Circular Trading, Fake ITC: Penalty Under Section 122 CGST Act Compliance

The Input Tax Credit, Goods and Services Tax regime has been conceptualized as a technology-driven system built on seamless Input Tax Credit and invoice-based transparency, and the success of this framework depends largely on the genuineness of transactions reflected in GST returns, invoices, and e-way bill systems. The recent judgment of the Madras High Court in TVL. Sam Enterprises & Ors. v. Commercial Tax Officer reported in 2026-VIL-486-MAD dated 18.02.2026 assumes considerable significance in this context, as it examines the scope of penalties under Sections 122(1)(ii) and 122(1)(vii) of the CGST Act and revisits the constitutional issue of the extent to which the writ jurisdiction should interfere where disputed factual findings and statutory appellate remedies coexist.

Key Facts

• The Madras High Court judgment in TVL. Sam Enterprises & Ors. v. Commercial Tax Officer reported in 2026-VIL-486-MAD dated 18.02.2026
• Sections 122(1)(ii) and 122(1)(vii) of the CGST Act
• The GST penalty provisions are governed by specific legislative language
• The expression “whichever is higher” in Section 122(1) of the CGST Act demonstrates legislative intent to link the penalty directly to the magnitude of tax evasion or wrongful availment of ITC
• The judgment distinguishes between two categories of penalty provisions: those that prescribe a maximum limit and leave substantial discretion with the authority, and those that provide a quantified formula linked to the disputed tax or ITC
• The Court’s interpretation of Section 122(1) of the CGST Act highlights the distinction between these two categories of penalty provisions
• The GST enactments provide a comprehensive hierarchy of remedies under Sections 107, 112, and 117 of the CGST Act
• The judgment reinforces the constitutional principle that writ courts exercising jurisdiction under Article 226 are not intended to serve as substitute appellate authorities in matters involving detailed factual adjudication

Statutory Context & Tax Analysis

The GST regime is built on the principles of input tax credit and invoice-based transparency, and the success of this framework depends on the genuineness of transactions reflected in GST returns, invoices, and e-way bill systems. The CGST Act provides for penalties under Sections 122(1)(ii) and 122(1)(vii) for wrongful availment of input tax credit or tax evasion. The expression “whichever is higher” in Section 122(1) of the CGST Act demonstrates legislative intent to link the penalty directly to the magnitude of tax evasion or wrongful availment of ITC. The GST penalty provisions are governed by specific legislative language, and the Court’s interpretation of Section 122(1) of the CGST Act highlights the distinction between two categories of penalty provisions. The GST enactments provide a comprehensive hierarchy of remedies under Sections 107, 112, and 117 of the CGST Act, and the judgment reinforces the constitutional principle that writ courts exercising jurisdiction under Article 226 are not intended to serve as substitute appellate authorities in matters involving detailed factual adjudication.

Section 16 of the CGST Act provides for the eligibility and conditions for taking input tax credit, and Section 17 provides for the apportionment of credit and blocked credits. The GST regime also provides for the concept of invoice-based transparency, where the supplier is required to issue an invoice for every supply of goods or services, and the recipient is required to verify the invoice and pay the tax accordingly. The e-way bill system is also an integral part of the GST regime, where the supplier is required to generate an e-way bill for every movement of goods, and the recipient is required to verify the e-way bill and accept the goods accordingly.

The judgment in TVL. Sam Enterprises & Ors. v. Commercial Tax Officer reported in 2026-VIL-486-MAD dated 18.02.2026 is significant in this context, as it examines the scope of penalties under Sections 122(1)(ii) and 122(1)(vii) of the CGST Act and revisits the constitutional issue of the extent to which the writ jurisdiction should interfere where disputed factual findings and statutory appellate remedies coexist. The Court’s interpretation of Section 122(1) of the CGST Act highlights the distinction between two categories of penalty provisions and reinforces the constitutional principle that writ courts exercising jurisdiction under Article 226 are not intended to serve as substitute appellate authorities in matters involving detailed factual adjudication.

Client Impact & Compliance Procedure

The judgment in TVL. Sam Enterprises & Ors. v. Commercial Tax Officer reported in 2026-VIL

Reference: Click here to view the official source