The Gauhati High Court has decisively held that partners of a partnership firm can be personally penalized under Section 122(1A) of the CGST Act for retaining the benefit of fraudulent transactions, even if they are not the taxable person. The judgment also affirms that this penalty provision applies to transactions occurring before its effective date of 01.01.2021, provided the show cause notice was issued after enactment.
Background & Facts
The Dispute
The writ petitions were filed by Mayank Bansal and Nadar Hussain, partners of M/S Quantum Infratech, a partnership firm engaged in residential construction. The respondents, including the Union of India and various GST authorities, imposed penalties under Section 122(1A) of the Central Goods and Services Tax Act, 2017, on the petitioners personally, for alleged GST evasion by the firm. The penalty was equivalent to the tax evaded during the period from July 2017 to March 2023.
Key Facts
- M/S Quantum Infratech (GSTIN: 18AAAFQ3262E1ZH) was the taxable person under the CGST Act.
- The petitioners, Mayank Bansal and Nadar Hussain, were identified as partners of the firm.
- During investigation, authorities alleged evasion of GST on:
- Supply of construction services to landowners without invoices
- Suppression of turnover through cash receipts
- Ineligible input tax credit (ITC) availed between July 2017 and March 2023
- Failure to issue tax invoices for services rendered
- A Show Cause Notice dated 03.08.2024 was issued under Section 74(1) read with Section 122(1A) and 122(3)(a) to:
- M/S Quantum Infratech (Noticee No.1)
- Mayank Bansal (Noticee No.2)
- Nadar Hussain (Noticee No.3)
- Smti Dejina Begum (Accountant)
- Paragraphs 9.6 and 9.7 of the Show Cause Notice specifically alleged that both petitioners:
- Knew or had reason to believe the transactions were in contravention of the Act
- Failed to file accurate GST returns
- Suppressed turnover and collected cash without issuing invoices
- Refused to produce customer-wise ledgers despite summons under Section 70 issued on 30.08.2023 and 01.11.2023
- Deliberately hindered investigation through objections dated 11.09.2023 and 09.11.2023
- The petitioners did not file any written reply to these specific allegations.
- The Proper Officer, in Order-in-Original dated 04.02.2025, found both petitioners liable under Section 122(1A) for retaining the benefit of transactions conducted at their instance.
- The Appellate Authority, by Order-in-Appeal dated 26.08.2025, confirmed the penalty.
- M/S Quantum Infratech filed separate writ petitions challenging the consolidated nature of the Show Cause Notice, which the Court addressed in a separate judgment on 08.06.2026.
Procedural History
- July 2017 to March 2023: Period of alleged GST evasion and fraudulent transactions
- 30.08.2023: First summons issued under Section 70 for production of records
- 01.11.2023: Second summons issued under Section 70
- 11.09.2023: Petitioners objected to summons
- 09.11.2023: Petitioners reiterated objections to investigation
- 03.08.2024: Show Cause Notice issued under Section 74(1) read with Section 122(1A)
- 04.02.2025: Order-in-Original passed by Proper Officer imposing penalty on petitioners
- 26.08.2025: Order-in-Appeal confirmed penalty
- 07.01.2026: Gauhati High Court issued notice and stayed coercive action
- 08.06.2026: Judgment pronounced in the instant writ petitions
The Parties' Positions
For the Petitioners
- Argued that Section 122(1A) applies only to the taxable person (M/S Quantum Infratech), not to partners.
- Relied on Shantanu Sanjay Hundekari v. Union of India (2024 SCC OnLine Bom 929) and Amit Manilal Haria v. Joint Commissioner, CGST (2026 SCC OnLine Bom 1510), where the Bombay High Court held that only the taxable person can be penalized under Section 122(1A).
- Submitted that the Supreme Court dismissed the SLP against Shantanu Sanjay Hundekari (2025 SCC OnLine SC 1358), thereby affirming the Bombay HC’s view.
- Contended that Section 122(1A) was inserted w.e.f. 01.01.2021 and cannot be applied retrospectively to transactions prior to that date, citing Article 20(1) of the Constitution.
- Relied on Amit Manilal Haria (supra) for the proposition that penalty cannot be imposed for periods when the provision was not in force.
For the Respondents
- Argued that Section 122(1A) uses the term "any person", which includes individuals such as partners.
- Highlighted that the Act defines "person" broadly under Section 2(84), encompassing individuals, firms, and artificial juridical persons.
- Distinguished between "taxable person", "registered person", and "any person" to show legislative intent to impose liability beyond the taxable entity.
- Relied on Gurudas Mallik Thakur v. Commissioner, GST (2025 SCC Online Del 3108), where the Delhi High Court held that Section 122(1A) targets individuals who retain benefits of fraudulent transactions.
- Cited Bhupender Kumar v. Additional Commissioner, CGST (2025 SCC OnLine Del 4848) to argue that the applicability of Section 122(1A) is determined by the date of the Show Cause Notice, not the date of the underlying transaction.
- Emphasized that Section 122(1A) does not create a new offence but identifies persons responsible for violations already punishable under Section 122(1), and thus is not retrospective.
- Noted that Section 132(1) of the CGST Act was amended to include "retains the benefit" language, reinforcing that Section 122(1A) is a complementary penalty provision.
Relief Sought
The petitioners sought:
- Quashing of the Order-in-Original dated 04.02.2025 and Order-in-Appeal dated 26.08.2025, insofar as they impose penalty on the petitioners.
- Declaration that Section 122(1A) cannot be applied to partners of a firm.
- Declaration that Section 122(1A) cannot be applied retrospectively to transactions prior to 01.01.2021.
The Legal Issue
Can a partner of a partnership firm be held liable for penalty under Section 122(1A) of the CGST Act, 2017, for retaining the benefit of fraudulent transactions committed by the firm, even if the partner is not the taxable person? And can this penalty be imposed for transactions occurring prior to the effective date of 01.01.2021, if the Show Cause Notice was issued after that date?
Arguments Presented
For the Appellant/Petitioner
The petitioners contended that Section 122(1A) is a penal provision that can only be invoked against the taxable person, as the underlying violations under Clauses (i), (ii), (vii), and (ix) of Section 122(1) can only be committed by the entity registered under the Act. They argued that partners, being natural persons, are not "taxable persons" under Section 2(107) and therefore cannot be penalized under a provision that is expressly tied to the acts of the taxable person. They relied on Shantanu Sanjay Hundekari and Amit Manilal Haria, where the Bombay High Court held that Section 122(1A) cannot be applied to non-taxable persons. The petitioners further submitted that the Supreme Court’s dismissal of the SLP in Union of India v. Shantanu Sanjay Hundekari (2025 SCC OnLine SC 1358) affirmed this view. They also argued that applying Section 122(1A) to pre-2021 transactions violates Article 20(1) of the Constitution, as no penalty can be imposed for an act that was not punishable at the time of commission.
For the Respondent/State
The respondents countered that the term "any person" in Section 122(1A) is deliberately broad and includes individuals who, though not taxable persons, retain the benefit of fraudulent transactions conducted at their instance. They emphasized that the Act distinguishes between "person", "registered person", and "taxable person" under Sections 2(84), 2(94), and 2(107), indicating legislative intent to impose liability on a wider class of actors. The respondents cited Gurudas Mallik Thakur to argue that the provision targets individuals who control or benefit from fraudulent invoicing or ITC availing, especially in corporate structures where the entity is a legal fiction. They further argued that Section 122(1A) is not a new offence but a mechanism to attribute liability to natural persons behind the taxable person, and thus its application is not retrospective. The date of the Show Cause Notice, not the date of the transaction, determines applicability, as held in Bhupender Kumar. The respondents also drew a distinction between criminal offences (governed by Article 20(1)) and civil penalties under tax law, citing Jawala Ram v. State of Pepsu to argue that tax penalties are not "punishment" in the constitutional sense.
The Court's Analysis
The Court undertook a detailed statutory interpretation of Section 122 of the CGST Act, 2017, and its definitions under Section 2. It observed that while Section 122(1) imposes penalties on the "taxable person" for specific violations, Section 122(1A) introduces a distinct category of liability for "any person" who retains the benefit of a transaction covered under Clauses (i), (ii), (vii), or (ix) and at whose instance the transaction was conducted. The Court rejected the narrow interpretation offered by the Bombay High Court in Shantanu Sanjay Hundekari and Amit Manilal Haria, holding that such an interpretation would render Section 122(1A) otiose. The Court reasoned that in a partnership firm, the taxable person is a legal entity incapable of acting on its own; the acts of evasion are invariably carried out by the partners. To limit liability only to the firm would defeat the legislative purpose of targeting those who actually control and benefit from fraudulent transactions.
The Court emphasized that Section 122(1A) does not create a new offence but identifies a subset of persons who are responsible for violations already punishable under Section 122(1). The penalty is not for a new act but for the retention of benefit from an existing violation. The Court held that the provision is not retrospective in the constitutional sense because it does not criminalize past conduct but merely attributes liability to persons who were already involved in unlawful acts. The Court distinguished between criminal conviction under Article 20(1) and civil tax penalties, relying on Jawala Ram v. State of Pepsu, which held that enhanced water charges were not penalties for offences but charges for services rendered. Similarly, Section 122(1A) is a mechanism to recover the benefit of tax evasion, not to punish a new crime.
The Court further noted that the Show Cause Notice was issued on 03.08.2024, well after the enactment of Section 122(1A) on 01.01.2021. The provision was therefore in force at the time of adjudication. The Court agreed with the Delhi High Court in Bhupender Kumar that the date of the notice, not the date of the transaction, governs applicability. The Court also observed that the petitioners had failed to rebut the specific allegations in Paragraphs 9.6 and 9.7 of the Show Cause Notice, and the findings of the adjudicating authority were affirmed by the Appellate Authority.
"The legislative intent behind Section 122(1A) is solely to identify the person at whose instance the violations took place and if the person had retained the benefits, the person would be liable to a penalty as mentioned therein."
The Court concluded that the petitioners, as partners who retained the benefit of transactions conducted at their instance, squarely fell within the ambit of Section 122(1A). The Court also held that the provision applies to transactions occurring before 01.01.2021, as long as the notice and adjudication occurred after its enactment, because the penalty is not for the act itself but for the continued retention of benefit and the failure to rectify the violation.
The Verdict
The writ petitions were dismissed. The Court held that the petitioners, as partners of M/S Quantum Infratech, are liable for penalty under Section 122(1A) of the CGST Act, 2017, for retaining the benefit of fraudulent transactions conducted by the firm. The penalty, equivalent to the tax evaded during the period July 2017 to March 2023, is validly imposed. Section 122(1A) applies to transactions occurring prior to 01.01.2021, provided the Show Cause Notice was issued after the provision came into force. The petitioners are granted liberty to file appeals before the Appellate Tribunal within 30 days from the date of this judgment. If filed within this period, the Appellate Tribunal shall hear the appeals on merits without insisting on limitation. The interim stay on coercive action shall continue until the Appellate Tribunal decides on any stay application.
What This Means For Similar Cases
Partners Can Be Directly Penalized Under Section 122(1A)
- Practitioners must now advise clients that partners, directors, or key personnel of firms/companies can be personally liable under Section 122(1A) if they are found to have retained the benefit of fraudulent transactions.
- Merely arguing that the taxable person is the entity and not the individual will not suffice; the focus must shift to the role and conduct of the natural person.
- In GST audits, authorities are likely to name individuals in Show Cause Notices under Section 122(1A) alongside the firm.
Pre-2021 Transactions Are Not Immune from Section 122(1A)
- Taxpayers cannot rely on the 01.01.2021 effective date to claim immunity for pre-enactment evasion.
- The critical date is the issuance of the Show Cause Notice, not the date of the transaction.
- Practitioners must assess whether the underlying violation (e.g., fake invoicing, ineligible ITC) occurred before 2021 but was only noticed or acted upon after 2021 - such cases remain vulnerable.
Burden of Rebuttal Is on the Individual
- Failure to reply to specific allegations in a Show Cause Notice under Section 122(1A) will be construed as admission.
- Practitioners must ensure that clients submit detailed, evidence-backed replies addressing each allegation of retention of benefit and involvement in the transaction.
- Oral submissions at hearings are insufficient without written rebuttals.
Appeal Strategy Must Focus on Facts, Not Just Jurisdiction
- While jurisdictional challenges under Section 122(1A) are now largely foreclosed by this judgment, appeals must now focus on factual disputes: whether the person retained the benefit and whether the transaction was conducted at their instance.
- Evidence of separation of roles, lack of control, or absence of financial benefit must be documented and presented.
Legislative Intent Trumps Literal Interpretation
- Courts will prioritize legislative intent over narrow textual readings when the provision aims to prevent tax evasion.
- The use of "any person" in Section 122(1A) is now interpreted expansively to cover all persons who materially contribute to or benefit from fraud.
Avoiding Section 122(1A) Requires Proactive Compliance
- Firms must ensure that all transactions are invoiced, ITC is properly documented, and cash receipts are avoided.
- Internal controls must be established to prevent partners or employees from engaging in unrecorded transactions.
- Regular audits and training on GST compliance are now essential to avoid personal liability.
