TaxTMI 
TaxTMI 
10 Oct 2026 
Twin Conditions Under Section 122(1A) and Section 132(1)--Manipulation of records: Removal of Power to Arrest Under Section 69(1)
1. In the formative phase of the Goods and Services Tax (GST) regime, departmental audits and enforcement actions predominantly tracked the paper trail of the formal registered entity. As circular trading cartels and paper-invoicing (bill trading) networks proliferated, the revenue administration recognized that the entities issuing invoices were frequently "dummy" or "shell" firms-straw persons devoid of tangible capital, set up solely to absorb demands and subsequently vanish. To pierce this synthetic veil, Parliament inserted Section 122(1A) via the Finance Act, 2020 (with effect from January 1, 2021) and recalibrated the penal architecture under Section 132(1).
2.These provisions shift the focus of enforcement from the registered dealer on paper to the actual beneficiary orchestrating the fraud. A rigorous statutory analysis reveals that the legislature did not intend to cast an indiscriminate net over mere intermediaries, statutory signatories, or operational personnel. Instead, jurisdiction under these provisions rests upon an indivisible, dual statutory foundation: the twin conditions of causing the fraudulent transaction and retaining the actual benefit derived therefrom. Where the revenue seeks to penalize or prosecute without substantiating both conditions with cogent evidence, the proceedings fail for want of foundational jurisdiction.
3.To evaluate the jurisdictional threshold, the text of both statutory provisions must be analyzed side by side.
Section 122(1A) of the CGST Act provides:
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."
In parallel, Section 132(1) of the CGST Act establishes criminal liability for:
Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences..."
4.The statutory architecture hinges squarely upon the conjunction "and". Under settled principles of statutory interpretation, the word "and" is strictly conjunctive unless reading it as such leads to an absurdity or entirely defeats the legislative intent. In penal and fiscal statutes, where strict construction is an unbending rule, "and" cannot be read disjunctively as "or." Consequently, two statutory ingredients must be concurrently fulfilled:
A. The Primary Condition: The transaction must have been conducted at the instance of the person, or the person must have caused the commission of the offence.
B. The Economic Condition (Retention of Benefit): The person must have retained the actual financial benefit generated from that transaction.
5. The Mandatory Strictness of "Twin Conditions" : Prospectively from 01/01/2021
The Hon'ble Supreme Court has consistently held that wherever a statute enacts "twin conditions" as a prerequisite for legal action or relief, subjective discretion cannot bypass those requirements. A striking parallel emerges from the Hon'ble Supreme Court's decision in State of Punjab Versus Balraj Singh @ Billa - 2026 (6) TMI 696 - Supreme Court. While interpreting the strict statutory framework under the NDPS Act, the Court held that where the legislature mandates twin statutory conditions (under Section 37), their consideration is non-negotiable. The Hon'ble Supreme Court set aside the High Court's grant of relief precisely because the High Court had bypassed the mandatory twin statutory prerequisites without entering a definite, recorded satisfaction based on tangible material. The Apex Court reiterated that adopting a liberal or relaxed approach that ignores mandatory statutory conditions is impermissible in law.
6.While Balraj Singh ruling (supra) addressed the strict thresholds governing personal liberty under special criminal statutes, the jurisprudential principle governing statutory discipline applies with equal force to penal and prosecution proceedings under the CGST Act. The revenue cannot dispense with the statutory mandate enacted by Parliament. Just as a court cannot grant bail under Section 37 of the NDPS Act without recording objective satisfaction on both statutory prongs, the tax department cannot invoke Section 122(1A) or Section 132(1) without establishing both that the person orchestrated the transaction and that they retained the ill-gotten benefit. The Supreme Court's insistence on strictly enforcing statutory conditions confirms that statutory safeguards are jurisdictional thresholds, not procedural formalities. A failure by the revenue to substantiate both prongs with independent, cogent evidence renders any consequential penal or prosecution proceeding fundamentally untenable.
7.The legislature deliberately coupled these two conditions to prevent executive overreach, arbitrary fastening of vicarious liability, and harassment of non-beneficiary third parties.
A. If a salaried accountant, an administrative manager, a tax professional, or a junior partner issues or files invoices under the instruction of a superior without personally siphoning, receiving, or retaining any portion of the tax evaded, penalizing them under Section 122(1A) or prosecuting them under Section 132(1) violates the statute. They may have handled the paperwork or facilitated the filing, but they did not retain the economic fruit of the evasion.
B. Conversely, if an entity receives a standard contractual payment, a settled commercial debt, or an ordinary business receipt from an entity that happened to commit an upstream invoice fraud, that receipt cannot be branded as "retaining the benefit" under Section 122(1A) unless the revenue proves that the recipient was the mastermind who caused the sham invoice to be issued. A mere commercial downstream benefit, absent proof of orchestrating the sham transaction, breaks the required statutory nexus.
8.High Courts across India have repeatedly struck down arbitrary invocations of Section 122(1A) where the revenue failed to demonstrate cumulative compliance:
A. 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: Held that Section 122(1A) mandates cumulative satisfaction of both statutory limbs. Where the revenue fails to produce objective material showing both that the transaction was conducted at the noticee's instance and that the noticee retained the illicit tax benefit, the penalty order is devoid of jurisdiction.
B. The Supreme Court in UNION OF INDIA & ORS. Versus SHANTANU SANJAY HUNDEKARI & ANR. ETC. - 2025 (1) TMI 1249 - SC Order: Quashed proceedings against retainers and professionals, holding that salaried or non-executive professionals cannot be mechanically roped into Section 122(1A) penalties or Section 132(1) prosecutions unless the revenue unearths direct material proving personal retention of the siphoned tax revenue.
C. The Gujarat High Court in Mr. Manoj Ramkishan Agrawal & Anr. Versus Union Of India & Anr. - 2026 (6) TMI 1285 - GUJARAT HIGH COURT: Confirmed that where Section 122(1A) is upheld, it is sustained only because the revenue discharged its evidentiary burden on both fronts-proving through financial trails, mobile communications, and cash channels that the noticees orchestrated the fake billing and pocketed the retained tax proceeds.
D. The operative portion of the Hon'ble Delhi High Court judgement in the case of 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 is reproduced hereunder for its clarity of the meaning of "any person" and the prospective effect of amendment to Section 122(1A):
55. In view of the foregoing discussion, we answer the questions framed in paragraph no.3 as follows:
i. the expression 'any person' occurring in Section 122(1A) of the Act of 2017 is not confined to a 'taxable person', and includes any person, whether or not registered or liable to be registered, who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or (ix) of Section 122(1), and at whose instance such transaction is conducted.
ii. Section 122(1A) of the Act of 2017 applies prospectively and is attracted only in respect of transactions or acts committed on or after 01.01.2021, irrespective of the date on which the Show Cause Notice is issued.
The above ratio applies to Section 132(1) of the CGST Act with equal force.
9.The statutory phrase "retains the benefit" is not a placeholder for departmental conjecture. It imposes a positive burden of proof on the tax administration:
A. The department must establish an unbroken forensic link-such as unrecorded cash flows, informal money-transfer channels, fictitious unsecured loans, or capital diversion back to the noticee's account.
B. Vicarious liability cannot be inferred merely from a person's designation as a Director, Partner, or Authorized Signatory. Section 122(1A) is an individual, conduct-and-benefit-based penalty, not an automatic corporate-office liability.
C. An adjudicating officer passing an order under Section 122(1A) must record a distinct finding of jurisdictional fact: first, identifying the precise act of orchestration; second, quantifying the specific monetary benefit retained by that specific individual.
10. Constitutional Mandate:
A. Articles 20(1) and 300A--Fastening penal liability without discharging the burden on both twin conditions violates core constitutional guarantees:
Article 20(1) (Protection against arbitrary penal action): Subjecting a citizen to prosecution under Section 132 or penalties under Section 122(1A) without satisfying the express conjunctive prerequisites amounts to imposing a sanction beyond the clear mandate of law.
B. Article 300A (Right to Property): The penalty under Section 122(1A) is expropriatory-prescribing 100% of the tax evaded or credit passed on. Depriving a person of property on half-proven facts, where retention of benefit is merely presumed rather than proved, lacks the authority of law.
11.The Breaking Point of Section 69: Kuldeep Goyal Vs. Union of India.
The persistent debate surrounding the massive misuse of arrest powers under Section 69 of the Central Goods and Services Tax (CGST) Act reached its tipping point before the Punjab & Haryana High Court in its landmark judgement dated 29/09/2026 in Kuldeep Goyal Vs. Union of India & Ors [ CPW-31694-2026 ((O & M)]. What unfolded was not merely a procedural lapse, but an alarming instance of state machinery manufacturing a paper trail to circumvent judicial oversight and deprive a citizen of personal liberty. The petitioner, Karta of a Hindu Undivided Family running M/s Ansh Steel Alloys, had approached the High Court challenging the provisional attachment of his bank accounts.
12.To test his bona fides, a Division Bench comprising Hon'ble Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor directed him to present himself before the Central GST Department at Ludhiana at 11:00 AM on September 23, 2026. The citizen complied faithfully, carrying relevant books of accounts to cooperate with the revenue authorities under explicit judicial direction. Instead of lawful verification, he walked directly into an administrative surprise trap.
13.The manner in which the department orchestrated the detention reveals systemic abuses within field formations. Despite presenting himself under court orders, the taxpayer was held in department offices throughout the night without formal arrest or access to legal remedies. His arrest was artificially recorded at 4:45 AM the following morning. In an attempt to cover the unauthorized detention, officials generated a summons under Section 70 requiring his attendance at 12:05 PM-disregarding the fact that the business man was already physically present and detained inside their office since 11:00 AM pursuant to High Court directions. The Document Identification Number (DIN) was timestamped at 12:07 PM, exposing an after-the-fact attempt to lend procedural authenticity to a pre-planned custodial ambush.
14.The Hon'ble High Court laid bare this institutional misconduct, observing that the tax authorities treated a court-monitored appearance as a private charter to act with impunity, showing scant regard for constitutional boundaries or judicial authority. The High Court held personal accountability of Senior Bureaucracy classifying the department's actions as a "brazen act of high-handedness" and a direct assault on the fundamental right to liberty under Article 21, and intervened swiftly:
A. The court directed the immediate interim release of the businessman.
B. In an unprecedented move, the Hon'ble High Court personally impleaded the senior hierarchy of the zone-including the Principal Commissioner of CGST, Mr. Sugrive Meena and Mr. Mohmad Saleem, SIO, Ludhiana-requiring them to show cause for contempt and constitutional overreach.
C. Faced with strict judicial action, the Principal Commissioner was compelled to tender an unreserved, unconditional apology before the Division Bench, leading the court to issue a firm caution note warning against future disregard of constitutional safeguards.
15.The Kuldeep Goyal episode (supra) shattered the assumption that internal administrative circulars, higher-officer concurrence, or statutory "reasons to believe" could adequately restrain the arbitrary exercise of arrest powers under Section 69(1), which is essentially based on the foundation of twin conditions enshrined in the opening phrase of Section 132(1) of the CGST Act. When statutory powers designed to check organized fiscal cartels are twisted into instruments of midnight intimidation, institutional correction becomes important. This blatant subversion of process-where records were fabricated to lock up a citizen cooperating under judicial directions-served as the primary catalyst for the decisions taken at the 57th GST Council meeting held at Summit Room, Bharat Mandapam, New Delhi on October 8, 2026. Recognizing that discretionary powers of arrest in the hands of field officers had become an impediment to the rule of law and an existential threat to commercial enterprise, the Council recommended the complete withdrawal of arrest powers from departmental tax authorities under Section 69(1).
16.The GST Council reaffirmed the core tenet of modern indirect tax jurisprudence, tax determination, adjudication, and recovery are civil, quasi-judicial processes governed by statutory procedure. They cannot be coerced through administrative detention. By removing the arbitrary threat of summary arrest, the GST framework eliminated an avenue of bureaucratic extortion, returning certainty, predictability, and dignity to the bona fide taxpayer community.
17.The Ludhiana episode (supra) stands as an enduring legal lesson, when executive power disregards constitutional safeguards and stoops to the manipulation of records to curtail liberty, it inevitably invites not only stern judicial reprimand, but the complete legislative withdrawal of that power itself. The removal of arrest powers is indeed a historic institutional blame. When an extraordinary statutory power-entrusted by Parliament to civil revenue officers to curb organized tax syndicates-is withdrawn, it constitutes an unequivocal declaration that the enforcement machinery failed to demonstrate the institutional maturity, constitutional restraint, and procedural integrity required to have it.
18.By recommending the withdrawal of these powers to arrest, the GST Council did not merely provide relief to trade and industry-it delivered a firm corrective message to the enforcement bureaucracy: powers granted by the Parliament are conditional on respect for Constitutional limits, and an apparatus that abuses exceptional authority will ultimately be stripped of it. The era of coercive tax policing and mechanical arrests has yielded to strict constitutional discipline, where unproven suspicion can no longer trample personal liberty.
19.Today, the Revenue must strictly establish its statutory twin conditions with unassailable proof, or watch its arbitrary proceedings collapse at the threshold of the law. By elevating the prosecution threshold to Rs. 5 Crores, the law shields ordinary businesses from routine criminalization while targeting only large-scale fraud. Crucially, subjecting arrest to prior judicial approval strips the executive of its arbitrary badge, placing personal liberty firmly under neutral judicial guardianship. No more arrests in anticipation of "something", the unrestricted doors are permanently closed for the officers' under Section 69(1) of the Act.
20. The conjunctive mandate of the "twin conditions" is the common jurisdictional thread linking both the criminal and civil penal machinery of the GST regime with effect from 01/01/2021. Just as the Special Court for Economic Offences cannot validate a custodial remand under Section 69(1) without the threshold coexistence of orchestration and personal unjust enrichment under Section 132(1), the First Appellate Authority and the Goods and Services Tax Appellate Tribunal (GSTAT) are bound by the exact same statutory yardstick when calibrating the validity of a penalty under Section 122(1A). Because Section 122(1A) explicitly conditions liability on a "person" having the transaction conducted at his instance and retaining its illicit benefit, these dual requirements constitute an indivisible jurisdictional prerequisite rather than a discretionary finding. Consequently, whether on the remand dais of a criminal court or before the appellate bench of the Tribunal, the Revenue's failure to establish an unbroken evidential trail proving both limbs collapses the foundational basis of the proceeding-compelling the immediate discharge of personal liberty on one hand, and the summary quashing of unlawful penalties on the other.
Conclusion
With effect from 01/01/2021, the legislative purpose behind Sections 122(1A) and 132(1) of the CGST Act is to penalize the actual economic beneficiaries of tax evasion schemes. In pursuing this objective, the revenue administration cannot disregard the internal statutory discipline of the provisions. "Causing the transaction" and "retaining the benefit" are twin pillars supporting a single arch. As affirmed by the Supreme Court's jurisprudence on mandatory statutory twin conditions (supra), failing to satisfy both requirements with concrete evidence renders the entire proceeding untenable and void of jurisdiction. For the department, establishing twin conditions is an indispensable statutory obligation; for the taxpayer/any person, demonstrating the absence of either condition serves as a complete defence.
As the law is clear, the evidence must be richer.