Legality of Initiation and Adjudication of Penalty Proceedings under Section 122 of CGST Act, 2017 – A Critical Examination
1. Introduction
The Goods and Services Tax law, being a comprehensive fiscal code, draws a clear distinction between substantive charging provisions, procedural adjudicatory provisions, and delegated legislation framed for carrying out the purposes of the Act. While penalty provisions under the CGST Act, 2017, have been widely invoked by the tax administration, questions continue to arise regarding the source of jurisdiction and authority to initiate and adjudicate such penalties, particularly under Sections 122 to 125 of the Act.
This article seeks to examine the legality of the initiation of proceedings under Section 122 of the CGST Act, especially in light of Rule 142 of the CGST Rules, 2017, judicial precedents, and the broader scheme of the Act. The central issue is whether the Act itself provides a self-contained mechanism for initiating and adjudicating penalties under Section 122, or whether such penalties can only be imposed consequentially through other adjudicatory provisions expressly enacted by the legislature.
2. Statutory Framework – Act, Rules and Delegated Legislation
Section 164(1) of the CGST Act, 2017 empowers the Government to frame rules “for carrying out the provisions of this Act” on the recommendations of the GST Council. It is a settled principle of law that rules are a form of delegated legislation and cannot override, supplement, or create substantive rights or obligations beyond the parent statute.
It is equally well settled that in case of conflict between the Act and the Rules, the provisions of the Act shall prevail. The Government, not being the legislature, can only frame rules to operationalise legislative intent as expressed in the statute, and not to substitute or supply legislative omissions.
3. Rule 142 of the CGST Rules – Procedural or Substantive?
Rule 142(1)(a) of the CGST Rules provides that the Proper Officer shall serve a summary of notice electronically in FORM GST DRC-01 along with notices issued under, inter alia, Sections 122 to 125. Rule 142(5) similarly mandates uploading of summary of the order in FORM GST DRC-07.
While Rule 142 prescribes the form and manner of service of notice and order, a crucial question arises: does Rule 142 merely regulate procedure, or does it implicitly assume the existence of substantive power to issue a notice under Section 122?
In “Mahavir Enterprise vs. Assistant Commissioner of State Tax [2020] 117 taxmann.com 471 (Gujarat)/[2020] 80 GST 446 (Gujarat)/[2020] 39 GSTL 14 (Gujarat)[22-06-2020]”, the validity of Rule 142(1)(a), to the extent it says notice issued under section 122, was challenged before the Hon’ble Gujarat High Court. Hon’ble High Court held- “In our opinion, Rule 142(1)(a) of the Rules, 2017 is valid and is no manner conflict with any of the provisions of the Act.”
With due respect to the Hon’ble High Court, it ishumbly submitted that the issue perhaps requires reconsideration. While the Hon’ble Court has upheld the validity of Rule 142(1)(a) of the CGST Rules, 2017, the judgment does not appear to have examined in detail the absence of any independent adjudicatory mechanism or procedural framework under section 122 of the CGST Act itself. Section 127 has also not been brought before the Hon’ble Court. In the considered opinion of the author, Section 122 merely prescribes a penalty but does not contemplate issuance of a standalone show cause notice or identification of a Proper Officer. In this backdrop, the validity of Rule 142(1)(a), to the extent it treats section 122 as an independent proceeding section, remains open to debate.
4. Absence of Adjudicatory Machinery in Sections 122 to 125
A plain reading of Sections 122, 123, 124 and 125 reveals that these provisions:
- prescribe acts constituting contraventions;
- specify quantum or limits of penalty;
- do not designate any Proper Officer;
- do not provide for issuance of notice;
- do not prescribe any adjudicatory process.
In contrast, provisions such as Sections 62, 63, 64, 73, 74, 74A, 76, 129 and 130 explicitly contemplate determination, notice, hearing and adjudication.
This structural distinction strongly suggests that penalty provisions under Sections 122 to 125 are intended to operate as consequential liabilities, rather than independent charging-cum-adjudicatory provisions.
5. Section 127 – The Statutory Key
Section 127 of the CGST Act provides that where a Proper Officer is of the view that a person is liable to a penalty and such penalty is not covered under proceedings under Sections 62, 63, 64, 73, 74, 74A, 129 or 130, he may issue an order levying such penalty after granting an opportunity of being heard.
This provision is significant for two reasons:
1. It recognises that a penalty is generally incidental to other adjudicatory proceedings;
2. It provides the only express statutory authority for imposing a standalone penalty.
If Sections 122 to 125 were independently self-executing, Section 127 would be largely redundant.
6. Proceedings under section 122- Judicial Precedent:
In “Patanjali Ayurved Ltd. vs. Union of India [2025] 175 taxmann.com 22 (Allahabad)/[2025] 99 GSTL 7 (Allahabad)[29-05-2025]”:
It was contested that Section 122 of the CGST Act cannot be adjudicated by department and has to undergo prosecution as it nowhere refers to the word Proper Officer, and therefore, it has to be concluded that Section 122 is required to be read with Section 134 of the CGST Act and such penalty can only be imposed by way of a criminal trial. He has further referred to CBIC Circular No.3/3/2017-GST dated July 7, 2017*, wherein the Board has assigned the Proper Officer for adjudication in relation to various sections of the CGST Act, but has intentionally excluded the proceedings under Section 122 for prosecution by criminal courts. It was further submitted that Section 122 does not contain any reference to a Proper Officer and therefore it implies these proceedings can only be carried out in a criminal court. (* Originally it was mentioned as 2022)
Hon’ble Allahabad High Court rejected the above contentions on the following ground:
a. Powers under Section 74 of the CGST Act are undoubtedly exercised by a Proper Officer. Explanation 1(ii) to Section 74 of the CGST Act clearly indicates that it is the Proper Officer who initiates the proceedings under Sections 73 and 74 is also the person who is initiating the proceedings under Sections 122 and 125 as the explanation provides for proceedings against the persons liable to pay penalty under Sections 122 and 125 are deemed to be concluded when the proceedings against the main person charged under Sections 73 and 74 are concluded.
It may further be noted that Explanation 1(i) to Section 74 of the CGST Act categorically states that the expression “all proceedings in respect of the said notice” shall not include proceedings under Section 132 of the CGST Act. Inclusion of this particular sub-clause can only be interpreted to mean that the legislature’s intention was to exclude the criminal proceedings which dealt with punishment for offences. On the other hand, it is an indication that a penalty under Section 122 of the CGST Act would fall within the proceedings in respect of a notice issued under Section 74, if so desired by the Proper Officer. Sub-clause (ii) of the explanation further buttresses the argument of the respondent that conclusion of a proceedings under Sections 73 or 74 against the main person would conclude proceedings against all other persons liable to pay penalty under Section 122 of the CGST Act.
b. Furthermore, upon sifting through the various sections of the CGST Act and the Rules framed thereunder the picture becomes absolutely transparent. Section 83 of the CGST Act which categorically states that in certain events provisional attachment may be made by the revenue if the Commissioner is of the opinion that for the purpose of protecting the government revenue, he may by order in writing attach provisionally any property including bank accounts belonging to the taxable person or any person specified in Section 122(1A). Section 122(1A) provides that any person who retains the benefit of the 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. In light of the same, it is clear that the penalty imposed under Section 122 is being imposed by the department as provisional attachment can be done for the same which would not have been possible if Section 122 was to be tried by the criminal courts.
c. Rule 142(1)(a) of CGST Rules categorically states that a Proper Officer shall serve along with the notice issued under Sections 52/73/74/76/122/123/124/125/127/129 /130, a summary thereof electronically in form GST DRC-01. Furthermore, Rule 142(5) provides that the summary of the order under Sections 52/62/63/64/73/76/122/123/124 /125/127/129/130 shall be uploaded electronically in form GST DRC-07, specifying therein the amount of tax, interest and penalty, as the case may be, payable by the person concerned. The above clearly indicates the intention of the legislature that the Proper Officer is required to issue show cause and thereafter adjudicate and pass order under Section 122 of the CGST Act and nothing further remains in doubt. The arguments placed by Mr. Datar with regard to the above issue, though very eloquently presented, do not seem to hold any water when one looks at the entire scheme of the Act as indicated above. In light of the same, one may conclude that a Proper Officer/adjudicating officer has the power to adjudicate on the penalty provision provided under Section 122 of the CGST Act.
The author takes the opportunity to discuss whether the intent of a particular section can be determined by a rule. Government is not the legislature, and it frames the rules to make the Act operational, and while doing so, as it is a settled law, it cannot cross the limit of the Act. Needless to explain that it is settled beyond any dispute that if there is a conflict between a section and a rule, the former will prevail. Therefore, whether a rule indicates the intent of a statute or the section, in my further opinion, is subject to further scrutiny of the law.
7. Circular No. 254/11/2025-GST – A New Dimension
Though the Hon’ble High Court held- “a Proper Officer/adjudicating officer has the power to adjudicate on the penalty provision provided under Section 122 of the CGST Act.”, the issue remained unanswered as to who will be the Proper Officer for Section 122. After a few days of the said Judgment of Hon’ble Allahabad High Court, the Board issued a Circular No. 254/11/2025-GST dated 27 October 2025 assigning Proper Officers for proceedings under Section 122. The said circular further intensified the debate regarding the independent sustainability of proceedings under Section 122, which is a substantive penal provision and does not even refer to any Proper Officer.
This assignment by the circular raises a legitimate question regarding the jurisdictional basis and source of authority relied upon for proceedings initiated prior to such explicit assignment.
Though courts may invoke doctrines such as de facto authority to protect past actions, the issuance of such a circular arguably underscores the absence of explicit statutory designation earlier.
Notably, no similar assignment has yet been made for Sections 123, 124 and 125, further reinforcing the uncertainty surrounding independent penalty proceedings under these provisions.
8. Conclusion
The scheme of the CGST Act suggests that penalty provisions are largely intended to operate as consequential civil liabilities arising from substantive adjudicatory proceedings expressly provided under the Act. While judicial precedents have upheld departmental adjudication of penalties under Section 122 when read in conjunction with Sections 73 and 74, the question whether Sections 122 to 125 can independently sustain initiation and adjudication of penalty proceedings remains open to academic scrutiny, particularly as the provisions of Section 127 were not brought for consideration before the Hon’ble High Courts in the aforesaid cases.
In the considered opinion of the author, initiation of independent show cause notices solely under Section 122 of the CGST Act does not appear to be in conformity with the statutory scheme of the Act. Section 122 is confined to identifying specified offences and prescribing the quantum of penalty for such offences and does not, by itself, provide any mechanism for initiation of proceedings, issuance of notice, or adjudication. As expressly provided under Section 127 of the CGST Act, proceedings for levy of penalty are contemplated only in the course of proceedings under Sections 62, 63, 64, 73, 74, 74A, 127, 129 and 130. In the absence of initiation of proceedings under any of these substantive provisions, Section 122 cannot be treated as an independent charging-cum-adjudicatory provision.
Delegated legislation and administrative circulars, though valuable for procedural facilitation, cannot substitute legislative clarity in conferring substantive jurisdiction. Until such clarity is provided, either legislatively or judicially, caution must be exercised in treating Sections 122 to 125 as self-executing penalty provisions. The issue, therefore, merits deeper examination, and constructive debate among stakeholders may assist in bringing much-needed certainty to this important area of GST jurisprudence.
One further issue which warrants immediate legislative attention is the absence of any prescribed limitation period for initiation and completion of penal proceedings.
Disclaimer: The above views are compiled by the author based on the study of various legal provisions, judicial pronouncements, etc. There may be some other views also on this subject matter. So, the readers are requested to refer to relevant provisions of the statute, latest judicial pronouncements, circulars, clarifications, etc., of the respective law and obtain legal opinion before acting on the above write-up.
The author is a C.A. in practice at Guwahati, specialising in GST litigation. Can be reached at fca.opg@gmail.com 94350-24252
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