GST Dept. Can’t Deny 15% Penalty Settlement Benefit for Failure to Issue DRC-01A: Allahabad HC

The Allahabad High Court has ruled that the statutory benefit available under Section 74(5) of the Central Goods and Services Tax (CGST) Act, 2017 cannot be defeated merely because the tax authorities did not issue Form GST DRC-01A prior to serving a formal show cause notice. The bench of Justice Saumitra Dayal Singh and Justice Vivek Saran has observed that taxpayers remain entitled to settle disputes by paying tax, interest, and a reduced penalty of 15% if they raise the claim before filing their reply to the show cause notice. The petitioner challenged an adjudication order dated February 12, 2026, and the consequential DRC-07 demand order for FY 2019-20. However, instead of contesting the merits of the tax demand, the taxpayer confined the challenge to a narrower legal issue—whether the department's failure to issue Form GST DRC-01A deprived it of the statutory opportunity to settle the matter under Section 74(5) of the GST Act with payment of only 15% penalty. The taxpayer argued that since no DRC-01A was issued before the show cause notice in Form DRC-01, it lost the opportunity to avail the reduced penalty mechanism provided under Section 74(5), which allows payment of tax, interest, and a 15% penalty before issuance of a formal notice. The tax department defended the proceedings by relying on the amended wording of Rule 142(1A). It argued that after the 2020 amendment, the rule uses the expression "may" instead of "shall," making issuance of DRC-01A discretionary rather than mandatory. Consequently, the department contended that a taxpayer could claim the benefit of Section 74(5) only where the proper officer had chosen to issue DRC-01A. The department further argued that once the show cause notice had been issued and adjudication completed, the stage for availing Section 74(5) had passed. It also maintained that the taxpayer could still have settled the matter at the show cause notice stage by paying a higher penalty of 25%, thereby suffering no real prejudice. The court emphasized that delegated legislation must always be interpreted consistently with the parent statute. The Court noted that Section 74(5) creates a substantive statutory right permitting a taxpayer to settle disputes before issuance of a show cause notice by paying tax, interest, and only 15% penalty. According to the Court, the purpose of Rule 142(1A) is to operationalize that statutory scheme by communicating the proposed tax liability to the taxpayer before a formal show cause notice is issued. Without such communication, the taxpayer would often be unaware of the amount sought to be recovered and would be unable to meaningfully exercise the settlement option provided under Section 74(5). While acknowledging that Rule 142(1A) was amended and the word "shall" was replaced with "may," the Court held that the amendment could not be interpreted in a manner that nullifies the substantive statutory benefit contained in Section 74(5). The Bench observed that treating Rule 142(1A) as purely directory would create a conflict between the CGST Act and the Rules, which is impermissible in law. The Court therefore concluded that the provisions of Section 74(5) and Rule 142(1A) must be read harmoniously. It held that issuance of DRC-01A is mandatory to the extent necessary for preserving the taxpayer's statutory right to settle disputes at the pre-notice stage with only 15% penalty. The Court clarified that failure to issue DRC-01A does not automatically invalidate the subsequent show cause notice issued in Form DRC-01. However, the taxpayer remains entitled to claim the benefit of Section 74(5) up to the stage of filing a reply to the show cause notice. If such a claim is made, the adjudicating authority is obligated to permit settlement on payment of tax, interest, and 15% penalty. The Bench also observed that this statutory right would be considered waived only where the taxpayer contests the demand on merits without invoking the settlement mechanism under Section 74(5). The Court found that the petitioner had specifically sought the benefit of Section 74(5) before the adjudicating authority. Consequently, the department ought to have allowed settlement at the reduced penalty rate instead of proceeding with the higher penalty demand. The Court allowed the writ petition and directed that if the taxpayer pays the disputed tax, applicable interest, and 15% penalty within one month, treating the matter as if a DRC-01A had been issued on the date of the show cause notice, the adjudication order would stand satisfied. The authorities were also given liberty to pass consequential rectification orders for statistical purposes. Case Details Case Title: M/S World Phone Internet Versus Superintendent, Range And Another Citation: JURISHOUR-1540-HC-2026(ALL) Case No.: WRIT TAX No. - 2707 of 2026 Date: 25/06/2026 Counsel For Appellant: Harsh Vardhan Gupta Counsel For Respondent: Dhananjay Awasthi Click Here To Read Order Read More: Penalty U/s 270A Can’t Be Levied on Estimated Bogus Purchase Addition: ITAT

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