What three court rulings — including a Supreme Court dismissal — mean for every CFO, Director Finance, and Independent Director in India.

 

The Question That Haunts Every Finance Leader

A Show Cause Notice lands on your desk. Not on the company's desk — on yours. Personally. With your name on it. Alleging that you — an individual — are liable to pay a penalty equivalent to ₹3,731 crore because the company you worked for (or advised, or represented) allegedly misused Input Tax Credit.

This is not a hypothetical. This happened. And it has now been firmly decided by the courts.

The question every CFO, Director Finance, AGM (Accounts), Independent Director, and tax head must understand is this: Does Section 122(1A) of the CGST Act, 2017 apply to you as an individual?

The answer — settled by the Bombay High Court and confirmed by the Supreme Court — is an emphatic No.

 

Understanding Section 122(1A): The "Reach-Beyond" Penalty Provision

What Was the Problem It Was Trying to Solve?

GST authorities recognised a dangerous pattern: the primary offender (the registered company) would be penalised, but the real mastermind — a director, a partner, a third-party beneficiary — would walk free. Section 122(1A) was introduced to close this gap.

The intent was clear: penalise the actual beneficiary, not just the registered entity.

The Language of the Provision

Section 122(1A) uses the phrase "any person" — language that on its face appears wide enough to capture anyone involved in a fraudulent GST transaction.

It provides that if any person —

• causes the commission of a specified offence, or
• retains the benefit of a specified offence,

— that person shall be liable to a penalty equal to 100% of the tax evaded or the ITC availed or passed on.

This sounds sweeping. And GST authorities used it aggressively.

 

The Four Offences That Trigger Section 122(1A)

All four relate to fake invoicing and fraudulent ITC — the core mischief that Section 122(1A) targets.

 

Section 122(1) vs Section 122(1A): Know the Difference

The confusion between the two sub-sections is common — and consequential.

 

The Landmark Case: Shantanu Sanjay Hundekari

The Facts

• MLIPL was appointed as the Steamer Agent of Maersk-Denmark, a Danish shipping company.
• Mr Shantanu Sanjay Hundekari was the Taxation Manager of MLIPL. He held a power of attorney to represent Maersk before tax authorities.
• GST authorities alleged that ₹1,561 crore of ITC was wrongly utilised by Maersk.
• A Show Cause Notice was issued to Hundekari personally — demanding a penalty of ₹3,731 crore — under Section 122(1A) read with Section 137 of the CGST Act.

The allegation: that he, as an individual, had caused or retained the benefit of a fraudulent transaction.

What the Bombay High Court Held

The Division Bench of the Bombay High Court, in Shantanu Sanjay Hundekari vs Union of India [WP(L) Nos. 30198-30241/2023, decided on 28 March 2024], delivered a ruling that has now become foundational law:

An employee of another company does not fall within the purview of Section 122(1A) of the CGST Act. He was neither a "taxable person" nor a "registered person" so as to retain any benefit as the provision ordains.

Two critical holdings emerged:

1. On Section 122(1A): The petitioner, being a mere employee of MLIPL, could not be a "taxable person" or "registered person" under the CGST Act. Since he could not retain the ITC in the manner the provision contemplates, Section 122(1A) could not be invoked against him. The SCN was quashed.
2. On Section 137: Proceedings under Section 137 (offences by companies) cannot be answered in a demand-cum-SCN issued under Section 74. Section 137 falls under Chapter XIX (Offences and Penalties) and involves criminal prosecution — it cannot be mixed with a demand notice under Section 74.

 

The Supreme Court's Seal of Approval

The Revenue was not satisfied. It challenged the Bombay High Court's ruling before the Supreme Court of India.

In Union of India vs Shantanu Sanjay Hundekari [SLP (Civil) Diary No. 55427/2024, decided on 24 January 2025], a bench of Justice J.B. Pardiwala and Justice R. Mahadevan dismissed the SLP.

The Supreme Court found no reason to interfere with the High Court's order.

With this dismissal, the legal position became settled and binding:

• An individual who is not a taxable/registered person under the CGST Act cannot be penalised under Section 122(1A).
• Revenue's attempt to stretch this provision to employees and individuals was judicially rejected at the highest level.

 

The Fresh Affirmation: Neil Karani Case (June 2026)

The issue has now come up again — this time involving an Independent Director.

In Neil Karani vs Union of India [WP No. 989/2026, Bombay High Court, 9 June 2026], the petitioner was an Independent Director of a company. A penalty was sought against him personally under Section 122(1A).

The Bombay High Court —

• Noted the binding precedent of Shantanu Sanjay Hundekari.
• Observed that the Supreme Court had refused to interfere with that ruling.
• Found that a strong prima facie case was made out in favour of the petitioner.
• Granted ad-interim protection: no coercive action shall be taken against the petitioner in relation to the penalty in question until further order.

The court's reasoning was direct: an individual — including an Independent Director — does not come within the definition of "any person" under Section 122(1A).

 

Who Is — and Who Is Not — Covered Under Section 122(1A)?

 

Key Procedural Points for Practitioners

• Section 122(1A) penalty does not require a prior determination of tax under Sections 73 or 74 (Allahabad HC in Patanjali Ayurvet Ltd., May 2025).
• If penalty is already imposed under Section 74 for fraudulent ITC utilisation, no fresh penalty for the same act can be imposed under Section 122 (Section 75(13)).
• Section 122(1A) deals with monetary penalties (civil liability). Criminal prosecution for similar acts is covered under Section 132 — a separate proceeding.
• A Show Cause Notice under Section 74 cannot also invoke Section 137 proceedings in the same notice. These are distinct in nature and jurisdiction.

 

What Should Finance Leaders Do When They Receive Such a Notice?

If you receive a personal Show Cause Notice under Section 122(1A):

• Do not respond on merits before taking legal counsel. The response you give sets the factual narrative.
• Establish your status — are you a registered taxable person under the CGST Act? If not, that is your primary defence.
• Cite the binding precedents — Shantanu Sanjay Hundekari (Bombay HC) and the Supreme Court's dismissal of the SLP are directly on point.
• Challenge jurisdiction immediately — if you are an employee, agent, or independent director, the notice itself lacks jurisdictional competence.
• Seek ad-interim relief — the courts have consistently granted protection in such cases at the threshold stage itself.

 

Conclusion

These are not merely legal arguments. They are hard-won truths carved out of real courtrooms, real careers placed under threat, and real injustice corrected by judges who read the law with precision.

The tax laws of this country are designed to penalise the guilty — not to intimidate the responsible. Section 122(1A) was created to reach those who orchestrate fraud from the shadows, hiding behind corporate structures. It was never designed — and has now been clearly held not to reach — those who discharge their duties as employees, advisors, or independent directors of a company.

Know this, and know it well: a Show Cause Notice is not a conviction. Receiving one does not mean the law is against you. It may mean only that the authority did not read the law carefully enough. Your duty, at that moment, is not panic — it is precision.

If you are a CFO, a Director Finance, or an Independent Director, you occupy a position of trust — not of liability for every act of the legal entity you serve. The corporate veil exists for a reason. Courts have repeatedly upheld it. And when authorities have overreached, the judiciary has stepped in — and stepped in firmly.

Protect your position — legally and factually. Ensure that your personal role is clearly documented: your scope of authority, the decisions you made or did not make, and the information you had at the time. The best defence is built long before the notice arrives.

And if a notice does arrive — do not attempt to navigate it alone. The difference between a quashed notice and a coercive recovery action is often just the quality of the first response. Engage counsel who understands GST litigation, not merely GST compliance.

The courts of India have spoken. Section 122(1A) has a defined reach. That reach does not extend to you simply because you served faithfully in a company that is now under scrutiny.

Sleep without fear. But work without carelessness. That balance — steady, informed, and principled — is the mark of every truly great finance professional.