Introduction
The scheme of appeals under the Central Goods and Services Tax Act, 2017 (“CGST Act”) is primarily governed by Sections 107 and 112, which prescribe the appellate remedies before the First Appellate Authority and the Appellate Tribunal respectively. A peculiar controversy, however, arises in cases involving penalty only proceedings, particularly those initiated under Section 122 of the CGST Act, wherein no tax demand is involved, and the proceedings culminate merely in imposition of penalty.
The issue assumes significance because Sections 107(6) and 112(8) mandate payment of a statutory pre-deposit for maintainability of appeals. While the legislative intent behind such provisions is to secure the disputed tax revenue during pendency of appellate proceedings, the applicability of pre-deposit requirements in cases where the dispute pertains solely to penalty has become a matter of interpretational debate.
Statutory Provision:
Section 107. Appeals to Appellate Authority.
(6) No appeal shall be filed under sub-section (1), unless the appellant has paid-
(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and
(b) a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, [subject to a maximum of [twenty] crore rupees,] in relation to which the appeal has been filed:
1[Provided that in case of any order demanding penalty without involving demand of any tax, no appeal shall be filed against such order unless a sum equal to ten percent of the said penalty has been paid by the appellant.]
Section 112. Appeals to Appellate Tribunal.
(8) No appeal shall be filed under sub-section (1), unless the appellant has paid
(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him, and
(b) a sum equal to [ten per cent] of the remaining amount of tax in dispute, in addition to the amount paid under sub-section (6) of section 107, arising from the said order, [subject to a maximum of [twenty crore rupees],] in relation to which the appeal has been filed:
2[Provided that in case of any order demanding penalty without involving demand of any tax, no appeal shall be filed against such order unless a sum equal to ten per cent of the said penalty, in addition to the amount payable under the proviso to sub-section (6) of section 107 has been paid by the appellant]
Burder on Taxpayer:
The issue becomes more pronounced in cases involving penalty-only proceedings under Section 122 of the CGST Act, where the department frequently invokes multiple sub-sections simultaneously, thereby leading to exorbitant and often overlapping penalties upon the taxpayer. In several instances, penalties are imposed mechanically under different clauses for the very same transaction or alleged contravention, resulting in an excessive financial burden even before the matter attains finality.
In such circumstances, insistence upon mandatory pre-deposit as a condition precedent for availing the statutory remedy of appeal substantially prejudices the taxpayer’s right to seek fair adjudication. The appellate remedy, though statutorily provided, becomes illusory when the assessee is compelled to deposit substantial amounts merely to challenge penalties whose legality itself is under dispute. This assumes greater significance in penalty proceedings where no determination of tax liability exists, and the dispute pertains solely to punitive consequences.
Unlike tax demands, which are compensatory in nature and intended to secure government revenue, penalties under Section 122 are quasi-criminal and deterrent in character. Therefore, equating penalty proceedings with tax recovery for the purpose of pre-deposit defeats the very object of fair appellate review. The financial hardship becomes even more severe where the department invokes numerous clauses of Section 122 in a single proceeding, thereby multiplying the penal exposure and effectively discouraging taxpayers from exercising their appellate rights.
Whether the Finance Act, 2025 Amendment Can Apply Retrospectively?
A more fundamental question arising from the amendment introduced by the Finance Act, 2025 is whether the newly inserted requirement of pre-deposit in penalty-only proceedings can be applied to disputes that originated before 1 October 2025.
The proviso inserted in Section 107(6) with effect from 01.10.2025 provides that where an order imposes only penalty without involving any tax demand, no appeal shall be maintainable unless ten per cent of the penalty amount is deposited by the appellant. While the amendment seeks to fill the legislative gap that previously existed in respect of penalty-only proceedings, its applicability to pending disputes and pre-existing causes of action remains contentious.
The crucial date for determining the applicability of appellate conditions is not merely the date of adjudication order but the date on which the proceedings commenced through issuance of the Show Cause Notice.
When a Show Cause Notice is issued, the taxpayer acquires a vested right to challenge any eventual adverse order through the appellate mechanism existing under law at that point in time. If, on the date of issuance of the Show Cause Notice, the statute did not require any pre-deposit in penalty-only disputes, a subsequent amendment introducing such a requirement cannot ordinarily be imposed upon that taxpayer.
To hold otherwise would result in altering the legal consequences of proceedings that had already commenced under a different statutory regime.
Judicial Pronouncements:
>Anukul Bindal v. Union of India [Writ Tax No. 2096 of 2026 Hon’ble Allahabad High Court]
The petitioner contended that his vested right of appeal arose from proceedings initiated prior to the enforcement of the amendment requiring pre-deposit of ten per cent of the penalty amount. Relying upon the celebrated decision of the Supreme Court in Hoosein Kasam Dada (India) Ltd. v. State of Madhya Pradesh, it was argued that a vested right of appeal cannot be impaired by a subsequent legislative amendment.
The Allahabad High Court found the contention worthy of serious consideration and granted interim protection by directing that the appeal be entertained without insisting upon the ten per cent pre-deposit.
> M/s M.M. Traders v. State of U.P. [ SPECIAL LEAVE PETITION (CIVIL) Diary No(s). 28833/2026 Hon’ble Supreme Court of India]
In this case, the appealable order was passed prior to the amendment introducing mandatory pre-deposit in penalty-only cases, whereas the amendment itself came into force on 1 October 2025. The petitioner argued that the newly inserted condition could not retrospectively burden an already vested appellate right.
Recognizing the importance of the issue, the Supreme Court issued notice and, pending adjudication, permitted the assessee to file and pursue the appeal without any pre-deposit requirement, subject to the outcome of the Special Leave Petition.
Conclusion:
The requirement of pre-deposit is intended to balance the interests of revenue protection with the taxpayer’s right to appellate review. However, when applied to penalty-only proceedings under Section 122, particularly in cases where multiple penal provisions are invoked simultaneously, the requirement may transform from a procedural safeguard into a substantial barrier to justice. The recent judicial pronouncements in Barjinder Singh Kohli, Anukul Bindal, and M.M. Traders have reignited the debate on whether taxpayers can be compelled to furnish pre-deposit in respect of penalties when the statutory provisions, as they originally stood, contemplated pre-deposit only in relation to “tax in dispute”. The issue goes to the heart of appellate jurisprudence under GST and raises important questions concerning vested rights, statutory interpretation, and access to effective remedies.
Notes:
1 Substituted (with effect from a date yet to be notified) by Section 129 of the Finance Act, 2025
2 Substituted (with effect from a date yet to be notified) by Section 129 of the Finance Act, 2025
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