When a company's GST affairs go wrong, the tax authorities sometimes look past the company to its directors, invoking Section 122(1A) of the Central Goods and Services Tax Act, 2017 to impose a personal penalty measured by the tax evaded or the input tax credit wrongly availed. For an ex-director — someone no longer in charge of the company's affairs, often with no access to its records or its GST portal login — such a demand can be both large and procedurally unfair. The defences, however, are substantial. They begin with the text of Section 122(1A) itself, which reaches only "taxable persons" who personally retained the benefit of specified transactions, and extend to the absence of vicarious liability under the GST regime, the bar on retrospective penalty, and the requirements of valid service and natural justice.
The Statutory Trigger: Who Section 122(1A) Actually Reaches
Section 122(1A), inserted with effect from 1 January 2021 by Notification No. 92/2020-Central Tax dated 22 December 2020 (traced to the Finance Act, 2020), provides:
"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."
Two ingredients must both be present for a personal penalty: the person must retain the benefit of one of the specified transactions — broadly, fake invoices without supply, or wrongful input tax credit availed or passed on — and the transaction must have been conducted at that person's instance. The provision is not a general net for anyone connected with the company; it targets the individual who both directed the transaction and pocketed its benefit.
The decisive gloss is that Section 122(1A) applies only to a "taxable person" as defined in Section 2(107) of the CGST Act, which means "a person who is registered or liable to be registered under section 22 or section 24." The Bombay High Court held as much in Shantanu Sanjay Hundekari v Union of India, Writ Petitions Nos. 30198, 30199, 30200 and 30241 of 2023 (decided 28 March 2024). Reading Section 122 as a whole, the Court reasoned that sub-section (1) levies penalty on a taxable person for the enumerated offences, and that sub-section (1A):
"provides that any person (who would necessarily be a taxable person) retains the benefit of the transactions covered under clause (i), (ii), (vii) or clause (ix) of sub section (1), and at whose instance, such transaction is conducted ... This clearly depict[s] the intention of the legislature that a person who would fall within the purview of sub-section (1A) of Section 122 is necessarily a taxable person as defined under Section 2(107) of the CGST Act read with the provisions of Section 2(94) of the CGST Act and a person who retains the benefits of transactions covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) of Section 122."
Applying that reading, the Court found the provision simply inapplicable to an individual who was an employee of a group company and not a registered or taxable person:
"[T]he petitioner cannot be a 'taxable' or a 'registered person' within the meaning and purview of the CGST Act so as to retain such benefits as the provision ordains. Hence, there was no question of respondent No. 3 invoking Section 122(1A) against the petitioner. Thus, the designated officer invoking the said provision against the petitioner is an act wholly without jurisdiction, so as to issue the show cause notice. A provision, which ex-facie is inapplicable to the petitioner who is an individual, has been invoked and applied in issuing the impugned show cause notice."
The practical consequence is a jurisdictional one. An ex-director who was not registered as a taxable person in his individual capacity, and who was a director or employee of the company rather than a person who retained the benefit of the transactions at his instance, falls outside Section 122(1A) altogether. Where that is so, the objection is not merely that the penalty is excessive but that the officer had no jurisdiction to invoke the provision against the individual in the first place.
No Vicarious Liability Under the GST Act
A related and equally important holding in Shantanu Hundekari is that the CGST Act does not import any principle of vicarious liability by which an individual is fixed with the company's default merely because of position:
"[I]t is ill-conceivable to read and recognize into the provisions of Section 122 and Section 137, of the CGST Act any principle of vicarious liability being attracted. There could be none. Thus, Respondent No. 3 clearly lacks jurisdiction to adjudicate the show cause notice in its applicability to the petitioner."
The Bombay High Court reaffirmed and applied this to similarly placed directors and employees in Amit Manilal Haria v Joint Commissioner CGST & Central Excise, Writ Petition No. 5001 of 2025 (decided 25 February 2026), holding that Shantanu Hundekari governs where the petitioners are employees of the company and there is no material to show they are taxable persons who in fact retained the benefit of the specified transactions. Position within the company — director or employee — does not by itself supply the two ingredients the provision demands.
The Non-Retrospectivity Bar
Because Section 122(1A) came into force only on 1 January 2021, it cannot be applied to transactions that predate its commencement. In Amit Manilal Haria, the Bombay High Court held:
"[A] person cannot be penalized under the law/provision which was not in force for the period in which such alleged acts are stated to have been committed. There could not have been any retrospective application of Section 122(1A) of the CGST Act in issuing the impugned show cause notice for the period July 2017 to 1 January 2021, and for such reason also the impugned order-in-original insofar as such period is concerned, cannot be sustained."
The constitutional anchor is Article 20(1), which provides that no person shall be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the offence. The memo records that the Delhi High Court in Parag Garg v Additional Commissioner, 2025 (7) TMI 1517, and the Bombay High Court in Amit Manilal Haria, found prima facie substance in the argument that Section 122(1A), being a penal provision brought into force on 1 January 2021, cannot be applied to periods before that date. The upshot is twofold: where the alleged transactions are pre-2021, retrospectivity is a complete answer to that part of the demand; and even for later transactions, the taxable-person and personal-benefit requirements still have to be met.
Strict Construction: Benefit and Instance Must Be Proved
Section 122(1A) is a penal provision and is construed strictly. The two ingredients are not presumed from status; they must be demonstrated. The person penalised must be shown to have personally retained a financial benefit, and the transactions must have been conducted at his instance. Mere employment or directorship, without positive evidence of these two elements, is insufficient. That principle disposes of the common revenue argument that a director must have known of, and therefore is answerable for, the company's transactions: knowledge is not benefit, and position is not instance.
If Section 122(3)(a) Is Invoked: Aiding and Abetting
Where the notice relies instead on Section 122(3)(a) — penalty on "any person who aids or abets" the specified offences — the analysis shifts but the outcome for a passive ex-director is similar. Aiding and abetting requires positive acts, not passive knowledge or mere employment. Active facilitation and a specific intent to further the offence are needed, and designation as a director or employee does not, without more, establish either. The memo draws the point from Shantanu Hundekari, where the individual held a senior tax operations role and even a power of attorney for the company, yet was found not to have aided or abetted: he was not in charge of day-to-day decision-making, he cooperated with the investigation, he retained no personal financial benefit, and there was no evidence he directed the transactions. An ex-director resisting a Section 122(3)(a) penalty will therefore press that the notice must identify concrete acts — issuing fake invoices, directing the ITC claims, instructing false filings — rather than resting on the fact of office, and that voluntary cooperation with an investigation is not abetment.
Defective Service: Portal Upload Alone May Not Be Enough
Section 169(1) of the CGST Act lists the permitted modes of serving a notice or order: direct tender to the addressee, taxable person or authorised representative; registered post, speed post or courier; email; making it available on the common portal; publication in a local newspaper; and, as a last resort, affixture. A recurring question is whether uploading a notice to the GST portal, by itself, is valid service on an individual noticee.
Several High Courts have held that it is not, at least where no personal or physical service is attempted. The memo cites the Madras High Court (Madurai Bench) in Tvl. Enfive Systems Private Limited v Commissioner of Commercial Taxes, W.P.(MD) No. 36252 of 2025, to the effect that where a taxpayer does not respond to a notice sent by one mode, the officer should explore the other modes under Section 169(1) — preferably registered post with acknowledgment due — and that "uploading a summary show cause notice on the GST portal alone does not amount to valid service of notice under Section 169", with the resulting ex parte order liable to be set aside for want of a hearing. The Odisha High Court in the Poomika Infra batch (W.P. Nos. 33562 of 2024 and connected matters) is cited as treating the modes in clauses (a) to (c) as the ordinary means of reaching an individual, with clauses (d) to (f), including portal upload, to be resorted to only after the earlier modes are exhausted and found impracticable.
The memo is careful to flag that the jurisprudence is not uniform: it records that the Supreme Court, in a matter noted as State of U.P. v Krishna Kant, stayed an Allahabad High Court ruling that had questioned portal-upload-only service, indicating ongoing tension. The safer litigation position it identifies is that portal upload alone, without personal service or an alternative mode, offends natural justice where the individual noticee has no access to the portal and is not effectively notified. For an ex-director this is often decisive on the facts: no longer in charge of the company, he will typically have no access to the company email used for portal notifications, no regular access to the portal in the company's name, and therefore no constructive notice of a notice uploaded without any attempt at personal service. The practical step the memo recommends is to obtain specifics of how service was in fact attempted, and, if it was portal upload alone, to argue non-service under Section 169, a consequent denial of the hearing required by Section 75(4), and an order passed without jurisdiction.
Natural Justice: The Hearing That Must Precede an Adverse Order
Section 75(4) of the CGST Act mandates that an opportunity of hearing "shall be granted where a request is received in writing from the person chargeable with tax or penalty, or where any adverse decision is contemplated against such person." If no notice was served, no hearing could have been offered, and the order is exposed to challenge.
The statutory requirement sits on a constitutional foundation. The rule of audi alteram partem is read into Articles 14 and 21 of the Constitution. The memo invokes the familiar line of authority: Maneka Gandhi v Union of India, (1978) 1 SCC 248, for the proposition that even where a statute is silent, the requirement of a hearing must be read in where individual rights are affected, and that natural justice applies to administrative action carrying civil consequences; State of Orissa v Dr. Binapani Dei, AIR 1967 SC 1269, for the principle that a power to decide to a person's prejudice carries a duty to act judicially and to give a fair hearing; and State Bank of Patiala v S.K. Sharma, AIR 1996 SC 1669, for the consequence that an order passed without any opportunity of being heard is invalid. Applied to GST, which the courts treat as quasi-judicial and subject to natural justice, the memo notes the Delhi High Court in M/s Perfetti Van Melle India Pvt. Ltd. v Additional Commissioner, 2025 DHC 2656-DB, setting aside an order where hearing notices were returned undelivered and the authority proceeded ex parte without exploring available modes of service, holding the Section 169 mandate unmet and remanding for a fresh hearing. Where an ex-director was neither served nor heard, the memo's conclusion is that the adjudication order is void for breach of natural justice — a defect going to jurisdiction rather than a curable irregularity.
Limitation: When the Clock to Appeal Starts
Section 107(1) allows an appeal to the appellate authority "within three months from the date on which the said decision or order is communicated to such person." The word that matters is "communicated". The memo's position is that limitation runs from the date the order is actually communicated to — received or known by — the individual appellant, and not from the date the order was passed, uploaded to the portal, or merely dispatched. It draws support from the discussion in commentary of Britannia Industries Ltd. v Union of India and Meritas Hotels Pvt. Ltd. v State of Maharashtra, where the courts treated the date of communication, rather than the date of portal upload, as the trigger for limitation, the latter decision reasoning that for limitation "the date of communication of the impugned assessment order is to be regarded as [the date] on which the order was sent by email to the petitioner", and declining to treat portal upload as the operative date.
For an ex-director who never received actual communication of the order, the three-month period may not have begun at all, so that an appeal is not necessarily time-barred by the passage of time since the order's date. And even where there is delay, Section 107(4) permits condonation of up to one further month on sufficient cause, which non-receipt of the order can supply. Delay attributable to a defective, unserved notice is, on this analysis, curable.
Parity With a Co-Director
Article 14 requires that like cases be treated alike, and the memo applies that consistency principle to co-noticees. Where an appellate authority has granted relief to one similarly placed co-director on a ground such as the taxable-person requirement, the absence of personal benefit, or the inapplicability of Section 122(1A) to a non-taxable individual, another co-director in substantially similar circumstances can invoke parity to claim the same relief, arguing that arbitrary discrimination between similarly situated parties offends Article 14. The comparison is fact-sensitive: it depends on the roles, designations and degree of involvement being genuinely comparable, and the authority would examine whether the two positions are alike before extending the same reasoning and relief. The memo is explicit about the precondition — the co-director's appeal must actually have been decided favourably; while it remains pending, the parity argument is not yet available, and the practical step is to obtain and place on record any favourable appellate order in the co-noticee's case.
Stay of Recovery Pending Challenge
A large personal penalty invites an application to stay recovery. Section 107(6) provides the appellate framework, and the High Court under Article 226 has independent power to grant interim relief. The memo's position is that pre-deposit need not invariably be insisted upon in a personal-penalty case turning on jurisdictional defects, and that a stay is appropriate where jurisdictional defects are apparent — non-service, or liability asserted against a non-taxable person under Section 122(1A) — where a strong prima facie case is shown, where the balance of convenience favours the individual because recovery of a very large sum from a former director would cause irreparable harm, and where the revenue's loss is speculative because the underlying liability is disputed on a question of law. It notes that the Delhi High Court in Parag Garg v Additional Commissioner, 2025 (7) TMI 1517, granted interim protection against coercive action where Section 122(1A) had been invoked for transactions before its commencement, indicating that courts are receptive to staying recovery where retrospectivity is in issue.
Section 127 and the Civil–Criminal Divide
If the notice reaches for Section 127, a further objection is available. The memo, citing Allahabad High Court commentary on the structure of Chapter XIX, distinguishes the civil penalty regime of Section 122 — adjudicated by the proper officer — from offences that are tried by criminal courts, observing that Section 122 uses the language of "penalty" for contraventions while the prosecution provisions use the language of "punishment" for offences, which points to the civil character of Section 122 and the absence of any role for criminal courts in its adjudication. The argument that follows is one of jurisdiction and joinder: a demand adjudicated in departmental proceedings is not the vehicle for provisions that require prosecution before a criminal court, and civil-penalty and criminal-offence provisions ought not to be combined in a single notice without the separate process each requires. The memo advances this as a live argument to be pressed if Section 127 is invoked, rather than as settled law.
Points of Caution
The strength of several of these defences depends on facts the ex-director must establish. The non-service argument is only as strong as the record of how service was attempted; if proper registered post or email service was in fact effected, it weakens. Actual knowledge of the notice through some other channel can blunt the service point even where portal upload was the only formal mode. The employee-centred reasoning of Shantanu Hundekari maps most cleanly onto an employee or a director who was not in office during the period of the alleged violations; where the individual was a serving director then, that analogy is less direct, though the taxable-person requirement and the need to prove personal benefit continue to apply. The parity ground depends on the co-noticee's appeal having actually been decided. And participation in the investigation, such as giving statements, may be used by the revenue to assert knowledge — though, as Shantanu Hundekari shows, voluntary cooperation is not itself aiding and abetting. Finally, the jurisprudence on portal-only service is unsettled at the apex level, so the service argument should be advanced alongside, rather than in place of, the jurisdictional grounds under Section 122(1A).
Practical Takeaways
- Lead with jurisdiction: Section 122(1A) reaches only a taxable person under Section 2(107) who retained the benefit of the specified transactions at his instance. An ex-director who is not a registered taxable person and retained no personal benefit falls outside it, per Shantanu Hundekari and Amit Manilal Haria.
- Deny vicarious liability: the CGST Act recognises none under Sections 122 and 137, so office alone does not fix an individual with the company's default.
- Raise non-retrospectivity for any pre-1 January 2021 transactions; Section 122(1A) cannot reach them, and Article 20(1) supports the bar.
- Attack service: obtain the record of how the notice was served, and if it was portal upload alone to a former director with no portal access, argue non-service under Section 169 and denial of the Section 75(4) hearing.
- Fix limitation to communication, not upload: if the order was never actually communicated, the three-month appeal period under Section 107(1) may not have started, and Section 107(4) allows condonation on sufficient cause.
- Use parity only once a co-director's appeal is actually allowed on comparable facts, and place that order on record.
- Seek a stay of recovery under Article 226 without assuming pre-deposit is mandatory where the demand rests on a jurisdictional defect and would cause irreparable harm to an individual.
Key Authorities
- CGST Act, 2017, Section 122(1A), Section 2(107) and Section 122(3)(a) — the personal-penalty provision, the definition of "taxable person", and the aiding-and-abetting penalty. Source
- Shantanu Sanjay Hundekari v Union of India, Bombay High Court, W.P. Nos. 30198-30200 & 30241 of 2023 (28 March 2024) — Section 122(1A) applies only to a taxable person; no vicarious liability under Sections 122 and 137; invoking it against an individual employee is without jurisdiction. Source
- Amit Manilal Haria v Joint Commissioner CGST, Bombay High Court, W.P. No. 5001 of 2025 (25 February 2026) — applies Shantanu Hundekari to directors and employees, and holds Section 122(1A) cannot be applied retrospectively to pre-1 January 2021 periods. Source
- Parag Garg v Additional Commissioner, Delhi High Court, 2025 (7) TMI 1517 — prima facie substance in the non-retrospectivity argument; interim protection granted against coercive action. Source
- Tvl. Enfive Systems Private Limited v Commissioner of Commercial Taxes, Madras High Court (Madurai Bench), W.P.(MD) No. 36252 of 2025 — uploading a show cause notice on the GST portal alone is not valid service under Section 169. Source
- M/s Perfetti Van Melle India Pvt. Ltd. v Additional Commissioner, Delhi High Court, 2025 DHC 2656-DB — order set aside for non-compliance with Section 169 and denial of hearing; matter remanded. Source
- Maneka Gandhi v Union of India, (1978) 1 SCC 248; State of Orissa v Dr. Binapani Dei, AIR 1967 SC 1269; State Bank of Patiala v S.K. Sharma, AIR 1996 SC 1669 — natural justice under Articles 14 and 21; a hearing must precede an adverse order, and its absence renders the order invalid.
- Britannia Industries Ltd. v Union of India and Meritas Hotels Pvt. Ltd. v State of Maharashtra — limitation under Section 107 runs from communication of the order, not from its upload on the portal. Source
- CGST Act, 2017, Sections 75(4), 107(1), 107(4), 107(6) and 169 — hearing, appeal period, condonation, stay of recovery, and modes of service.
This analysis reflects the law as at June 2026. It is published for general information and does not constitute legal advice.