Pre-Consultation Notice (DRC-01A) is Mandatory; Final Order Stayed

Issue

Whether the issuance of a Show Cause Notice (SCN) under Section 74 (involving fraud/suppression) is valid if the Department fails to first issue a pre-consultation notice in Form GST DRC-01A as required under Rule 142(1A). The core dispute is whether skipping this step deprives the taxpayer of the statutory right to settle the case with a reduced penalty.

Facts

The Action: The GST Department issued a show-cause-cum-demand notice to the petitioners alleging tax evasion under Section 74.
The Violation: The petitioners argued that the Department skipped a mandatory procedural step: they did not issue Form GST DRC-01A (Part A) before issuing the formal SCN.
Petitioner’s Argument:
- Section 74(5) of the CGST Act grants a substantive right to pay the tax with a reduced penalty (15%) before the service of the formal notice.
- Rule 142(1A) provides the mechanism for this via Form DRC-01A.
- Failure to issue DRC-01A effectively denies the taxpayer this opportunity for a reduced penalty settlement.
The Prayer: The petitioners sought to restrain the Department from passing a final adjudication order while the High Court decided on the validity of the SCN.

Decision

Prima Facie Case: The High Court found merit in the petitioner’s submission regarding the non-issuance of the pre-consultation notice.
Interim Relief: The Court granted ad-interim relief:
- The petitioners must continue to cooperate with the adjudication process (filing replies, attending hearings).
- However, the Respondents (Department) are restrained from passing the final order during the pendency of the Writ Petition.
Ruling: The adjudication proceedings can continue, but no final demand can be raised until the court decides on the mandatory nature of DRC-01A.

Key Takeaways

DRC-01A is a Critical Defense: If you receive a direct SCN under Section 74 without a prior DRC-01A, you can challenge the validity of the proceedings. The argument is that you were denied the statutory right to settle with a 15% penalty (Section 74(5)) instead of facing the 50% or 100% penalty applicable after the SCN is issued.

“May” vs. “Shall”: Although Rule 142(1A) was amended to make the pre-notice discretionary (“may”), courts often interpret it as mandatory to protect the taxpayer’s substantive rights under Section 74(5).

HIGH COURT OF GUJARAT

Luxor Hospital

Union of India^*

A.S. Supehia and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 15009 of 2025

NOVEMBER 20, 2025

Abhay Y Desai for the Petitioner. Nidhi T. Vyas for the Respondent.

ORDER

A.S. Supehia, J. – Heard learned advocate Mr. Abhay Desai for the petitioners and learned Assistant Government Pleader Ms. Nidhi T. Vyas for the respondents.

2. Learned advocate Mr. Abhay Desai submitted that the impugned show-cause cum demand notice dated 27.05.2024 was issued in contrary to the provision of Section 74(5) of the CGST/GGST Act, 2017 (for short “the Act”), as the respondent authorities have not issued any notice in Form GST DRC-01A as contemplated under Rule 42(1A) of the CGST/GGST Rules, 2017.

3. It was submitted that though the requirement of issuance of the pre-consultation notice in Form-DRC-01A is not compulsory as per the amendment brought on the statute with effect from 15^th October, 2020, the word “may” is required to be read as “shall” otherwise, Subsection (5) of Section 74 of the Act would become redundant.

4. Considering the above submissions, issue Notice returnable on 27.11.2025. By way of ad-interim relief, the petitioners shall continue to cooperate in the adjudication process of the impugned show-cause notice, however the respondents shall not pass the final order during the pendency of this petition.

5. Direct service through e-mail is permitted.