In a significant ruling, the Delhi High Court addressed the issue of whether further penalty proceedings under Section 74 of the GST Act can continue when a taxpayer has already voluntarily paid the tax and interest before the issuance of a show-cause notice (SCN). This case involved the petitioner, Delhi Sales Corporation, who challenged a GST demand of ₹1,32,467, alleging involvement with fake firms. The petitioner argued that they had already settled their tax liability in August 2022, well before the SCN was issued in June 2024, and thus no further proceedings should ensue.
The court examined the provisions of Section 74(5) of the GST Act, which allows taxpayers to settle tax liabilities by paying the tax, interest, and a 15% penalty before the SCN is issued, effectively closing the case. The court noted that the petitioner had indeed made such a payment, which was acknowledged by the department. Despite the department's justification for imposing a penalty due to the investigation's scale, the court ruled that further proceedings could not be sustained for the amount already settled.
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The court directed the petitioner to deposit 15% of the penalty within four weeks, after which the impugned order would be quashed concerning the petitioner. However, this decision does not extend to other parties involved in the broader investigation. The court's decision highlights the protective scope of Section 74(5) for taxpayers who proactively settle their dues before formal notice, emphasizing efficiency and fairness in tax proceedings.
Parties: Delhi Sales Corporation v. Principal Commissioner of Central Tax & Ors.
Order Date: 18 November 2025
Facts
- The petitioner challenged the Order-in-Original dated 21.01.2025 and the consequential DRC-07 dated 23.02.2025 raising GST demand of ₹1,32,467.
- The department alleged that the petitioner was one among 1155 buyers/recipients linked with 79 fake, non-existent firms, and therefore liable for tax and penalty.
- The petitioner contended that the entire tax liability was already paid in August 2022, well before issuance of SCN dated 07.06.2024.
- This payment was acknowledged on page 12 of the OIO, where under noticee number 631, the department recorded receiving ₹2,07,868 from the petitioner.
- Petitioner relied upon Section 74(5), which allows payment of tax + interest + 15% penalty before issue of SCN, leading to closure of proceedings.
- The department admitted in court that the tax amount stood paid, but justified imposition of penalty due to the scale of the investigation involving fake firms.
- The petitioner argued that since payment was made pursuant to summons dated 06.07.2022, and the SCN was much later, no further proceedings could be sustained against them.
Issue
- Whether proceedings under Section 74 can continue when the taxpayer has already deposited tax and interest prior to issuance of show-cause notice under Section 74(5)?
Order
- The Court held that Section 74(5) and Section 74(8) operate differently, and payment before SCN under 74(5) prevents further notice for the amount deposited.
- Since the petitioner paid tax and interest voluntarily in August 2022, prior to SCN, proceedings could not continue for that portion of demand.
- The Court noted that even assuming full penalty liability, the amount would be minimal (₹19,000). The Court declined to relegate the petitioner to alternate appellate remedy as it would cause unnecessary delay.
- The petitioner was directed to deposit 15% of penalty within four weeks, after which The impugned order shall stand quashed qua the petitioner alone. The order does not apply to other noticees involved in the larger investigation. Petition disposed with directions; all pending applications closed.
