FROM INVOICE MANIPULATION TO PERSONAL LIABILITY - THE EXPANDING SCOPE OF SECTION 122 UNDER GST

When Paper Transactions Begin to Replace Real Business

Modern GST enforcement is increasingly moving beyond traditional tax scrutiny to a deeper examination of whether a business transaction genuinely reflects commercial activity. In many recent investigations, the central allegation is not merely a shortfall in tax payment, but the creation of artificial transaction chains designed to generate Input Tax Credit (ITC), inflate turnover figures, or project commercial strength unsupported by real economic activity. The controversy examined by the Madras High Court in TVL. Sam Enterprises & Ors. v. Commercial Tax Officer [2026 (5) TMI 861 - MADRAS HIGH COURT] arises from this very background. According to the Department, the entities involved were allegedly engaged in circular trading arrangements where invoices moved repeatedly through multiple entities without corresponding movement of goods or proportionate underlying business activity.

Unlike conventional tax disputes involving classification or valuation, allegations of fake invoicing and circular trading usually focus on the authenticity of the entire transaction structure. In such cases, the authorities seek to determine whether the turnover reflected in GST returns genuinely represents business activity or merely a paper-based circulation of invoices intended to generate artificial ITC and inflate commercial visibility. The same goods - and in some situations even non-existent goods - may allegedly be shown as repeatedly sold and resold through interconnected entities, so that turnover figures continue to increase at every stage of the transaction chain. Consequently, businesses appearing commercially strong on paper may, according to the Department, actually possess very limited underlying economic substance.

It is this evolving nature of GST enforcement that gives the present judgment wider significance. The case demonstrates that GST investigations increasingly rely on invoice trails, e-way bills, transportation records, banking patterns, stock movement, and commercial linkages among related entities to determine whether the transactions reflected in returns correspond to genuine economic activity. The decision therefore does not merely concern penalties under Section 122 of the CGST Act. It also reflects the broader transition of GST administration from a return-based compliance system to a more forensic examination of transaction authenticity, behavioural compliance, and commercial credibility.

From Tax Investigation to Financial Credibility Examination

The proceedings before the Madras High Court arose from investigations conducted against several dealers operating in the medical equipment sector. According to the Department, the turnover disclosed by the entities concerned appeared disproportionately high when compared with surrounding commercial indicators and the overall pattern of business activity observed during the investigation. The Revenue therefore initiated proceedings alleging wrongful availment and passing on of ITC through interconnected transaction structures.

A notable feature of the Department's case was that the investigation went beyond mere tax computation. The authorities suspected that the reported turnover figures were also being used to project a larger business scale and greater financial credibility to banks, lenders, and other commercial institutions. In the contemporary commercial environment, GST turnover has increasingly become an important indicator for assessing borrowing capacity, vendor reliability, market standing, and working capital exposure. Consequently, inflated turnover figures may create a commercial image that does not fully correspond with the underlying economic activity of the business.

The present case therefore reflects the evolving nature of GST enforcement in India. Investigations today are increasingly directed not merely towards identifying short payment of tax, but towards examining whether the overall transaction ecosystem reflects genuine commercial behaviour.

When GST Liability Begins to Extend Beyond the Company

A key development in recent GST litigation is the Department's efforts to extend penal liabilities beyond the taxable entity, targeting employees, directors, authorised representatives, and managerial officials involved with the business. This trend is evident in investigations related to fake invoicing, circular trading, and artificial turnover inflation, which pose significant revenue risks. Courts are increasingly initiating proceedings under Sections 122(1A) and 137 of the CGST Act not only against the company accused of wrongful ITC claims but also against individuals involved in management, compliance, or commercial activities. The constitutional validity and jurisdiction of this approach have been examined in detail by the Bombay High Court in cases such as Shantanu Sanjay Hundekari, Vikas Agarwal, Yogesh Agarwal, Mamta Gupta Versus Union of India, through Secretary, Ministry of Finance, New Delhi., State of Maharashtra, Joint Director, Director General of Goods and Service Tax Intelligence, Gujarat. The Additional/Joint Commissioner, Thane Commissionerate, - 2024 (3) TMI 1277 - BOMBAY HIGH COURT and 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.

In Shantanu Sanjay Hundekari, penalties over Rs. 3,700 crore were proposed against Maersk employees and power-of-attorney holders for alleged wrongful ITC transactions, citing Sections 122(1A)[ [Penalty on Persons Benefitting from Certain Transactions] and 137[ Offences by Companies]. The Bombay High Court analysed the structure of Section 122(1A) and emphasised that such severe penalties cannot be automatically applied to everyone associated with a company. The Court clarified that before invoking Section 122(1A), the Department must independently prove that the individual meets the statutory requirements, including being a 'taxable person' and benefiting from the disputed transactions. The Court also reasoned that employees or representatives acting in their professional or authorised roles should not automatically face large penalties just for participating in compliance or representing the company before tax authorities. Describing the proceedings as 'highly unconscionable and disproportionate,' the Court quashed the show cause notices issued to the employees. Notably, the Supreme Court dismissed the Special Leave Petition against this judgment in UNION OF INDIA & ORS. Versus SHANTANU SANJAY HUNDEKARI & ANR. ETC. - 2025 (1) TMI 1249 - SC Order.

The Bombay High Court reaffirmed the same constitutional approach in Amit Manilal Haria & Ors., where personal penalties exceeding Rs. 400 crore were imposed on senior executives of Shemaroo Entertainment Ltd. under Section 122(1A). The Court again emphasised that managerial designation alone cannot justify personal penal exposure unless the statutory ingredients creating such liability are independently established against the individual concerned. The judgment further clarified that Section 122(1A), introduced with effect from 01.01.2021, cannot be invoked retrospectively for earlier periods, as retrospective operation of a penal provision would offend Article 20(1) of the Constitution. Taken together, these decisions indicate that although GST enforcement has become increasingly stringent in cases involving alleged fake ITC and invoice manipulation, constitutional courts continue to insist on strict jurisdictional discipline, careful interpretation of penal provisions, and fairness before imposing massive personal liabilities on individuals connected with corporate entities.

The Real Significance of the Phrase 'Whichever is Higher'

One of the central legal issues before the Madras High Court concerned the interpretation of the expression 'whichever is higher' in Section 122(1) of the CGST Act, 2017. The provision prescribes a penalty of Rs. 10,000 or an amount equivalent to the tax evaded or the ITC wrongly availed or passed on, whichever is higher. Though seemingly simple, this statutory phrase formed the foundation of the Court's reasoning while examining the extent of penalties imposed in the present case.

The High Court observed that the wording of Section 122 reflects a deliberate legislative choice to directly link the penalty to the magnitude of the alleged tax violation. According to the Court, once the ingredients of the provision are established, the adjudicating authority has limited discretion to substantially reduce the penalty on equitable considerations alone. In effect, Section 122 adopts a formula-based penalty mechanism in serious cases involving issuance of invoices without supply, wrongful availment of ITC, or artificial passing on of tax credit. The judgment therefore indicates that the statute itself predetermines the minimum penal exposure once the contravention falls within the scope of the provision.

The ruling also highlights an important distinction in fiscal jurisprudence. Some penalty provisions merely prescribe a maximum limit and leave substantial discretion to the adjudicating authority in determining the quantum of penalty. Others, however, directly link the penalty to the disputed tax or ITC. Section 122 falls within the latter category. Consequently, the Madras High Court declined to accept the argument that the penalty could automatically be capped at Rs. 10,000 merely by invoking the doctrine of proportionality. The judgment therefore reinforces the principle that where the legislature itself adopts a quantified statutory formula for penalty, constitutional courts ordinarily exercise restraint in substantially rewriting the legislative structure through equitable interpretation alone.

Dharamendra Textile - Reference, Reliance, or the Real Ratio?

An academically interesting aspect of the Madras High Court judgment is its reference to UNION OF INDIA AND OTHERS Versus DHARMENDRA TEXTILE PROCESSORS AND OTHERS - 2008 (9) TMI 52 - Supreme Court and Union of India Versus M/s Rajasthan Spinning & Weaving Mills AND Commissioner of Customs and Central Excise Versus M/s. Lanco Industries Ltd. - 2009 (5) TMI 15 - Supreme Court. The Department relied on these decisions to contend that once the statutory ingredients for imposing a penalty are satisfied, the adjudicating authority has limited discretion to substantially reduce the penalty prescribed under the statute. In essence, the Revenue argued that Section 122 adopts a formula-driven penalty structure in which equitable considerations cannot materially dilute the statutory consequences once contraventions relating to wrongful ITC or invoice irregularities are established.

However, a careful reading of the judgment indicates that the aforesaid Supreme Court decisions were cited primarily while recording the submissions advanced on behalf of the Department. The Madras High Court did not independently ground its reasoning solely on Dharamendra Textile or Rajasthan Spinning. Instead, the Court appears to have proceeded principally on the plain wording of Section 122 - particularly the expression 'whichever is higher' - along with the factual findings recorded in the adjudication orders. The judgment's decisive reasoning therefore rests more on the statutory structure of Section 122 and the factual conclusions drawn by the authorities than on an elaborate independent application of the aforesaid precedents.

The discussion, however, has academic significance because it highlights an important distinction frequently encountered in judicial reasoning. Courts often refer to multiple precedents while recording rival submissions, but not every cited judgment necessarily forms part of the operative ratio decidendi. In the present case, the more substantive basis of the decision appears to be the legislative wording of Section 122 and the limited scope of writ interference in matters involving disputed factual findings.

Writ Jurisdiction under GST - The Limits of Constitutional Interference

The central issue before the Court was whether controversies, involving examination of commercial records and transaction patterns, should properly be scrutinised within writ proceedings or through the statutory appellate framework created under the CGST Act.

While addressing this issue, the High Court reiterated that the GST enactments provide a comprehensive hierarchy of appellate remedies under Sections 107, 112 and 117 of the CGST Act. The Court relied on the landmark constitutional decision in L. Chandra Kumar Versus Union Of India And Others - 1997 (3) TMI 90 - Supreme Court, where the Supreme Court emphasised the importance of specialised statutory forums in matters requiring detailed factual adjudication. The judgment therefore reaffirms the well-settled constitutional principle that writ courts are not ordinarily expected to act as substitute appellate authorities in disputes involving the appreciation of evidence, the examination of commercial transactions, or the verification of factual records. The Madras High Court therefore reiterated the self-imposed constitutional restraint traditionally exercised by writ courts in fiscal matters.

At the same time, the judgment indicates that constitutional intervention may still be available in exceptional situations involving jurisdictional infirmities, violation of statutory safeguards, or manifest procedural unfairness - a principle equally reflected in the Bombay High Court decisions in Shantanu Sanjay Hundekari and Amit Manilal Haria, where the dispute fundamentally concerned the jurisdictional applicability of Section 122(1A) itself.

When Pre-Deposit Threatens the Right of Appeal

Although the Madras High Court ultimately declined to interfere with the adjudication orders, the judgment contains an important feature reflecting judicial sensitivity to practical realities in high-value GST disputes. The Court recognised that where proceedings involve exceptionally large penalties arising from allegations of fake invoicing and circular trading, insisting on mandatory pre-deposit under Section 107 of the CGST Act may, in certain situations, impose an excessive financial burden on the assessee. In cases involving massive fiscal exposure, even a statutory requirement of 10% pre-deposit can substantially impair a taxpayer's practical ability to pursue the appellate remedy provided under the law.

Against this background, the High Court, while relegating the petitioners to the statutory appellate mechanism, dispensed with the requirement to deposit 10% of the penalty amount as a condition for filing appeals. This aspect of the judgment assumes particular significance because pre-deposit requirements under GST law are ordinarily treated as mandatory legislative conditions, and constitutional courts generally exercise considerable restraint when interfering with such fiscal requirements. The Court therefore did not dilute the statutory framework governing appeals; rather, it ensured that the appellate remedy remained meaningfully available in the peculiar circumstances of the case.

The ruling thus reflects a carefully balanced constitutional approach. While the Court refused to bypass the statutory appellate structure in a matter involving disputed factual findings, it ensured that the procedural conditions attached to the appellate remedy did not become so onerous as to render the remedy itself practically useless. The judgment therefore illustrates how constitutional courts may preserve access to justice without undermining legislative discipline in fiscal administration.

A Judgment That Reflects the Changing Philosophy of GST Enforcement

The decision in TVL. Sam Enterprises & Ors. reflects the significant transformation that GST litigation has undergone in recent years. Unlike the earlier indirect tax regime, where disputes frequently centred on classification, valuation, or exemption notifications, modern GST investigations increasingly focus on the authenticity of business transactions and the credibility of the commercial framework reflected in statutory records. The present case demonstrates that GST enforcement is no longer confined merely to the verification of returns or arithmetical tax computation. Instead, investigations now frequently extend to the examination of transaction patterns, business conduct, financial linkages, and the economic reality underlying reported turnover figures. Allegations relating to fake invoicing and circular trading are therefore increasingly viewed not merely as tax irregularities but as issues affecting the integrity of the entire tax ecosystem.

The judgment also highlights the serious consequences that may arise under Section 122 when authorities allege artificial turnover generation or wrongful circulation of ITC. businesses and professionals must therefore recognise that aggressive invoice structuring and commercially unsupported transaction patterns may invite substantial fiscal exposure that extends far beyond ordinary tax demands. At the same time, parallel developments before the Bombay High Court in Shantanu Sanjay Hundekari, Vikas Agarwal, Yogesh Agarwal, Mamta Gupta Versus Union of India, through Secretary, Ministry of Finance, New Delhi., State of Maharashtra, Joint Director, Director General of Goods and Service Tax Intelligence, Gujarat. The Additional/Joint Commissioner, Thane Commissionerate, - 2024 (3) TMI 1277 - BOMBAY HIGH COURT and 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, along with the dismissal of the SLP in UNION OF INDIA & ORS. Versus SHANTANU SANJAY HUNDEKARI & ANR. ETC. - 2025 (1) TMI 1249 - SC Order, demonstrate that constitutional courts continue to insist on a strict interpretation of penal provisions where personal liability is sought to be imposed on employees, officers, or authorised representatives under Section 122(1A).

Viewed collectively, these judicial developments indicate a broader shift in GST jurisprudence. On the one hand, courts are increasingly reluctant to interfere where detailed factual findings exist regarding alleged fake ITC and invoice manipulation. On the other hand, constitutional courts continue to preserve jurisdictional discipline, procedural fairness, and statutory safeguards while examining the scope of penal liability. The emerging judicial trend therefore reflects a dual message - GST enforcement is becoming increasingly stringent and forensic in character, yet constitutional protections against mechanically imposed or jurisdictionally unsupported penalties remain equally significant within the framework of fiscal administration.

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CA. RAJ JAGGI AND ADV. KIRTI JAGGI, ASSISTANT PROFESSOR, ASIAN LAW COLLEGE, NOIDA