Daksh Kumar Bafna is a third-year law student at GNLU, Gandhinagar.
Introduction
The recent four rulings from different High Courts have created a big divide on the interpretation of Section 122(1A) of the Central Goods and Services Tax Act, 2017. In the case of Shantanu Sanjay Hundekari v. Union of India (“Hundekari”) and Amit Manilal Haria v. Joint Commissioner, CGST (“Haria”), the Bombay High Court had ruled that the provision applies only to ‘taxable persons’ and further cannot be made applicable for transactions that happened before its commencement. The Delhi High Court in the case of Gurudas Mallik Thakur v. Commissioner of Central GST (“Gurdas Mallik Thakur”) and Gauhati High Court in the case of Mayank Bansal v. Union of India (“Mayank Bansal”) have taken different views on both these points. This disagreement is neither peripheral nor easily reconcilable. It is a doctrinal conflict which is yet to be settled by the Supreme Court in the case of Mukesh Kumar Garg v Union of India (“Mukesh Kumar”).
This article argues that between the two competing approaches, the Delhi and Gauhati view on the personal scope of Section 122(1A) is more persuasive. Their reasoning on retrospective application is also largely right, except that it does not significantly pick up on the fairness concerns that played into the Bombay High Court decisions. The answers to those concerns must be nuanced in a way that the courts have not done so far.
The Common Factual Pattern
In all the cases, the facts were substantially similar. The revenue officials inquired into a taxable person – a company or partnership firm – for fake invoicing, wrongful availment of Input Tax Credit (‘ITC’) or undisclosed cash transactions. Alongside proceedings against the entity, authorities imposed individual penalties under Section 122(1A) on directors, officers, employees, or partners. The provision penalises ‘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.’
The financial consequences were substantial. In Hundekari, an employee of a steamer agent faced a demand of ₹3,731 crore arising from transactions of a foreign shipping line. In Haria, three officers of an entertainment company were each subjected to penalties of ₹133.60 crore. In Gurudas Mallik Thakur, two directors of a manpower company faced similar liability. In Mayank Bansal, two partners of a construction firm were penalised for allegedly collecting cash outside the books.
While the facts were different, the same legal argument was presented. The registered taxable entity argued that it was only the registered taxable entity that could be liable for the offence under Section 122(1A), and that the provision could not be applied to transactions that occurred prior to its application on 1 January 2021.
Why the Wider Interpretation is Preferable
The Bombay High Court’s understanding is based on the language of the clauses (i), (ii), (vii) and (ix) of Section 122(1) which refer to the actions of a ‘taxable person’. The court drew the inference that the liability of a person under Section 122(1A) should also be limited to a taxable person.
That approach is to mix up the type of wrongdoing with the type of person being penalized. The transactions referred to in subparagraph 122(1) can clearly only be affected by a taxable person. GST invoices can be issued and input tax credit can be availed by only a taxable person. However, it does not follow that the person liable under Section 122(1A) must be the same taxable person.
The language of Section 122(1A) points in the opposite direction. It targets ‘any person’ who both retains the benefit of the transaction and causes it to occur. Those requirements contemplate a person standing behind the taxable entity rather than the entity itself. The provision is therefore directed at an additional actor whose conduct is connected to the underlying contravention.
The Gauhati High Court noted that a company and partnership firms can operate only through a natural person. Fraudulent invoicing, incorrect credit notes etc. do not happen in a vacuum. They are created, conceived and carried out by individuals. The specific purpose of Section 122(1A) is to capture those who are affected by the underlying contravention by the entity.
The best evidence for this interpretation is not found in Section 122, but in the overarching statutory framework. Section 83 provides for provisional attachment of property of ‘the taxable person or any person specified in sub-section (1A) of section 122’. The word ‘or’ is used, which makes it very clear that Parliament considered taxable persons and those that fell within the scope of Section 122(1A) as two separate categories. The second limb would be superfluous if both of them meant the same class of people.
A purposive reading of the section also leads to the same conclusion. While Section 137 of the CGST Act, 2017, provides for a mechanism for imposing liability on directors and partners for offences committed by the company, as explained in depth by Hundekari, its invocation requires a criminal prosecution, proof of consent, connivance or neglect, and compliance with the sanction requirement under Section 134 of the CGST Act, 2017. In the absence of a civil adjudicatory mechanism that enables revenue authorities to proceed directly against the individual who benefits from GST fraud, limiting Section 122(1A) to taxable persons would create a significant enforcement gap. Under Section 132, criminal prosecution under the CGST Act is limited by mens rea and monetary thresholds, and CBIC’s own guidelines caution against using criminal prosecution to address technical breaches or interpretational disputes. A director or partner who knowingly retained the benefit of an entity’s default, but whose conduct falls short of the fraudulent intent required for prosecution, or whose case falls below the threshold, would escape liability altogether if Section 122(1A) were read narrowly. This leaves revenue authorities with no means of proceeding against the persons the provision was designed to reach.
That interpretation would substantially diminish the practical utility of Section 122(1A), particularly in relation to the fake-invoicing misconduct that prompted its introduction following the GST Council’s recommendation in December 2019. A construction that renders the provision largely ineffective in addressing the very problem it was enacted to combat is difficult to reconcile with legislative intent.
Retrospectivity: The Correct Outcome, but Not the Complete Answer
The Bombay High Court’s reliance on Article 20(1) of the Constitution is difficult to sustain. Article 20(1) prohibits retrospective criminalisation and the imposition of retrospective punishment for offences. But a penalty action under Section 74 of CGST Act is not a criminal proceeding nor punishment for an offence. The Constitution Bench in the case of Jawala Ram v. State of Pepsu has finally clarified this and it has been rightly recognised by the Gauhati High Court. However, while the constitutional reasoning of the Bombay Court can be criticized, the Court’s ultimate holding in Haria is correct for a different reason, namely, the general rule against the retrospective application of fiscal laws.
In CIT v. Vatika Township, the Constitution Bench once again held that, as a general rule, legislation has retrospective application only if it has been expressly provided so. This concept is particularly relevant with respect to tax laws. Some of the changes to procedures or recovery options must be distinguished from substantive liability. Section 122(1A) is clearly one of the latter.
Until 1st January 2021, there was no independent civil exposure for any transaction carried out by a taxable entity for directors/partners/employees of such entity under CGST Act. Other than the narrow provision of Section 137. The statute failed to designate those sorts of people as a class of which they could be singled out for punishment. Section 122(1A) has radically shifted that position with the establishment of a separate ground of liability. The fact that it came into force by publication in a specific commencement notification, and without any deeming fiction or validating clause extending the operation of the amendment back to July 2017, suggests that there would be a legislative intent that it would only apply from that date. Indeed, where Parliament has intended GST amendments to operate retrospectively, it has done so in express terms.
The other route taken by the Gauhati and Delhi High Courts – that applicability depends on the issuing of the show cause notice – is less convincing. It puts the liability on the administrative timing of the department, and not on the individual’s conduct. That undermines the doctrine of retrospectivity for which it is argued. The more principled position is therefore that Section 122(1A) applies only to transactions undertaken at a person’s instance on or after 1 January 2021.
Conclusion
A coherent interpretation of Section 122(1A) requires separating questions of scope from questions of proof. On the first issue, the Delhi and Gauhati High Courts are correct in holding that the provision is not confined to taxable persons. It is evident from the statutory text, the structure of the CGST Act and the legislative intent behind the amendment of the CGST Act in 2020 that the legislature was aiming at them who stand behind the taxable person, enjoy the benefits of a transaction and make it happen. Simultaneously, personal liability cannot be imposed simply because the director, partner, officer, or employee alleges or proves that he or she benefitted or was involved, without first making specific allegations and providing specific evidence. But in the subsequent case, on retrospectivity, the Bombay High Court took the more desirable view for reasons not related to Article 20(1). Section 122(1A) establishes a new substantive civil liability and ought to be only prospective in application unless there is clear legislative intent to the contrary. The Supreme Court’s eventual resolution must reconcile these principles to restore certainty in GST enforcement.
