Penalty Must Follow the Benefit - Decoding Section 122 (CGST Act)

GST was designed to be a "trust-and-verify" system: businesses self-assess tax, take input tax credit (ITC), file returns, and the tax chain flows smoothly. But the moment the chain is gamed-fake invoices, circular trading, wrongful ITC, bogus refunds-the system needs a sharp deterrent.

That deterrent, in large measure, sits in Section 122 of the CGST Act-a provision that does two things at once:

1. Names specific contraventions (invoice fraud, wrongful credit, suppressed turnover, etc.), and

2. Links the penalty quantum to the "benefit" (tax evaded / ITC availed or passed on / refund fraudulently claimed), subject to minimums.

The phrase "Penalty must follow the benefit" captures the spirit behind Section 122-especially after the insertion of Section 122(1A). This article breaks down Section 122 in a practical, litigation-ready way: who it applies to, when it triggers, how it is quantified, and how it interacts with Sections 73/74 and the "no double penalty" rule.

1) What Section 122 covers - and why it's drafted differently from "demand" sections

Sections 73 and 74 are primarily tax determination mechanisms (tax, interest, and penalty as part of demand). Section 122, however, sits in the chapter on Offences and Penalties and is framed as a standalone penalty provision for specified "offences"/contraventions.

That distinction matters, because:

2) The anatomy of Section 122 - sub-section wise decoding

A. Section 122(1): "Taxable person" + listed contraventions + benefit-linked quantum

Section 122(1) lists a broad menu of contraventions-ranging from supply without invoice, issuing invoices without supply, collecting tax and not paying, wrongful ITC without receipt of goods/services, fraudulent refunds, suppression of turnover, obstructing officers, transporting goods without documents, and more.

Penalty quantum (core rule):

A taxable person committing any of the listed clauses is liable to Rs.10,000 or an amount equivalent to (as applicable) tax evaded / tax not deducted / tax not collected / ITC availed/passed on/distributed irregularly / fraudulent refund, whichever is higher.

Key takeaway: Even within 122(1), the statute repeatedly ties penalty to the quantified tax/ITC/refund impact-i.e., the "benefit."

B. Section 122(1A): "Penalty follows the beneficiary" (the heart of this article)

Inserted and brought into force w.e.f. 01.01.2021, Section 122(1A) is a targeted weapon against the real beneficiary/mastermind behind fake invoice or wrongful ITC structures.

It says: Any person who:

1. retains the benefit of a transaction covered under 122(1)(i), (ii), (vii) or (ix), and

2. at whose instance such transaction is conducted,

shall be liable to a penalty equivalent to tax evaded / ITC availed or passed on.

This is the clearest statutory expression of "penalty must follow the benefit." It attempts to move beyond penalising only the front-end invoice-issuer and reach the person who caused the arrangement and kept its gains.

Why it matters in practice:

Fake invoice chains often involve multiple layers-dummy firms, brokers, paper transactions-where the invoice issuer may have no "tax payable" (because there is no supply), yet the credit travels and someone enjoys its value. Section 122(1A) aims to attach liability to that "someone."

C. Section 122(1B): E-commerce operator exposure (newer compliance risk)

Section 122(1B) (effective 01.10.2023, later substituted) imposes penalty on an e-commerce operator liable to collect TCS under Section 52, if it allows supplies through it by certain ineligible/unregistered persons or fails to furnish correct statement details. Penalty is Rs.10,000 or tax involved (as if supply made by a registered person), whichever higher.

Theme link: again, penalty is pegged to the tax involved-a benefit/impact lens.

D. Section 122(2): Registered person - split between "non-fraud" and "fraud" buckets

Section 122(2) applies where a registered person supplies goods/services on which tax is not paid/short paid/erroneously refunded or ITC wrongly availed/utilised.

This sub-section mirrors the policy that the penalty should roughly map to the degree of revenue prejudice and culpability.

E. Section 122(3): "Any person" who abets/handles tainted goods/services, etc. - capped penalty

Section 122(3) extends to any person who aids/abets listed offences, deals with goods liable to confiscation (knowing/reason to believe), deals with contravening services, fails to appear on summons, or fails to issue/account invoices-penalty up to Rs.25,000.

This is important because it covers brokers, facilitators, transport-related actors, etc.-even when they aren't the main taxable person.

3) "Penalty must follow benefit" - what does Section 122(1A) actually require?

Section 122(1A) is not triggered merely because a transaction exists. It is structured with two built-in filters:

(i) "Retains the benefit"

This phrase is doing real work. It suggests the department must show that the person enjoyed/kept the advantage arising out of the tainted transaction-typically:

(ii) "At whose instance such transaction is conducted"

This is meant to capture the instigator/controller, not every peripheral participant.

Practical inference: Section 122(1A) should be strongest where evidence shows:

And this isn't just theory-Circular 171/03/2022-GST expressly notes that in fake invoice / wrongful ITC contexts, "any person who has retained the benefit… and at whose instance such transactions are conducted" is liable under 122(1A).

4) Section 122 vs Sections 73/74 - avoiding double punishment

A. The statutory "no double penalty" rule - Section 75(13) Section 75(13) states: where any penalty is imposed under Section 73 or 74 (or 74A), no penalty for the same act/omission shall be imposed on the same person under any other provision of the Act.

Meaning: If the department penalises a person under Section 74 for fraudulent ITC, it cannot again penalise that same person for that same act under Section 122.

B. Circular 171/03/2022-GST - the department's own playbook

Circular 171 gives scenario-based clarification. Two high-impact points:

1. Invoice issued without supply ("A" issues fake invoice to "B"): since there is no "supply" under Section 7, no tax demand under 73/74 on A; but penalty under 122(1)(ii) applies for issuing invoice without supply.

2. Where B avails and utilises fraudulent ITC, B faces demand + interest + penalty under Section 74, and because of Section 75(13), no penalty under Section 122 for the same act.

This is a crucial compliance and litigation point: identify whether the proposed penalty is duplicative of a 73/74 penalty and invoke 75(13).

5) Can Section 122 survive even if Section 74 is dropped? The Patanjali line - and its limits

A major controversy is whether 122 is so "tied" to 73/74 proceedings that if demand proceedings collapse, penalty must also collapse.

A. The deeming conclusion rule in Section 74 Explanation 1(ii)

Explanation 1(ii) to Section 74 provides that where a notice in the same proceedings is issued to the main person and other persons, and proceedings against the main person are concluded under 73/74, then proceedings against persons liable to penalty under Sections 122 and 125 are deemed concluded.

So yes-there is a statutory route for closure of 122/125 proceedings, but only when the conditions are met (same proceedings + main person concluded).

B. Allahabad High Court in Patanjali (2025) - Section 122 treated as civil penalty and proceedings can continue

In M/s Patanjali Ayurved Ltd v. Union of India (2025(05)LCX0298), the Allahabad High Court dealt with a challenge to large penalty proceedings under Section 122 even after Section 74 demand proceedings were dropped for certain units. The Court allowed continuation of 122 proceedings and discussed the framework distinguishing tax determination and penalty proceedings.

But the story is still developing: In August 2025, the Supreme Court of India reportedly stayed recovery of the penalty while hearing the matter further.

Practical reading:

6) Retrospectivity and "non-taxable persons" - Supreme Court's interim signal in Mukesh Kumar Garg (2025)

Another sharp edge: Can Section 122(1A) be applied to periods before it came into force? Can Section 122(1) be applied to someone claiming to be a "non-taxable person"?

In Mukesh Kumar Garg v. Union of India (2025(08)LCX0018), the Supreme Court of India granted interim relief noting two key contentions:

The Court stayed recovery subject to deposit of 25% of the demand.

Why this matters: Where departments invoke 122(1A) for pre-2021 conduct, this interim order becomes a serious litigation hook (while final law will depend on the eventual judgment).

7) Procedure: How is Section 122 penalty actually imposed?

Penalty under Section 122 typically travels through adjudication machinery and prescribed electronic forms.

Rule 142 specifically lists Section 122 notices and requires a summary in FORM GST DRC-01, and orders generally reflect in DRC-07-type summaries for recovery mechanisms.

Litigation tip: Many disputes are not about whether Section 122 exists, but how it is invoked:

8) Built-in moderation: Section 126 (penalty discipline) and Section 128 (waiver power)

Even though Section 122 is harsh, the Act contains balancing levers:

9) Practical checklist: How businesses should approach a Section 122 exposure

If you're advising or defending a taxpayer, treat Section 122 as a fact-intensive penalty provision. A practical response framework:

Step 1: Identify the exact hook

Step 2: Map "benefit" to quantification

Step 3: Test duplication and statutory bars

Step 4: For 122(1A), demand proof of BOTH limbs

Step 5: Watch the timeline

Conclusion: Section 122 is not "one penalty fits all"-it is a benefit-tracking enforcement tool

Section 122 is best understood as GST's benefit-tracing penalty architecture:

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.