CATCH THE BENEFICIARY, NOT THE BYSTANDERS. DECODING SECTION 74, 122 & 132

Preamble

This article is conceived as a prior and independent exposition of the true scope of Section 122 of the CGST Act. It advances a singular and consistent principle-that penal liability under GST is benefit-centric, not participation-centric-arrived at on a plain and purposive reading of the statute, much before subsequent judicial affirmations. [Please refer my Article ' Penalty Must Follow The Benefit' -TMI Dated 03/02/2026]

1.The evolving jurisprudence under the Central Goods and Services Tax Act, 2017 reflects a gradual but decisive judicial effort to align tax enforcement with foundational principles of legality, proportionality, and individual culpability. A significant contribution in this direction is the judgment of the Bombay High Court in Amit Manilal Haria, Hiren Uday Gada, Atul Hirji Maru Versus The Joint Commissioner, CGST & Central Excise., The Superintendent, CGST & CX, Range-V, Division V, Mumbai East Commissionerate. - 2026 (2) TMI 1409 - BOMBAY HIGH COURT, which, though rendered in the context of penalty under Section 122(1A), has far-reaching implications for adjudication under Section 74 and even prosecution under Section 132. The decision invites a deeper doctrinal inquiry into the central role of 'retention of benefit' in cases involving fake invoices and wrongful input tax credit, and whether such retention constitutes the true jurisdictional anchor for invoking the penal and adjudicatory machinery of the statute.

2.The statutory scheme of the CGST Act reveals that Sections 74 and 122 operate in close conceptual proximity, particularly in cases involving fraud, fake invoicing, and wrongful availment or utilisation of input tax credit. Section 74 is triggered where tax has not been paid or has been short paid by reason of fraud, wilful misstatement or suppression of facts, while Section 122 prescribes penalties for specific offences, including issuance of invoices without supply and wrongful availment of input tax credit.

3. Section 122(1A), introduced subsequently, extends penalty to 'any person' who retains the benefit of such transactions and at whose instance they are conducted. Although these provisions are textually distinct, their operational overlap becomes evident in fake invoice cases, where the question is not merely whether an irregularity has occurred, but who truly benefits from it and who orchestrates it. The Bombay High Court's analysis brings into sharp focus the indispensability of the twin conditions embedded in Section 122(1A), namely, retention of benefit and the transaction being conducted at the instance of the person sought to be penalised. The Court's insistence that these are not mere evidentiary considerations but jurisdictional prerequisites fundamentally reshapes the manner in which liability is to be attributed.

4.The expression 'any person' cannot be read in isolation so as to cast a wide and indiscriminate net; it must be understood in the context of the statutory design, which is aimed at targeting the real beneficiary and the controlling mind behind the offending transaction. In the absence of such retention of benefit, the very foundation for invoking Section 122(1A) collapses. This reasoning, when logically extended, has a profound bearing on adjudication under Section 74 itself. If the gravamen of the offence in fake invoice cases is the wrongful availment or utilisation of input tax credit, and if such availment is meaningful only when it results in a tangible benefit, then the absence of retention of such benefit raises a serious question as to whether the ingredients of fraud or suppression can at all be said to exist against a particular person.

5.The statutory language of Section 74 is undoubtedly wide, but it is not unstructured. Fraud and suppression are not abstract concepts; they must be grounded in conduct that results in unlawful gain or advantage. Where a person neither retains nor derives any benefit from the alleged wrongful credit, the attribution of fraudulent intent becomes shaky and risks degenerating into a mere presumption based on association or designation. The logic becomes even more compelling when one considers the nature of fake invoice rackets, which typically operate through a network or cartel of entities. Within such a structure, there may be multiple participants-issuers of invoices, intermediaries, and ultimate beneficiaries.

6.However, the economic reality is that the entire arrangement is driven by the entity that ultimately utilises and retains the benefit of the input tax credit. It is this beneficiary who has both the motive and the capacity to orchestrate the chain of transactions. The other participants, though not necessarily innocent, do not stand on the same footing in terms of culpability unless it is demonstrated that they too have retained a share of the benefit of ITC or have actively directed the transactions. The Bombay High Court's emphasis on 'at whose instance' thus acquires critical significance, as it directs attention to the source of control and the locus of benefit. In this backdrop, it becomes difficult to sustain a view that every taxable person appearing in the chain of fake invoices can be subjected to adjudication under Section 74 in a uniform manner.

7.The provision cannot be deployed as a blunt instrument to fasten liability across the board without a careful inquiry into who actually retained the benefit of the wrongful credit. To do so would not only dilute the statutory requirement of fraud or suppression but also undermine the principle that penal consequences must be proportionate to individual culpability. The absence of retention of benefit, therefore, is not a peripheral factor; it goes to the root of jurisdiction under Section 74. If no benefit is retained, the allegation of evasion loses its substantive content, and the invocation of Section 74 becomes vulnerable to challenge.

8.The same principle applies with equal, if not greater, force to the imposition of penalty under Section 122(1A). The provision is explicitly conditioned upon retention of benefit and the transaction being conducted at the instance of the person concerned. These are cumulative requirements, and failure to establish either is fatal to the proceedings. The Bombay High Court's ruling makes it clear that liability cannot be inferred merely from the position held by an individual within a company or from a generalized allegation of involvement. There must be clear and cogent material to show that the person has actually benefited from the transaction and has played a decisive role in bringing it about. In the absence of such material, the proceedings are rendered without jurisdiction.

9.This approach also has a natural resonance with the scheme of prosecution under Section 132, where the offences are largely pari materia with those enumerated in Section 122. Criminal liability, by its very nature, demands an even higher threshold of proof, including the establishment of mens rea. If retention of benefit is treated as a jurisdictional fact for the purpose of civil penalty, it would be strange to dispense with such a requirement in the context of criminal prosecution. The absence of benefit would significantly weaken the inference of intent to evade tax, thereby undermining the basis for prosecution. Although Section 132 operates independently, the underlying offences being similar, the interpretative discipline applied to Section 122(1A) provides valuable guidance in ensuring that criminal proceedings are not initiated in a routine or mechanical manner.

10.The broader implication of this line of reasoning is that GST enforcement must move away from a form-driven approach to a substance-oriented analysis that identifies the real beneficiary of the alleged wrongdoing. The retention of input tax credit benefit emerges as the central connecting factor that links the act, the intent, and the consequence. It is this factor that justifies the invocation of stringent provisions such as Section 74 and the imposition of severe penalties under Section 122(1A).

11.Conversely, in its absence, the edifice of adjudication and penalty becomes unstable and susceptible to judicial scrutiny. Ultimately, the Bombay High Court's ruling underscores a fundamental principle that runs through tax as well as criminal jurisprudence: liability must be personal, evidence-based, and proportionate. The mere existence of a chain of transactions involving fake invoices does not, by itself, justify the imposition of uniform liability on all participants. The law must identify and target the true beneficiary and the controlling mind behind the scheme. Only such an approach ensures that the objective of curbing tax evasion is achieved without sacrificing the equally important values of fairness and legal certainty.

Conclusion

In the backdrop of the well-settled legal position [supra], enforcement must remain firmly trained on the real beneficiary-the controlling mind and ultimate recipient of wrongful ITC-rather than on peripheral participants in the transactional chain. Misplaced focus on the latter not only distorts the statutory scheme but also renders proceedings legally fragile, often resulting in the collapse of charge sheets before judicial scrutiny. Such an approach, apart from defeating the object of the law, raises serious concerns when the true beneficiaries are left untouched. The mandate is clear: the law must reach the source of the benefit, for it is there alone that penal liability legitimately resides.