Facts of the Case:

In this case, the petitioner challenged the adjudication order and the consequential Form GST DRC-07 issued for Financial Year 2019-20. The dispute did not relate to the merits of the tax demand but was confined to the petitioner’s claim that it had been denied the statutory benefit available under Section 74(5) of the CGST Act, 2017 read with Rule 142(1A) of the CGST Rules, 2017. The petitioner contended that no pre-show cause notice intimation in Form GST DRC-01A had been issued before the issuance of the formal show cause notice in Form GST DRC-01. Consequently, the petitioner was deprived of the opportunity to settle the proposed demand by paying the tax, interest and a reduced penalty of 15%, as contemplated under Section 74(5). The revenue defended the proceedings by arguing that after amendment of Rule 142(1A), the use of the word “may” rendered issuance of DRC-01A discretionary and not mandatory. It was further contended that since adjudication had already been completed and the petitioner had participated in the proceedings, the stage contemplated under Section 74(5) had passed and no prejudice had been caused because the petitioner could still have settled the matter after issuance of the show cause notice by paying a higher penalty of 25%.

Issue:

Whether issuance of Form GST DRC-01A under Rule 142(1A) is mandatory despite the use of the word “may” in the Rule, particularly when Section 74(5) of the CGST Act grants a taxpayer the substantive right to settle a proposed demand before issuance of a show cause notice upon payment of tax, interest and a reduced penalty of 15%. Whether failure to issue DRC-01A would invalidate the subsequent show cause notice and adjudication proceedings, or whether the taxpayer would nevertheless remain entitled to claim the statutory benefit available under Section 74(5).

Held That: 

The High Court held that Section 74(5) creates a substantive statutory mechanism enabling a taxpayer to settle a proposed demand before issuance of a formal show cause notice by paying the tax, applicable interest and a reduced penalty of 15%. Such a valuable statutory right cannot be defeated by interpreting Rule 142(1A) as merely directory. The Court observed that delegated legislation must always be read harmoniously with the parent statute and cannot be interpreted in a manner that curtails or nullifies rights expressly granted by the Act.

While acknowledging that Rule 142(1A) was amended and now uses the word “may” instead of “shall”, the Court held that the provision must still be construed in a manner that preserves the operation of Section 74(5). Accordingly, issuance of DRC-01A was held to be mandatory for the purpose of enabling the taxpayer to avail the benefit of pre-notice settlement under Section 74(5). However, the Court clarified that non-issuance of DRC-01A does not render the subsequent show cause notice in Form DRC-01 void or without jurisdiction. Instead, where DRC-01A has not been issued, the taxpayer continues to retain the right to invoke Section 74(5) up to the stage of filing a reply to the show cause notice.

The Court further held that where a taxpayer specifically claims the benefit of Section 74(5) upon receiving DRC-01, the adjudicating authority is duty-bound to allow settlement of the proposed demand at the reduced penalty rate of 15%. Since the petitioner had raised such a plea during adjudication, denial of that statutory benefit was held to be unsustainable. The writ petition was accordingly allowed and the petitioner was permitted to discharge the tax demand along with interest and 15% penalty, whereupon the adjudication order would stand satisfied.

Case Name: M/s World Phone Internet Versus Superintendent, Range And Another dated 25.05.2026