Supreme Court Grants Relief in GST Penalty Case - Fake Tax Credit Claims Need Proper Appeal Process

The Hon'ble Supreme Court of India in Mukesh Kumar Garg v. Union of India (SLP TO APPEAL (C) NO(S). 18178 of 2025) decided on August 4, 2025 held that where penalty was imposed on petitioner for incorporating fake firms and availing fake ITC without supply of goods, writ petition could not be entertained as writ court could not adjudicate upon or ascertain factual aspects pertaining to what was role played by petitioner, whether penalty imposed was justified or not, whether same required to be reduced proportionately in terms of invoices raised by Petitioner. Recovery stayed subject to 25 per cent deposit.

Facts of the Case

The Petitioner was involved in a case where the Department conducted a detailed investigation and a show cause notice was issued to the Petitioner alleging that the Petitioner along with some other persons incorporated 28 firms and in collusion with other traders availed ITC without supply of goods. Thereafter the impugned order was passed imposing penalty on the Petitioner.

The case of the Petitioner was that the Petitioner was not authorized signatory and not a taxable person and hence no penalty could be imposed and at best penalty could be imposed to extent of Rs. 25000 under section 122(3) of the Central Goods and Services Tax Act, 2017.

The High Court held that when fraudulent transactions are entered into, a factual analysis would be required to be undertaken and same cannot be decided in writ jurisdiction. The Court, in exercise of its writ jurisdiction, could not adjudicate upon or ascertain factual aspects pertaining to what was role played by Petitioner, whether penalty imposed was justified or not, whether same required to be reduced proportionately in terms of invoices raised by Petitioner under his firm or whether penalty was liable to be imposed under Section 122(1) and Section 122(3) of CGST Act. Since appellate remedy under Section 107 was available, petition could not be entertained. The Petitioner could avail appellate remedy under Section 107. The SLP was filed against this order of the High Court.

Issue

Whether penalty under Section 122(1) of CGST Act can be imposed on a non-taxable person and whether provisions of Section 122(1A) which came into force w.e.f. 01.01.2021 can be applied retrospectively for Assessment Years 2017-2020.

Held by the Court

The Hon'ble Supreme Court of India in Mukesh Kumar Garg v. Union of India (SLP TO APPEAL (C) NO(S). 18178 of 2025) decided on August 4, 2025 held that:

The Court noted that two primary contentions have been raised. First, Section 122(1) of the Central Goods and Services Tax Act, 2017 would not be applicable to the petitioner as he is a non-taxable person. Secondly, the provisions of Section 122 (1A) of the Act which came into force w.e.f. 01.01.2021 cannot be applied retrospectively for the Assessment Years 2017-2020.

The Court held that leave is granted. The Court further held that in the meanwhile, there shall be stay on the recovery of the amount directed to be deposited provided the appellant deposits 25% of the demand before the GST Department either through Electronic Ledger or through Cash Ledger.

Relevant Sections

• Section 122(1) of the Central Goods and Services Tax Act, 2017:

Relating to penalty for certain offences

• Section 122(1A) of the Central Goods and Services Tax Act, 2017:

Provision which came into force w.e.f. 01.01.2021

• Section 122(3) of the Central Goods and Services Tax Act, 2017:

Relating to penalty provisions

• Section 107 of the Central Goods and Services Tax Act, 2017:

Relating to appeal to Appellate Authority

• Article 226 of the Constitution of India, 1950:

Empowering High Courts to issue writs

Pari Materia / Cases Referred

1. Mukesh Kumar Garg v. Union of India (Delhi High Court) - High Court held that where fraudulent transactions are entered into, factual analysis would be required and same cannot be decided in writ jurisdiction.