Section 122(1A) CGST Act: Prospective or Retrospective?

Summary: Section 122(1A) of the CGST Act, 2017, effective from 1 January 2021, imposes a penalty on a person who retains the benefit of specified transactions conducted at that person’s instance. The Bombay High Court has held that the provision, being penal, cannot apply to acts committed before its commencement. In contrast, the Gauhati High Court, following the Delhi High Court, has treated Section 122(1A) as identifying the beneficiary of violations already covered by Section 122(1) and permitted its application to earlier transactions where it was in force when the show-cause notice was issued. Supreme Court decisions in CIT v. Vatika Township and Asia Sugar & Chemical Co. support the presumption against retrospectivity and distinguish retrospective fiscal liability from retrospective penal consequences. Accordingly, a strong legal basis exists for contending that Section 122(1A) should operate prospectively and should not impose penalties concerning transactions undertaken before 1 January 2021.

Cleavage of Opinion of Hon’ble High Courts: The Application of Section 122(1A) of the CGST Act, 2017 — Prospective or Retrospective?

General Rule Against Retrospective Application of Law

The general rule of construing a statute is to ascertain and give effect to the intention of the Legislature from the language embodied in the enactment. The settled principle of statutory construction is expressed in the maxim lex prospicit non respicit—the law looks forward and not backward. Unless a contrary intention appears expressly or by necessary implication, a legislation is presumed to operate prospectively. The rationale underlying the rule is one of fairness: a person is ordinarily entitled to arrange his affairs in accordance with the law prevailing at the relevant point of time and should not subsequently be subjected to a new burden or disability in respect of an act which, when undertaken, was governed by the existing law.

Retrospectivity in Fiscal Legislation

The principle assumes particular significance in fiscal legislation. Article 265 of the Constitution provides that “No tax shall be levied or collected except by authority of law.” While the Legislature possesses the competence to enact retrospective fiscal legislation, the nature of the liability sought to be created or altered remains material. A provision which merely clarifies an existing position or gives effect to an existing liability may stand on a different footing from a provision which creates a new obligation, imposes a fresh burden or attaches a new disability to a past transaction. Thus, the mere fact that a provision forms part of a taxing statute cannot, by itself, justify its retrospective application. The legislative intent, the nature of the amendment and the consequence sought to be attached to past conduct must necessarily be examined.

Article 20(1) and Retrospective Penal Consequences

The distinction becomes still more significant when the consequence sought to be imposed is penal in nature. Article 20(1) of the Constitution embodies the principle that no person can be convicted for an act except for violation of a law in force at the time of its commission, nor can a person be subjected to a penalty greater than that which could have been imposed under the law then in force. Penalty presupposes culpability, default or failure to comply with an obligation imposed by law. Therefore, the principal fiscal liability and the penal consequence cannot necessarily be placed on the same footing. The question whether a tax liability can be retrospectively created is distinct from whether a person can retrospectively be subjected to a penalty for conduct which, at the time it was undertaken, did not attract such penal consequence. It is this distinction which assumes central importance in examining the retrospective application of Section 122(1A) of the CGST Act, 2017.

Controversy Over Retrospective Application of Section 122(1A)

The precise issue, in the backdrop of the above principles, is whether Section 122(1A) of the CGST Act, 2017, which came into force on 1 January 2021, can be applied to transactions undertaken prior thereto. The question has resulted in a cleavage of opinion amongst the Hon’ble High Courts, with divergent views on the prospective or retrospective application of the provision.

Bombay High Court: Section 122(1A) Cannot Apply Retrospectively

The Hon’ble Bombay High Court, in Amit Manilal Haria v. Joint Commissioner, CGST & Central Excise 2026 SCC OnLine Bom 1510 = (2026) 40 Centax 100 (Bom.), has very well observed the retrospective application of Section 122(1A) of the CGST Act, which came into force with effect from 1 January 2021. The show cause notice in the matter covered the period from July 2017 to July 2023. The Court, placing reliance upon Article 20(1) of the Constitution, held that a person cannot be penalised under a provision which was not in force during the period in which the alleged acts were committed. Accordingly, the Court held that Section 122(1A) could not be retrospectively invoked for the period prior to 1 January 2021.

Gauhati High Court: Section 122(1A) Identifies the Beneficiary

The Gauhati High Court, in Mayank Bansal v. Union of India & Ors., W.P.(C) No. 24 of 2026, decided on 08.06.2026, considered the competing views of the Bombay and Delhi High Courts and, relying upon the decision of the Hon’ble Delhi High Court in Bhupender Kumar, held that Section 122(1A) could be applied even to transactions undertaken prior to 1 January 2021, provided that the provision was in force when the show cause notice was issued. The Court reasoned that Section 122(1A) does not create any independent violation or enlarge the violations contemplated under Section 122(1), which had been in force from the inception of the CGST Act. Rather, its purpose is to identify the person at whose instance the underlying violations occurred and who retained the benefit thereof. The Court, therefore, observed that the question of retrospectivity did not arise in the conventional sense.

Conditions Stated by the Gauhati High Court

The Court nevertheless expressly held that Section 122(1A) would apply to transactions undertaken prior to its coming into force, where the underlying transactions fall within the specified clauses of Section 122(1). It further clarified that Section 122(1A) would operate only after the underlying violation under Section 122(1) is adjudicated, and that the provision must be in force on the date of issuance of the show cause notice. Thus, the Gauhati High Court expressly endorsed the approach adopted by the Delhi High Court in Bhupender Kumar and held that Section 122(1A) could be invoked in respect of pre-01.01.2021 transactions. (Paras 48, 50, 58(ii)).

Supreme Court Principles Governing Retrospective Fiscal and Penal Provisions

CIT v. Vatika Township: Presumption of Prospectivity

Further, the Constitution Bench of the Hon’ble Supreme Court in CIT v. Vatika Township (P) Ltd., (2015) 1 SCC 1, laid down the general principles governing retrospectivity and held that, unless a contrary intention appears, legislation is presumed not to operate retrospectively. The foundation of this principle is fairness, as a person is entitled to arrange his affairs on the basis of the law prevailing at the relevant time. The Court further held that legislation which modifies accrued rights, imposes obligations or new duties, or attaches a new disability, is ordinarily prospective unless the legislative intent clearly indicates otherwise. The decision, therefore, provides an important interpretative framework for examining whether Section 122(1A), introduced with effect from 1 January 2021, can attach a new penal consequence to transactions undertaken prior thereto. (Para 29).

Asia Sugar: Principal Tax Liability Distinguished From Penalty

The Supreme Court’s recent decision in Asia Sugar & Chemical Co., Devangere v. State of Karnataka & Ors., 2026 INSC 693, assumes considerable significance in the present context. Although the Court upheld the retrospective fiscal amendment, it held that penalty could not be imposed for the pre-amendment period where the assessee had acted in accordance with the law as it then stood. The Court emphasised that penalty presupposes culpability, default, deliberate breach or failure to comply with an existing obligation, and drew a clear distinction between the validity of a retrospective principal tax liability and the imposition of a consequential penalty. It accordingly permitted reassessment for determination of the principal tax liability but held that no penalty could be imposed or recovered for the pre-amendment period. Though the case concerned the retrospective withdrawal of a tax exemption under the Karnataka Sales Tax Act and not Section 122(1A) of the CGST Act, the principle laid down by the Hon’ble Supreme Court is particularly instructive in examining whether a retrospective fiscal provision can validly attach a penal consequence to conduct which, at the relevant time, did not attract such penalty. (Paras 80–84).

Divergent Judicial Approaches to Section 122(1A)

The aforesaid judgments reveal a clear divergence in approach. The Bombay High Court proceeds on the premise that Section 122(1A), being a penal provision brought into force only from 1 January 2021, cannot be invoked for acts committed prior thereto. The Delhi High Court, on the other hand, considers the date of issuance of the SCN and the continuing nature of fraudulent transactions as material to its applicability, while the Gauhati High Court has held that Section 122(1A) does not create an independent violation but merely identifies the person liable in respect of violations already contemplated under Section 122(1). In our considered view, therefore, the controversy ultimately turns upon the true nature and legal effect of Section 122(1A), whether it creates a new penal liability or merely operates upon an existing statutory contravention. Applying the general rule that an amendment is ordinarily prospective unless the legislative intent, expressly or by necessary implication, indicates otherwise, we are of the considered opinion that a stricter approach is warranted in the case of a penal provision, since penalty is intrinsically connected with culpability, default and breach of an obligation existing at the relevant time.

Section 122(1A) Should Operate Prospectively

In our respectful view, Section 122(1A), having come into force only from 1 January 2021, ought not to be invoked to impose a penalty for transactions undertaken prior thereto. This view, in our opinion, finds further support from the recent decision of the Hon’ble Supreme Court in Asia Sugar & Chemical Co. v. State of Karnataka & Ors., 2026 INSC 693, wherein the Court distinguished between the validity of a retrospective principal fiscal liability and the imposition of a consequential penalty, observing that “the validity of the principal tax liability is one thing. The imposition of penalty is another.” Although the said decision did not concern Section 122(1A), the distinction drawn therein, in our considered view, provides a strong basis to contend that a penal consequence cannot retrospectively be attached to past transactions merely because Section 122(1A) was in force on the date of issuance of the SCN.

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Written By;

R.P. Singh, Advocate | Managing Partner | USR LEGAL ADVISORS
Nirmal Dixit, Advocate | Associate Advocate | SR LEGAL ADVISORS