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) (involving fraud/suppression) and the subsequent demand order are sustainable when the assessee had already deposited the tax and interest before the issuance of the SCN, and whether the proceedings should be deemed concluded upon payment of the applicable reduced penalty.

Facts

Investigation: Summons were issued to the petitioner regarding a tax discrepancy.
Voluntary Payment: Prior to the service of any Show Cause Notice (SCN), the petitioner paid the tax amount along with interest, purportedly under Section 73(5) (non-fraud cases), evidenced by a contemporaneous letter.
Department’s Action: Despite this payment, the Department proceeded to issue a Demand-cum-Show Cause Notice invoking Section 74(1) (fraud cases) and subsequently passed an Order-in-Original in Form DRC-07 imposing a higher penalty.
Petitioner’s Plea: The petitioner argued that since the liability was discharged before the notice, the proceedings should have been closed.

Decision

Statutory Scheme (Section 74): The High Court analyzed the closure mechanisms under Section 74:
- Section 74(5): If tax + interest + 15% penalty is paid before the SCN, the officer shall not serve any notice.
- Section 74(8): If tax + interest + 25% penalty is paid within 30 days of the SCN, the proceedings are deemed concluded.
Application to Facts: Since the petitioner had already paid the tax and interest before the SCN, the only missing component for closure under Section 74(5) was the 15% penalty.
Relief Granted: The Court held that forcing the petitioner to go through the appellate route would cause unnecessary delay.
Ruling: The Court directed that upon the petitioner depositing 15% of the tax amount as penalty, the SCN and the impugned order would stand quashed, and the proceedings would be deemed concluded under Section 74(5).

Key Takeaways

Timing determines Penalty: In fraud cases (Section 74), the penalty rises in steps:

15%: If paid before SCN.

25%: If paid within 30 days of SCN.

50%: If paid within 30 days of Order.

100%: If not paid within the above timelines.

Section 73 vs 74 Mistake: Even if a taxpayer pays tax thinking it is a Section 73 case (0% penalty if paid before SCN), and the Department later classifies it as Section 74, the taxpayer can still avail the benefit of the 15% penalty bracket if the payment was made before the notice.

HIGH COURT OF DELHI

Delhi Sales Corporation

Principal Commissioner of Central Tax

PRATHIBA M. SINGH and SHAIL JAIN, JJ.

W.P.(C) 15646 of 2025
CM APPL. 63996 of 2025

NOVEMBER 18, 2025

M.A. Ansari, Ms. Tabbassum Firdause, Mohd. Saleem, Md. Imran Ahmad and Ahmad Ansari, Advs. for the Petitioner. Akash Verma, Adv. and Sandeep Tyagi for the Respondent.

ORDER

Prathiba M. Singh, J.- This hearing has been done through hybrid mode.

2. The Petitioner has filed the present writ petition under Article 226 of the Constitution of India, inter alia, challenging the Order-in-Original dated 21st January, 2025 (hereinafter, ‘the impugned order’) passed by the Office of the Principal Commissioner of Central GST, Delhi North. The Petitioner further challenges the Form DRC-07 dated 23rd February, 2025 by which a demand has been raised against the Petitioner for a sum of Rs. 1,32,467/-.

3. The stand of the Petitioner is that prior to the issuance of the show cause notice dated 7th June, 2024, (hereinafter, ‘SCN’), the entire demand was paid by the Petitioner in the month of August, 2022 itself. This is evidenced by a letter dated 31^st August, 2022 issued by the Delhi Sales Corporation which is placed at Annexure P-3 in the present petition. Thus, it is the stand of the Petitioner that though the impugned order relates to 1155 buyers/recipients and 79 fake non-existent firms, insofar as the Petitioner is concerned, if the entire amount has been paid, the impugned order would be unsustainable to the extent of the demands raised against the Petitioner.

4. A perusal of the impugned order would show that the said payment made by the Petitioner is also acknowledged in the impugned order itself at page no.12. On the said page, where noticee no. 631 is the Petitioner, under the head ‘appropriation’ a sum of Rs.2,07,868/- is duly acknowledged to have been received by the Department.

5. Today, Mr. Verma, ld. Counsel for the Department confirms that the tax amount of Rs. 2,07,868/- has been deposited by the Petitioner. It is his submission that there were a large number of buyers and recipients of 79 fake, non-existent firms and hence a penalty was imposed upon the Petitioner.

6. Ld. Counsel for the Petitioner submits that in this case, the summary of the SCN i.e. FORM GST DRC-01 was issued on 27^th September, 2024. However, the amount was deposited by the Petitioner in August, 2022 itself. Reliance is also placed by the Petitioner upon Section 74(8) of the Central Goods and Service Tax Act, 2017.

7. Ld. Counsel for the Petitioner also submits that in terms of Section 74(5) of the Central Goods and Service Tax Act, 2017 (hereinafter, ‘the Act’), even prior to issuance of SCN, a person chargeable with tax can pay the same. Hence, it is the case of the Petitioner that no further penalty can be imposed on them.

8. Heard. A perusal of Section 74 of the Act would show that there is a fundamental difference in the wording of Section 74(5) and Section 74(8) of the Act. The said provisions contemplate issuance of initially a notice under Section 74(1) of the Act, as to why the taxable amount along with interest ought not to be recovered. Upon such notice being issued along with a statement-cum-demand under Section 74(3) of the Act, the person chargeable with tax has the option to pay the tax along with 15% of the penalty on his own. If the same is done, then no further notice would be served upon such a person.

9. On the other hand, if the amount is not paid and a show cause notice is actually served and thereafter, within 30 days, the tax along with interest and penalty equivalent to 25% is paid, then the proceedings emanating from the show cause notice are deemed to be concluded. The relevant provisions of the Act are extracted hereinbelow:

74. Determination of tax pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.—

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

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(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax.

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(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under subsection (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded. “

10. In the present case, summons were issued to the Petitioner on 6^th July, 2022. In response to the summons issued on 6th July, 2022, the Petitioner paid the tax amount along with interest in terms of a letter dated 31^st August, 2022 under Section 73(5) of the Act.

11. Subsequently, the demand-cum-SCN was issued under Section 74(1) of the Act on 7^th June, 2024. In terms of the provisions, even if the entire amount and penalty is taken into consideration, the penalty only comes to Rs.19,000/-. Under such circumstances, relegating the Petitioner to the appellate remedy would unnecessarily delay the matter.

12. Accordingly, if the Petitioner deposits 15% of the penalty amount, the SCN would be deemed to be closed in terms of Section 74(5) of the CGST Act.

13. The Petitioner is willing to deposit the same. Let the Petitioner deposit 15% of the penalty amount within a period of four weeks, subject to which, the impugned order, only qua the Petitioner shall be quashed. It is made clear that this order would not apply to any of the other noticees.

14. Petition is disposed of in these terms. All pending applications, if any, are also disposed of.