The Hon’ble Supreme Court in Mukesh Kumar Garg v. Union of India & Ors [SLP(C) No. 18178/2025, order dated August 04, 2025] held that Section 122(1) of the Central Goods and Services Tax Act, 2017 would not apply to a non-taxable person, and provisions of Section 122(1A) which came into force from January 1, 2021 could not be applied retrospectively for assessment years 2017 to 2020. The Court granted leave and stayed recovery of the penalty amount subject to the petitioner depositing 25% of the demand before the GST department.
Facts:
Mukesh Kumar Garg (“the Petitioner”) was involved in the alleged establishment of 28 firms in collusion with various traders for the availment of fictitious Input Tax Credit (ITC). The Directorate General of GST Intelligence issued a Show Cause Notice dated July 31, 2024, alleging that the Petitioner and his son Anuj Garg had incorporated multiple firms to fraudulently avail ITC amounting to over Rs. 115 crores without any actual supply of goods or services.
The Union of India and GST authorities (“the Respondents”) contended that penalty proceedings under Section 122(1A) of the CGST Act were justified as the Petitioner had retained benefits from the fraudulent ITC transactions. The Respondents argued that the Petitioner was the proprietor of M/s Bhagwati Trading Company and was instrumental in creating the complex web of fake firms used for ITC fraud.
The Petitioner contended that he was not a ‘taxable person’ under Section 122(1) of the CGST Act and therefore could not be subjected to penalty under said provision. Furthermore, the Petitioner argued that Section 122(1A), which came into effect only from January 1, 2021, could not be applied retrospectively to assessment years 2017-2020.
The Respondent contended that the penalty was justified as the Petitioner had actively participated in the creation and operation of fictitious firms for fraudulent ITC availment, and the provisions were applicable regardless of whether he was a registered taxable person.
The Petitioner’s grievance was that the Delhi High Court had dismissed his writ petition challenging the penalty proceedings initiated under Section 122(1A), and therefore approached the Supreme Court through a Special Leave Petition under Article 136 of the Constitution, challenging the High Court’s judgment dated May 9, 2025 in WP(C) No. 5737/2025.
Issue:
Whether Section 122(1) of the CGST Act, 2017 is applicable to a non-taxable person, and whether the provisions of Section 122(1A) of the Act, which came into force from January 1, 2021, can be applied retrospectively for assessment years 2017-2020.
Held:
The Hon’ble Supreme Court in SLP(C) No. 18178/2025 held as under:
- Observed that, two primary contentions were raised by the petitioner. First, that Section 122(1) of the CGST Act would not be applicable to the petitioner as he is a non-taxable person, and secondly, that provisions of Section 122(1A) which came into force from January 1, 2021 cannot be applied retrospectively for assessment years 2017-2020.
- Noted that, the matter involved substantial questions of law regarding the applicability of penal provisions to non-taxable persons and the retrospective application of Section 122(1A).
- Directed that, leave be granted in the matter, recognizing the significance of the legal questions involved.
- Held that, there shall be stay on the recovery of the amount directed to be deposited, provided the appellant deposits 25% of the demand before the GST Department either through Electronic Ledger or through Cash Ledger.
Our Comments:
This Supreme Court order represents a significant development in GST jurisprudence concerning the retrospective application of penalty provisions and the scope of liability for non-taxable persons. The decision aligns with constitutional principles against retrospective penal legislation under Article 20(1) of the Constitution.
The present case also draws significance from the Supreme Court’s own precedent in Union of India v. Shantanu Sanjay Hundekari & Anr [Writ Petition (L) NO. 30198 of 2023] where it upheld the Bombay High Court’s ruling that employees cannot be held liable for employer’s GST evasion under Section 122(1A). This suggests a consistent judicial approach toward limiting the scope of vicarious liability under GST penalty provisions.
The Bombay High Court in Amit Manilal Haria v. Joint Commissioner of CGST & CE [WP No. 5001 of 2025], where it was held that, Prima facie, we find substance in the argument that Section 122(1A), brought on the statute book only with effect from January 1, 2021, cannot be retrospectively applied to impose penalty for periods prior to that date. Section 122(1A) is prospective in nature and cannot be invoked for alleged contraventions prior to January 1, 2021 and that Penalty under Section 122(1A) applies only to a person who is a “taxable person” and who has retained the benefit of the contravention, which must be proved with evidence.
The Delhi High Court in the case of Bhupender Kumar v. Additional Commissioner Adjudication CGST Delhi North & Ors. [W.P.(C) 9141/2025 dated July 16, 2025] has made it clear that Section 122(1A) of the Goods and Services Tax Act 2017 can be imposed retrospectively, provided the show cause notice had been issued to the assessee when the provision was introduced.
Relevant Provisions:
Section 122(1) of the Central Goods and Services Tax Act, 2017:
“Where a taxable person who––
(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply;
(ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;
(vii) takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;
(ix) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;
he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or tax not collected under section 52 or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.”
Section 122(1A) of the Central Goods and Services Tax Act, 2017
“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”
Section 2(107) of the Central Goods and Services Tax Act, 2017
“Taxable person means a person who is registered or liable to be registered under section 22 or section 24″.
Article 20(1) of the Constitution of India:
“No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.”
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