HC holds penalty u/s 122(1A) of CGST Act can be levied on directors of the company

This Tax Alert summarizes a recent judgement of the Delhi High Court (HC)^[1] on imposition of penalty on directors of a company under the Central Goods and Services Tax Act, 2017 (CGST Act). 

Due to non-payment of tax and claim of ineligible input tax credit (ITC) by the company, the Department also imposed penalties on the directors under Section 122(1A) of the CGST Act. 

The petitioners, who are the company’s directors, challenged the penalty, contending that it can only be imposed on taxable persons.     

Section 122(1A) provides for penalty on any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of section 122(1) and at whose instance such transaction is conducted.

The key observations of the HC are:

• The question as to whether and in what manner the petitioners (directors) are benefitted from availing the fake ITC or from non-filing of GST returns cannot be gone into in the present writ petition.
• The statute makes a clear distinction between ‘taxable person’ and ‘any person’. Section 83 of the CGST Act, which deals with provisional attachment, also uses the language ‘taxable person’ in contra distinction with ‘any person’.
• Further, while Section 122(1) uses the phrase “taxable person”, section 122(1A) uses “any person”.
• The companies being inanimate, the responsibility has, by the wisdom of the legislature, been fixed under Section 122(1A) upon any person who retains the benefits of a transaction.

Accordingly, the High Court held that the penalty under Section 122(1A) can be imposed on any person and is not restricted to taxable persons alone. 

However, since the petitioners are non-taxable persons on whom penalties have been imposed, a mechanism would have to be created or made available by the Department to enable them to file the appeals.

Comments:

• The provisions of section 122(1A) were introduced by the Finance Act, 2020 and came into effect on 1 January 2021.
• Currently, when a director agrees to pay the penalty to settle the matter, there appears to be no mechanism available on the GST portal for him to make such payment in his individual capacity.

^[1] G.S.R. 256(E) dated 24 April 2025