HC Restores Benefit of Reduced Penalty Under GST Section 74:

The Allahabad High Court allowed the writ petition filed by M/s World Phone Internet, holding that the statutory benefit of pre-show cause notice communication under Rule 142(1A) of the CGST Rules, read with Section 74(5) of the CGST Act, cannot be denied merely on account of non-issuance of Form GST DRC-01A. A Division Bench comprising Justice Saumitra Dayal Singh and Justice Vivek Saran further held that the scheme under Section 74(5) is mandatory to the extent it confers a right on the assessee to settle tax liability at a 15% penalty prior to formal adjudication under Form GST DRC-01.

The petitioner had challenged the adjudication order dated 12.02.2026 and the consequential DRC-07 for FY 2019-20, primarily contending that no opportunity was granted for availing the statutory pre-notice benefit under Section 74(5) of the Act. It was submitted that in the absence of the issuance of DRC-01A, the petitioner was deprived of its right to opt for payment of tax, interest, and reduced penalty at 15% before the initiation of formal adjudication proceedings.

The Revenue, however, argued that Rule 142(1A) uses the word “may” and therefore issuance of DRC-01A is discretionary and not mandatory. It was further contended that since the petitioner had already participated in the adjudication proceedings after issuance of the show cause notice in DRC-01 and had contested the liability, the benefit under Section 74(5) could no longer be claimed. Reliance was also placed on the amended Rule 142(1A) and Notification No. 79/2020 to argue that the statutory scheme is directory in nature.

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The Court examined the interplay between Section 74(5) of the CGST Act and Rule 142(1A) of the CGST Rules and held that statutory provisions must prevail over delegated legislation. It was observed that Section 74(5) forms an integral part of the statutory scheme enabling voluntary settlement of tax liability before issuance of a formal show cause notice and adjudication, along with a reduced penalty at 15%. “To interpret Rule 142(1A) as directory would be to create a conflict between the principal legislation and delegated legislation, which is impermissible in law.”

At the same time, the Court observed that the non-issuance of DRC-01A does not render the subsequent show cause notice under DRC-01 without jurisdiction. However, it held that the assessee’s right under Section 74(5) survives up to the stage of filing a reply to the show-cause notice, unless expressly waived by contesting the liability.

The court held that once the petitioner had raised the plea for availing the benefit of Section 74(5), the adjudicating authority was bound to consider the same and permit settlement at a 15% penalty along with tax and interest. Denial of such benefit, in the facts of the case, was found to be contrary to the statutory scheme.

Thus, the writ petition was partly allowed. The Court directed that if the petitioner pays the disputed tax along with interest and 15% penalty within one month, the adjudication order shall stand satisfied and the proceedings shall be treated as concluded in terms of Section 74(5) of the Act, with liberty to the authorities to pass consequential rectification orders for statistical purposes.

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