments of coercion, but as targeted deterrents against real revenue loss. Section 122 of the CGST Act, 2017 is one such penal provision. Its misuse, however, lies in treating participation as culpability and proximity as guilt, while ignoring the statute’s central organising principle — benefit retention. This article examines the statutory architecture of Sections 122, and demonstrates that penalty under GST must attach only to the real beneficiary of wrongful ITC, not to every entity forming part of a paper trail.
2. Section 122:
Penal liability is offence-specific and person-specific: A plain reading of Section 122 makes it clear that it provides for levy of penalty only for “certain offences” committed by a taxable person. Sub-section (1) lists specific acts under clauses (i) to (xxi), and only a taxable person committing such acts renders himself liable to penalty. The provision itself prescribes a graded penalty structure — ?10,000 or an amount equivalent to the tax evaded / ITC wrongly availed and utilised, whichever is higher — thereby recognising that not all contraventions are equal in consequence or gravity.
3. Clauses (ii) and (vii): Two distinct offences, two distinct consequences clause (ii): Issuance of invoice without supply clause (ii) penalises issuance of invoices without supply of goods or services. The offence is formal in nature. It may facilitate a chain of transactions, but does not by itself result in revenue loss, unless ITC is ultimately availed and utilised. The issuer of such invoice, may not retain any ITC, may not utilise ITC, and may not enjoy any tax benefit.
4. Clause (vii): Availment or utilisation of ITC without receipt of goods Clause (vii), in contrast, strikes at the heart of revenue leakage. The offence is complete only when ITC is taken and utilised, and especially when such ITC is really used to set off output tax liability. The person falling under clause (vii) is therefore the ultimate and real beneficiary of the transaction.
Legislative recognition of the beneficiary principle sub-section (1A) of Section 122 is not an expansion of penal power; it is a legislative refinement. Though it uses the expression “any person”, its scope is statutorily confined. It applies only where:
A. The person retains the benefit of transactions covered under clauses (i), (ii), (vii) or (ix) of sub-section (1); and
B. Such transactions are conducted at his instance with a deliberate desire and the motive to enhance his gains. Both conditions are mandatory and cumulative. The reference to clauses of sub-section (1), read with Sections 2(94) and 2(107), makes it clear that the person contemplated under Section 122(1A) is necessarily a taxable person, capable of retaining and utilising ITC.
6. Circular bill trading: Innocent participants vs. Real beneficiary.
In cases of paper transactions and circular bill trading, the factual pattern is well-known: Several entities function as dummy/innocent or conduit participants, Invoices circulate without movement of goods, Funds rotate through bank accounts to create an illusion of consideration, yet, one or two entities ultimately avail and utilise the ITC. These dummy/innocent participants: do not retain ITC, do not use ITC to discharge tax liability, act merely as pass-through entities without economic substance. The real beneficiary is the entity: at whose instance the arrangement is orchestrated, and who ultimately utilises the ITC.
7. Section 122(1A) of the CGST Act is not an omnibus penal provision but a narrowly structured jurisdictional tool meant to identify and proceed only against the real instigator and beneficiary of a fraudulent transaction. The statutory expression “at whose instance such transaction is conducted” is a term of precision, not of convenience. It postulates the existence of a controlling mind—one who plans, commands, directs, and causes the transaction to occur—and who simultaneously retains the ITC benefit thereof. In the absence of such control and benefit, the assumption of jurisdiction under Section 122(1A) is ex facie without authority of law.
8. Penal liability under a credit-based tax regime cannot be imposed on a circular or collective basis when the benefit itself is singular and traceable. Mere participation in the transactional chain, without decisional control or retention of wrongful input tax credit, does not satisfy the statutory threshold. To proceed against persons who neither retained the benefit nor acted as the instigating force is to convert a targeted penal provision into a hunt—an approach wholly alien to the scheme of the CGST Act and destructive of the safeguards consciously embedded by Parliament.
9. Explanation (ii) to Section 74: Statutory finality of proceedings. The legislature has gone a step further to prevent multiplicity of penal proceedings. Explanation (ii) to Section 74 mandates that where proceedings are initiated against the person chargeable with tax under Section 73 or 74 in respect of wrongful ITC, the proceedings against all persons liable to penalty under Sections 122 and 125, in relation to the same transaction, shall be deemed to be concluded. This deeming fiction has profound legal consequences: once the real beneficiary is proceeded against under Section 73 or 74, all ancillary penalty proceedings against other persons automatically abate by operation of law. Sections 122 and 125, being ancillary penal provisions, cannot survive independently once the core tax liability is adjudicated against the real beneficiary..
10. Evidence, Not Assumption, Determines Penal Liability.
In such cases, documents speak for themselves. When a transaction-flow chart is in place mapping, invoice movement, fund rotation, absence of goods movement, and utilisation of ITC, the existence of circular bill trading and the identity of the real beneficiary become evident. Mere transfer of funds between bank accounts does not automatically qualify as “consideration” under Section 2(31), unless linked to a genuine supply. Circular fund movement without economic substance cannot substitute proof of supply. Suspicion, however strong, cannot take the place of evidence. A show cause notice that alleges circular trading involving multiple entities, yet proceeds to penalise each as an independent beneficiary, becomes internally inconsistent and legally unsustainable. Therefore, it is absolutely necessary to place on record on the part of the Proper Officer that he independently applied his mind to the tangible material which would evidence the linkage/nexus to come to his independent conclusion that there is an offence under Section 122 and that there is need for levying proportionate penalty.This mandatory process alone gives the Proper Officer power to levy penalty.
11. Judicial Seal:
A.The legal position [supra] is no longer res integra. The Hon’ble Madras High Court, in its landmark judgment dated 08.12.2021 rendered in M/s. Aathi Hotel, Versus The Assistant Commissioner (ST) (FAC), Nagapattinam - 2022 (1) TMI 1213 - MADRAS HIGH COURT, authoritatively held that penalty or interest cannot be mechanically levied merely on the allegation of wrongful availment of Input Tax Credit. The Court categorically ruled that a proper exercise under Section 74(10) of the Act is a sine qua non, requiring the proper officer to first ascertain—on facts and evidence—whether the credit was not only wrongly availed but also wrongly utilised for discharge of tax liability. In the absence of such determination, the very foundation for invoking Sections 73 or 74 collapses.
The Court further clarified the statutory distinction between availment and utilisation of ITC, holding that while proceedings under Sections 73(1) or 74(1) may be initiated for wrongful availment, interest and penalty under these provisions are attracted only when the credit is actually utilised. This interpretation preserves the legislative intent and prevents a colourable exercise of power whereby penal consequences are imposed without the essential jurisdictional fact of utilisation being established. The judgment thus decisively curtails the emerging practice of treating mere ledger entries as completed offences.
Significantly, the Court also held that where the facts disclose only an attempt to wrongly avail and utilise ITC in future, the proper course is not to invoke Sections 73 or 74 at all, but at best to consider proceedings under Section 122 of the TNGST Act, 2017, and even then only to the limited extent warranted. Accordingly, the penalty imposed under Sections 73/74 was set aside, and only a token penalty of Rs.10000/- was sustained, reinforcing the principle that tax administration must be proportionate, reasoned, and statute-compliant—not punitive by default.
B. Similarly, the Bombay High Court in UNION OF INDIA & ORS. Versus SHANTANU SANJAY HUNDEKARI & ANR. ETC. - 2025 (1) TMI 1249 - SC Order held that, Section 122 does not create vicarious liability, Penal provisions must be strictly construed, and only a person capable of retaining the benefit can be penalised. This judgment places a judicial brake on administrative overreach.
12.The combined reading of Section 122(1), Section 122(1A), Sections 73 and 74 (Explanation ii), and judicial precedents[supra], leads to one unavoidable conclusion: In GST law, penalty must follow the benefit. Innocent participants cannot be equated with real beneficiaries. Once the real beneficiary of wrongful ITC is identified and proceeded against, the law itself closes the chapter on further penal proceedings. Any contrary approach converts GST from a tax administration statute into a penal hunt, a consequence neither the legislature nor the courts have sanctioned.
13. It is beneficial to touch the supporting provision which springs sound logic akin to Section 122. Interest under Section 50(3) is levied not for a mere technical or procedural lapse, but only when wrongful availment of input tax credit culminates in its utilisation, thereby depriving the State of its due and legitimate revenue. The levy of interest is thus compensatory in nature; it presupposes an actual loss to the public exchequer. In the absence of such utilisation—and consequently, in the absence of deprivation of revenue—the very foundation for invoking Section 50(3) collapses. Extending the same statutory logic, penalty under Section 122(1A)—which authorises imposition of a penalty equivalent to the tax amount—can be justified only where the State is demonstrably deprived of its due revenue on account of the impugned transaction. The provision is not designed to punish shadows or suspicions; it targets conduct that results in real fiscal injury. Where no tax has escaped, no credit has been utilised, and no revenue has been lost, the harsh penalty equal to tax becomes wholly disproportionate and legally unsustainable. In such circumstances, the statute itself draws a clear line, where there is no deprivation of revenue, the law mandates only a nominal penalty of ?10,000, and nothing more.
14. To impose a penalty equal to tax in the absence of actual revenue loss would be to sever the provision from its legislative intent and convert a compensatory-deterrent mechanism into an instrument of arbitrary punishment. Therefore, deprivation of due revenue is the sine qua non—the indispensable jurisdictional fact—for initiation of proceedings either for interest at the notified rate under Section 50(3) or for penalty equivalent to tax under Section 122(1A). Absent such deprivation, the statutory trigger is missing, and the coercive machinery of the Act cannot be set in motion. In support of this, much reliance is placed on the division judgement of the Hon’ble Gujarat High Court in the case of Symphony Limited & Anr. Versus Union of India & Anr. - 2025 (10) TMI 1321 - GUJARAT HIGH COURT which has held that interest cannot be levied on unutilised ITC. The department, therefore, cannot have the luxury of litigating a non-issue discarding discipline of fiscal jurisprudence.
15.Therefore the GST law contemplates penal action under Section 122 only as a precursor to the effective adjudication of the ultimate beneficiary of wrongful ITC. Such beneficiary is the head, the brain, and indeed the sole mastermind of the cartel—conceiving, directing, and sustaining the arrangement exclusively to benefit himself. Absent this controlling mind, circular bill trading loses all fiscal significance and degenerates into a hollow exercise, no more than a game of kite-flying, producing movement without purpose and noise without substance. Therefore, it is incumbent upon the authorities to recalibrate their approach in conformity with the statutory scheme, ensuring that enforcement/adjudication proceeds smoothly and reaches its intended destination.
16. Taxable person- the focal point
A. Section 122(1) of the CGST Act opens with the expression “any taxable person who----”. The legislative choice of words is deliberate and restrictive. Liability to penalty under this provision is, therefore, statutorily confined to a “taxable person” alone. The jurisdictional fact for invoking Section 122(1) is not the allegation of misconduct, but the legal status of the person proceeded against.
B. It thus becomes imperative to first ascertain who qualifies as a “taxable person” under the GST regime. GST is a levy on the “supply of goods or services or both”. Unless there is a real and legally cognisable supply, its ‘consideration’ cannot enter the pool of “turnover” as defined under Section 2(112) of the Act.
C. Turnover, in turn, is the determinative factor for liability to registration under Sections 22 and 24 of the Act. In the absence of any real supply, there is no turnover; and in the absence of turnover, the very edifice of compulsory registration collapses.
D. An empty sump of turnover necessarily shakes the foundational qualification of a “taxable person” as defined under Section 2(107). A person who is not liable to registration under Sections 22 or 24 cannot, by legal fiction or administrative assumption, be elevated to the status of a “taxable person”.
E. This settled statutory scheme applies in its full amplitude while examining penal consequences under Section 122(1). Penal provisions must be construed strictly, and jurisdictional facts cannot be presumed. In the absence of the primary condition—namely, that the person is a “taxable person”—the machinery of penalty cannot be set in motion.
F. Consequently, penal action under Section 122(1) can be initiated only against a person who actually supplies goods or services or both, and who thereby qualifies as a “taxable person” within the meaning of Section 2(107) of the Act. Any attempt to extend penal liability to a non-taxable person would be contrary to the plain language of the statute and unsustainable in law. The ‘taxable person’ is the focal point of the GST penal universe, remove that centre, and the law is left orbiting nothing.
17.Section 122(1A) does not create an independent offence nor does it enlarge the class of offences contemplated under Section 122(1). It merely prescribes the quantum of penalty in respect of specified offences already enumerated in clauses (i), (ii), (vii) and (ix) of sub-section (1). The legislative focus of sub-section (1A) is not on defining culpability afresh, but on identifying the person who retains the benefit of the transaction and at whose instance such transaction is conducted, for the limited purpose of quantifying the penalty. The liability under Section 122(1A), therefore, is derivative and consequential, flowing strictly from the existence of a proven offence under Section 122(1). In other words, Section 122(1A) operates only after an offence under Section 122(1) is established; it does not travel beyond the contours of sub-section (1), nor can it be invoked in isolation to fasten penal consequences in the absence of a foundational violation under the parent provision.
18. Section 122(2) draws a clear distinction based on intent. Where a registered person supplies goods or services resulting in unpaid, short-paid or wrongly refunded tax, or wrongful availment or utilisation of input tax credit, the penalty depends on whether the lapse is bona fide or fraudulent. If the default is without fraud, wilful misstatement or suppression of facts, the penalty is limited to Rs.10,000 or 10% of the tax due, whichever is higher. However, where the default is tainted by fraud, wilful misstatement or suppression with intent to evade tax, the law mandates a much harsher penalty of Rs.10,000 or 100% of the tax due, whichever is higher. The provision thus calibrates punishment strictly in proportion to the presence or absence of mens rea.
19.Section 122(3) is a residual penal provision which covers persons who may not themselves be primary offenders but are involved in or facilitate violations of the GST law. It applies to those who aid or abet GST offences, knowingly deal with goods liable to confiscation, are involved in illegal supply of services, disobey summons, or fail to issue or properly account for invoices. For these specified contraventions, the law prescribes a moderate penalty, capped at Rs.25,000, reflecting that these are ancillary or procedural violations rather than core tax-evasion offences.
20.Sections 2(62) and 2(82) together define the statutory ecosystem of tax under the GST regime, both being inexorably anchored to the existence of a ‘supply’. “Input tax” arises only when tax is charged on a real supply made to a registered person, and “output tax” exists only when tax is chargeable on a real supply made by such person. Supply, therefore, is not a matter of inference but a jurisdictional fact. In the absence of an actual supply, there can be neither input tax nor output tax, and consequently no question of availing, utilising or passing on input tax credit, nor of tax being payable or evaded. Section 122(1) presupposes the existence of either input tax or output tax arising from a real supply, and cannot be invoked on paper transactions. Penal provisions do not operate in a vacuum, where the foundational fact of supply is missing, the very edifice of liability under Section 122(1) crushes at inception. So enough care should be taken to ensure that authority discharges its statutory role in a fair manner guided by the binding judicial rulings.
21. The true inquiry under Section 122 is not who is available to be proceeded against, but who consciously decided or caused to break the law. Penal liability under the GST regime arises only from a deliberate, attributable decision of a legally identifiable person—either the taxable person who commits the prohibited act, or the person who, within the meaning of Section 122(1A), causes such act to be done at whose instance the transaction is conducted. The burden squarely lies on the authorities to first establish that the law was in fact broken, then to demonstrate who took the decision to break it, how that decision translated into a specific statutory contravention, and why the person proceeded against answers the statutory description.
22. Interestingly there is foundational similarity between Section 122 and Section 132. Section 132 does not introduce a distinct species of misconduct, nor does it travel beyond the statutory universe of Section 122. It represents an aggravated scale of the very contraventions enumerated therein, where a regulatory breach—ordinarily amenable to civil consequence—when infused with wilful intent, conscious design, and calculated deceit, crosses the invisiblebut decisive threshold into criminality. The soil from which both provisions spring remains the same; it is the depth of culpability, and not the nature of the act, that alters the colour, gravity, and legal character of the offence.
23. Ex facie, under Sections 122 and 132, it is the unseen back-shooters who reap the illicit gains, while only the front shoulders stand exposed—the guns behind remaining conveniently invisible. Dummy persons paraded at the forefront of such cartels act without real knowledge of the legal implications or the cascading complications that follow, whereas the back-shooters stay concealed, operating with cool, premeditated calculation and reaping the benefits with ostensibly clean hands. The mandate of law, however, is unambiguous: those who pull the strings must face penalty or prosecution, as the case may be, and not escape behind borrowed shoulders. That is the perfect catch—when the law pierces the veil, reaches the back-shooter, and leaves no gun hiding behind another’s shoulder.
24.Tax is the backbone of every nation’s economy and it must be protected diligently with deterrence. GST law punishes evasion of tax, not imagination of tax. Therefore when invoking Sections 122 and 132, officers must think twice before acting, so that a tax mistake is not wrongly treated as a crime and power is not misused. Such matters demand neutral and expert officers who understand the difference between suspicion and proof, and between error and offence. This is the need of the hour to ensure highest standards of governance, transparency and compliance by the department whose role is to shine light on the truth. And it always have to have that in mind to act within the lines of the law.