CGST Act | Penalty Applies Prospectively From Jan 1, 2021; 'Any Person' Includes Non-Taxable Entities: Delhi High Court

"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." Delhi High Court, in a significant ruling dated September 29, 2026, has clarified the scope and temporal applicability of Section 122(1A) of the Central Goods and Services Act, 2017 (CGST Act).

A bench of Justice Anil Kshetarpal and Justice Bharat Parashar held that the penal provision applies to "any person"—not merely "taxable persons"—who retains the benefit of fraudulent transactions, but limited its operation to acts committed on or after January 1, 2021, citing constitutional safeguards under Article 20(1) of the Constitution of India.

The petitions arose from Show Cause Notices (SCNs) and consequential Orders-in-Original issued by GST authorities, which imposed heavy personal penalties on directors of a company for their alleged roles in circular trading and fraudulent Input Tax Credit (ITC) availment. The petitioners challenged the imposition of these penalties, arguing that they were employees rather than beneficiaries and that the provision under Section 122(1A) was being applied retrospectively to transactions pre-dating its introduction.

The primary questions before the court were whether the penalty under Section 122(1A) of the CGST Act could be recovered from a non-taxable person, and whether the provision could be applied retrospectively to offences committed before it came into effect on January 1, 2021. The court also examined whether the date of the SCN could be the trigger for determining the temporal applicability of the penalty.

Defining 'Any Person' in Section 122(1A)

The court observed that the legislature deliberately used the term "any person" in Section 122(1A) while using "taxable person" in other sections. It held that to confine the scope to "taxable persons" would frustrate the legislative intent to catch masterminds behind shell entities who operate outside the registered GST framework.

Statute Distinguished From Taxable Person

The bench emphasized that a company or juridical person can only act through natural persons. If Section 122(1A) were restricted to "taxable persons," it would effectively grant immunity to the human orchestrators of corporate fraud. Thus, "any person" is broad enough to include individuals who are not themselves registered or liable to be registered under the Act, provided they meet the twin tests of benefit retention and orchestration.

"The expression ‘any person’ occurring in Section 122(1A) of the Act of 2017 is not confined to a ‘taxable person’ as defined under Section 2(107), but extends to every person, whether or not registered or liable to be registered."

Prospective Application and Article 20(1)

Addressing the temporal issue, the court rejected the contention that the date of the SCN dictates the applicability of the penalty. It held that because Section 122(1A) imposes a penal consequence, its applicability must be tethered to the date of the underlying act. To hold otherwise would allow administrative delays in issuing notices to create retroactive liabilities, which would violate Article 20(1) of the Constitution.

No Retrospective Imposition of Penalties

The bench drew a parallel between the civil penalty in Section 122(1A) and the criminal consequences in Section 132 of the CGST Act. Given that both were amended simultaneously to address the same type of fraud, the court reasoned that it would be incongruous to allow retrospective application for the penalty while barring it for prosecution. Therefore, the provision cannot reach acts committed before January 1, 2021.

"A person cannot be penalised under a provision that was not in force at the time the alleged act was committed, and there could be no retrospective application of Section 122(1A) to the period prior to 01.01.2021."

Final Directions to Appellate Authorities

The Court disposed of the petitions, granting the petitioners liberty to approach the Appellate Authority under Section 107 of the CGST Act. The Appellate Authority is directed to verify on a case-by-case basis whether the twin requirements of personal benefit and direct orchestration are met, and whether the alleged transactions occurred after the January 1, 2021 cut-off date.

The ruling provides much-needed clarity for practitioners regarding the reach of the GST department in fastening personal liability on directors and employees. By restricting the application of Section 122(1A) to post-2021 transactions, the High Court has protected against the arbitrary and retroactive imposition of severe fiscal penalties, while still upholding the state's power to penalize the actual beneficiaries of fraudulent GST schemes.

Date of Decision: 29 September 2026