The Beneficiary May Be Unregistered, but Section 122(1A) Cannot Operate Retrospectively

When Corporate GST Liability Becomes Personal

A company acts through individuals, but not every individual associated with it automatically becomes personally liable for the company's GST contraventions. This distinction becomes especially important where the Department alleges circular trading, issuance of invoices without supply or fraudulent availment of input tax credit. The taxable entity may be directly liable under GST law, but imposing an equivalent personal penalty on a director, employee, or other individual requires an independent statutory basis.

This issue arose prominently in Parag Garg, Dipanshu Aggarwal, Rajesh Aggarwal, M/s. Sun Flame Trading Pvt Ltd & Ors., Ashish Jain, Rajnish Jain, Avdhesh Mittal, Sanjiv Kadian, Amit Gupta, Naresh Goel, Anil Kumar Misra, Parag Garg, Varun Khanna, M/s. Atlantic International Trading Pvt Ltd & Ors., Madhav Agarwal, Abhimanyu Sharma, Parag Garg Versus Commissioner, Adjudication, CGST Delhi West And Anr., Commissioner Of Goods And Service Tax, Central Tax, (Delhi West) & Anr., Union Of India & Ors., The Commissioner, DGGI Adjudication, CGST. & Ors., Joint Commissioner Adjudication CGST Delhi North & Ors., The Common Adjudicating Authority Additional Commissioner Of Central Tax, CGST Delhi West And Anr, Deputy Director, DGGI, Dzu And Anr. - 2026 (10) TMI 97 - DELHI HIGH COURT. The Delhi High Court considered a batch of writ petitions challenging personal penalties imposed under Section 122(1A) of the CGST/DGST Act, 2017. In the lead matters, M/s Worlds Window Impex India Private Limited was accused of circular trading and irregular availment of ITC amounting to Rs.24,99,88,069 [Rupees Twenty-Four Crore Ninety-Nine Lakh Eighty-Eight Thousand and Sixty-Nine] through invoices allegedly issued without actual supply. Apart from the demand and penalty against the company, each of its three directors faced a separate penalty of Rs.24,99,88,069 [Rupees Twenty-Four Crore Ninety-Nine Lakh Eighty-Eight Thousand and Sixty-Nine] under Section 122(1A), along with a penalty of Rs.25,000 under Section 125.

The dispute presented two distinct questions. First, does the expression "any person" in Section 122(1A) extend beyond a registered or taxable person and include directors, employees and other unregistered individuals? Second, can this personal penalty be imposed for transactions completed before 01.01.2021, merely because the show-cause notice was issued after that date? The judgment answers the first question broadly and the second restrictively: the provision may reach an unregistered beneficiary, but it cannot travel backwards to penalise an act committed before it came into force.

Different Statutory Expressions Must Carry Different Meanings

Section 122 employs several expressions with deliberate precision. Section 122(1) imposes penalties on a "taxable person" who commits any of the listed contraventions. Section 122(1A), inserted by the Finance Act, 2020, applies to "any person" who retains the benefit of specified transactions and at whose instance those transactions are conducted. Section 122(1B) addresses specified electronic commerce operators, Section 122(2) refers to "any registered person", and Section 122(3) again uses "any person."

These expressions are not interchangeable. A "taxable person" is defined under Section 2(107) as a person registered or liable to be registered under Sections 22 or 24. A "registered person" under Section 2(94) is a person registered under Section 25, excluding a person possessing a Unique Identity Number. The word "person", by contrast, is defined broadly under Section 2(84) and includes individuals, companies, firms, limited liability partnerships, associations, trusts, governments and other artificial juridical persons. Reading "any person" in Section 122(1A) as meaning only a taxable person would erase a distinction Parliament expressly created.

The provision therefore extends beyond the entity holding the GST registration. It may cover a director, promoter, employee, consultant, controlling individual or any other person who satisfies its substantive requirements, even though that person is neither registered nor independently liable to be registered. However, the breadth of the expression identifies only the class of persons who may potentially be proceeded against. It does not dispense with the Department's obligation to establish the specific ingredients creating personal liability.

Personal Liability Depends on Benefit and Control, Not Designation

Section 122(1A) contains two cumulative conditions. The person concerned must have retained the benefit of a transaction covered by clauses (i), (ii), (vii) or (ix) of Section 122(1), and that transaction must have been conducted at the person's instance. Both conditions must be independently established. Proof of benefit, without proof that the person caused or directed the transaction, is insufficient. Similarly, participation in management, without proof of retaining the resulting benefit, does not satisfy the statutory requirement.

The inquiry proceeds in two stages. The Department must first establish, against the taxable person, an underlying contravention involving supply without an invoice, issuance of an invoice without supply, wrongful availment or utilisation of ITC, or wrongful taking or distribution of ITC. Only thereafter does the further question arise: who retained the benefit of that contravention, and at whose instance was it carried out? Section 122(1A) does not permit these separate inquiries to be compressed into a general allegation against every person connected with the entity.

Consequently, the mere fact that an individual was a director during some part of the relevant period cannot justify an equivalent personal penalty. The notice must identify that individual's role in conceiving, directing or implementing the transaction and explain the financial or other benefit personally retained. The adjudication order must then record findings supported by evidence on both requirements. Section 122(1A) reaches the real beneficiary and decision-maker; it does not create automatic vicarious liability based solely upon designation.

The Corporate Form Cannot Shield the Real Beneficiary

Section 122(1A) was introduced following the recommendations of the 38th GST Council Meeting held on 18.12.2019. It aimed to address fake invoicing arrangements in which a registered entity might merely serve as a formal vehicle, while the actual transaction was designed, controlled, and financially exploited by persons operating behind it. Shell entities may be registered in the names of employees, drivers, domestic workers or persons whose identity documents have been misused. A narrow construction confined to the registered entity would punish the nominal taxpayer while leaving the true architect and beneficiary beyond reach.

The expression "any person" therefore ensures that an individual cannot avoid liability merely because the fraudulent transaction was routed through a company, partnership, limited liability partnership or another juridical entity. An artificial entity cannot formulate or execute a scheme without human agency. Where evidence establishes that an individual caused the specified transaction and retained its benefit, the absence of personal GST registration does not confer immunity.

At the same time, the provision cannot be invoked merely because a company necessarily acts through natural persons. That proposition explains why liability may extend beyond the company; it does not prove liability against a particular individual. The Department must still cross the statutory threshold in every case. Thus, the corporate form cannot shield the real beneficiary, but it also cannot become a shortcut for imposing the company's entire penalty on each director or employee without proof of personal involvement and benefit.

The Penal Reach Is Fixed by the Transaction Date

Section 122(1A) was inserted by Section 126 of the Finance Act, 2020, and came into force on 01.01.2021. Neither the provision nor the notification that commenced it had retrospective effect. This was particularly significant because Parliament expressly made certain other amendments under the same Finance Act retrospective from 01.07.2017. The selective use of retrospective language demonstrated that Section 122(1A) was intended to operate prospectively.

The relevant date is therefore the date of the underlying act or transaction, not the date of the show-cause notice. A notice is an administrative step taken by the Department and may be issued promptly or after several years. If the notice date-controlled applicability, two identical transactions completed on the same day could attract different penalties merely because the Department issued notices at different times. The temporal reach of a penal provision cannot depend on the Department's subsequent choice of when to begin proceedings.

Accordingly, transactions or acts completed before 01.01.2021 cannot attract Section 122(1A), even if the notice and adjudication order were issued after that date. Where a fraudulent arrangement allegedly continued beyond 01.01.2021, the Department must identify the particular transactions occurring after the provision became effective. It cannot treat the entire arrangement from 2017 onwards as one indivisible event and impose the new penalty on pre-amendment transactions without separately establishing post-01.01.2021 conduct.

Civil Form Does Not Remove the Penalty's Prospective Character

The Department argued that Section 122(1A) merely imposed a civil or fiscal consequence for conduct already prohibited under Section 122(1). Since fake invoicing and wrongful ITC were unlawful from the outset of the GST regime, the amendment was said to merely identify an additional person on whom the existing consequence could be imposed. Reliance was also placed on Securities and Exchange Board of India Versus Ajay Agarwal - 2010 (2) TMI 600 - Supreme Court, to distinguish a civil monetary penalty from punishment for a criminal offence under Article 20(1) of the Constitution.

The judgment rejected the proposition that a penalty's civil description automatically permits retrospective application. Section 122(1A), though monetary in form, remains penal in consequence and creates a substantial personal liability equal to the tax evaded, ITC wrongly availed, or ITC passed on. Before 01.01.2021, an individual who was not the taxable person did not face this specific personal penalty merely because the transaction was allegedly conducted at his instance and he retained its benefit. The amendment therefore imposed a new statutory disability upon a wider class of persons.

This interpretation was reinforced by the parallel amendment to Section 132(1), also effective from 01.01.2021. Section 132 was expanded to cover a person who causes an offence to be committed and retains its benefit. While Section 122(1A) creates monetary liability, Section 132 may result in prosecution and imprisonment. It would be inconsistent to confine the amended criminal provision to post-01.01.2021 conduct while applying the corresponding monetary penalty to earlier transactions. The common legislative exercise indicated that both amendments were intended to address future conduct falling within their expanded scope.

Divergent Precedents Resolved on Two Separate Questions

The existing decisions disclosed two separate conflicts that required careful treatment. On the meaning of "any person", Bharat Parihar, Kishan Lal Bunkar, Sunbright Designers Pvt. Ltd. Versus State of Maharashtra Thr. PP Office And Ors. - 2023 (7) TMI 101 - BOMBAY HIGH COURT; Gurudas Mallik Thakur and Dinesh Kumar Raghav Versus Commissioner Of Central Goods And Service Tax & Anr. - 2025 (5) TMI 227 - DELHI HIGH COURT; and Mayank Bansal (Partner - Quantum Infratech Assam), Nadar Hussain (Partner Quantum Infratech) Versus The Union Of India, State Of Assam, Deputy Director DGGI Guwahati Zonal Unit, Assistant Commissioner CGST And Central Excise Guwahati, Additional Commissioner (Appeals) CGST Central Excise And Customs Guwahati, Commissioner CGST Central Excise And Customs Guwahati. - 2026 (6) TMI 629 - GAUHATI HIGH COURT supported the wider view that Section 122(1A) could extend to non-taxable persons who controlled and benefited from fraudulent transactions. The Delhi High Court accepted this approach.

A narrower interpretation had been adopted 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 followed 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. Those decisions emphasised that employees could not be penalised without findings of personal benefit and involvement and treated Section 122(1A) as ordinarily concerning the taxable person. The present judgment preserved the requirement of proving personal benefit and instigation but declined to confine "any person" to a taxable person. The Supreme Court's dismissal of the SLP (C) No. 55427/2024 in UNION OF INDIA & ORS. Versus SHANTANU SANJAY HUNDEKARI & ANR. ETC. - 2025 (1) TMI 1249 - SC Order did not settle this interpretative question because it left it expressly open.

A separate disagreement concerned prospectivity. Bhupender Kumar Versus Additional Commissioner Adjudication CGST Delhi North & Ors. - 2025 (7) TMI 626 - DELHI HIGH COURT, and Mayank Bansal treated the notice date, or continuation of the alleged scheme beyond the cut-off date, as sufficient to attract Section 122(1A). The present judgment declined to adopt that reasoning as a general rule. The observations in Bhupender Kumar were treated as obiter, particularly because Article 20 had apparently not been brought to the Bench's attention. On this question, the Court accepted the reasoning 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.. Section 122(1A) cannot penalise conduct completed before 01.01.2021.

Appellate Scrutiny Must Now Be Individual and Transaction-Specific

The High Court answered the two recurring questions of law but did not determine the factual liability of each petitioner. It expressed no final opinion on whether a particular individual retained the benefit, caused the transaction to be undertaken, or participated in any qualifying transaction after 01.01.2021. Those matters require the statutory Appellate Authority to examine notices, corporate records, financial flows, communications, responsibilities, and transaction-wise evidence.

The petitioners were permitted to file appeals under Section 107 against their respective Orders-in-Original. Appeals filed within four weeks of 29.09.2026 were protected from dismissal on limitation and were required to be considered on merits. The Appellate Authority must now test each case against three distinct requirements: an underlying contravention covered by the specified clauses of Section 122(1); proof that the individual retained the benefit and caused the transaction; and proof that the relevant act or transaction occurred on or after 01.01.2021.

The decision therefore neither grants blanket immunity to directors and employees nor permits indiscriminate personal penalties. It identifies the true reach of Section 122(1A): registration status is not decisive, but personal benefit, individual control, and the transaction date are. A person operating behind a corporate entity cannot escape merely because the entity holds the GST registration. Equally, the Department cannot convert designation into culpability or use a later notice to impose a penalty that did not exist when the alleged conduct occurred.

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