Who May Issue a Section 122 Penalty Notice? —The Supreme Court Has Stayed the Allahabad Answer

Most GST notices that reach a business in Uttar Pradesh demand tax first and a penalty as a consequence. A notice under Section 122 is different. It demands nothing but penalty — and the penalty can be as large as the entire credit or the entire tax the department says was wrongly taken. When such a notice arrives in Form GST DRC-01, the argument that most often decides the first round is not about the credit at all. It is about the line at the bottom of the notice: the designation of the officer who signed it. That question is now travelling from the Lucknow Bench of the Allahabad High Court to the Supreme Court.

What a Section 122 notice actually is

Section 122(1) lists twenty-one offences. The two that appear most often in a penalty-only notice are clause (ii) — a person who "issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder" — and clause (vii) — one who "takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder". The sting is in the closing words of the sub-section: the person "shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded … or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher".

That is a penalty standing on its own feet: there need be no determination of tax under Section 73, 74 or 74A behind it. The machinery comes from Section 127, which permits the proper officer, where he is of the view that a person is liable to a penalty not covered by the assessment, determination, detention or confiscation proceedings that the section lists, to levy it by order after a reasonable opportunity of being heard. Everything therefore turns on who the "proper officer" is — and there the Act is circular. Section 2(91) defines him as the Commissioner, or the officer whom the Commissioner assigns that function. Until someone is assigned, nobody is the proper officer.

The gap the Board closed in October 2025

For more than eight years, nobody had been. Circular No. 254/11/2025-GST dated 27 October 2025 (F. No. CBIC-20010/80/2025-GST) says so in terms: it records that "no proper officer has been assigned" in respect of Section 74A, Section 75(2), Section 122 and Rule 142(1A) of the CGST Rules, and then assigns them. The circular designates the Superintendent, the Deputy or Assistant Commissioner and the Additional or Joint Commissioner of Central Tax as proper officers for Section 122, and — because penalty proceedings had to be distributed sensibly — fixes monetary limits for each rank.

Two things about that circular are easy to miss. It is addressed to the Principal Chief Commissioners and Chief Commissioners, and every officer it names is an officer of Central Tax. And the limits are pegged to the penalty proposed — not to turnover, and not to any tax figure.

Why Uttar Pradesh is a separate question

A notice issued by a State tax officer under the Uttar Pradesh GST Act, 2017 does not draw its authority from a Board circular meant for central formations; it draws it from the State Act and the State's own assignment orders. So a taxpayer served by a Deputy Commissioner of State Tax with a penalty above ₹1 crore has an obvious argument — the Board has placed that figure with an Additional or Joint Commissioner — and the State an equally obvious answer, that the Board was speaking only to its own officers.

That is precisely the contest in M/s Nageen Traders and Molding India Pvt. Ltd. v. State of U.P., Writ Tax Nos. 989, 991 and 992 of 2026, decided by the Lucknow Bench on 10 August 2026 (Saraf and Chaudhary, JJ.). A Deputy Commissioner of State Tax had issued a show cause notice dated 19 November 2025 in Form GST DRC-01 under Section 122(1)(ii) for FY 2023-24, proposing a penalty running past ₹1 crore, and had followed it with a penalty order dated 24 June 2026 in Form GST DRC-07 under Sections 122(1)(ii) and 122(1)(vii). The petitioner relied on Circular No. 254/11/2025-GST. The State relied on UPGST circulars dated 11 December 2018 and 10 May 2022, and on the proposition that the proper officer for Section 122 is the officer contemplated by Section 127.

The High Court accepted the State's reading: Section 127 empowers the proper officer to levy a penalty that falls outside the listed proceedings, and that officer is competent to issue a notice under Section 122. On the facts before it, it found no want of jurisdiction in the Deputy Commissioner.

The part of the judgment with the widest reach

The Court did not stop at jurisdiction. It held that the petitioner, having appeared before the officer and contested the notice on its merits, and having raised the objection of want of jurisdiction only after the penalty order went against him, was hit by the doctrine of election and ought to be relegated to the statutory appellate remedy — with the benefit of Section 14 of the Limitation Act, 1963 for the period the writ petition was pending.

A jurisdictional objection kept in reserve is a jurisdictional objection half spent. The time to say that the officer had no power is the first reply, not the appeal after the order.

What the Supreme Court has done — and what it has not

On 7 September 2026, in SLP (C) Nos. 30711–30713 of 2026, a Bench of Narasimha and Aradhe, JJ. issued notice to the State of Uttar Pradesh and the other respondents and stayed the operation of the High Court's judgment, making the notice returnable on 9 October 2026.

It is worth being precise about that. A stay suspends the operation of the judgment; it is not a finding that the judgment was wrong, and it invalidates nobody else's Section 122 notice. What it establishes is that the proper-officer question under the State Act is open at the highest level, and that a taxpayer who takes the point today is not taking a frivolous one. It also means the position may move — this is a matter to re-check, not to assume.

What to do with a Section 122 notice in hand

None of this turns a weak case into a strong one. But a Section 122 penalty is not a percentage of the tax — it can equal the whole of the credit in issue — and on a demand of that size, the question of who was empowered to raise it deserves to be asked at the outset rather than discovered afterwards. Where the notice is a composite one carrying both tax and penalty, a different question arises about which provision it has been issued under.