Proceedings deemed closed upon payment of 15% penalty when tax & interest paid pre-SCN under Section 74

Issue

Whether a Show Cause Notice (SCN) issued under Section 74(1) and the subsequent demand order are sustainable when the assessee had already discharged the tax and interest liability before the issuance of the notice, and if the proceedings should be deemed concluded upon payment of the reduced 15% penalty under Section 74(5).

Facts

Voluntary Payment: The petitioner paid the full tax amount along with interest before the issuance of the Show Cause Notice (SCN) and provided written intimation of the same to the department.
Department’s Action: Despite this pre-notice payment, the Department issued a Show Cause Notice under Section 74(1) (invoking fraud/suppression) and subsequently passed an Order-in-Original and raised a demand in Form DRC-07, effectively ignoring the closure benefit available for early payment.
Petitioner’s Plea: The petitioner argued that the substantive liability having been discharged before the notice, the proceedings should have been closed under the beneficial provisions of Section 74(5) rather than proceeding to adjudication.

Decision

Section 74(5) vs 74(8): The Delhi High Court distinguished between the two closure mechanisms:
- Section 74(5): mandates closure if Tax + Interest + 15% Penalty is paid before the service of notice.
- Section 74(8): allows deemed conclusion if Tax + Interest + 25% Penalty is paid within 30 days of the issuance of SCN.
Right to Reduced Penalty: Since the petitioner had admittedly paid the tax and interest before the SCN, they were statutorily entitled to the benefit of Section 74(5). The only remaining dispute was regarding the penalty quantum.
Relief: The Court held that forcing the petitioner to file a statutory appeal for this clear legal position would cause unnecessary delay.
Ruling: It was held that upon payment of the 15% penalty (as per Section 74(5)), the SCN would be treated as closed. Consequently, the impugned Order-in-Original and the demand in Form DRC-07 were quashed.

Key Takeaways

Timing Saves Money: In cases involving suppression or fraud (Section 74), the penalty structure is tiered based on when you pay:

15%: Before SCN.

25%: Within 30 days of SCN.

50%: Within 30 days of Order.

100%: If contesting and losing.

Statutory Closure: If a taxpayer satisfies the conditions of Section 74(5) (Tax + Interest + 15% Penalty paid pre-notice), the Proper Officer is legally barred from issuing a notice for the same grounds.