GST Paid Before SCN Acknowledged: Delhi HC Quashes Demand Subject to Payment of 15% Penalty u/s 74(5) [Read Order]

The Delhi High Court, in its decision addressed the validity of a demand raised under Form DRC‑07 despite the petitioner having already discharged its tax liability prior to issuance of the show cause notice (SCN).

The Court’s ruling provides important clarity on the application of Section 74 of the Central Goods and Services Tax Act, 2017, particularly the interplay between sub‑sections (5) and (8).

The petitioner, Delhi Sales Corporation, challenged the Order‑in‑Original dated 21 January 2025 and the corresponding Form DRC‑07 dated 23 February 2025, which raised a demand of ₹1,32,467/-.

The petitioner’s primary contention was that the entire demand had been paid in August 2022, well before the SCN dated 7 June 2024 was issued. This payment was evidenced by a letter dated 31 August 2022 and was duly acknowledged in the impugned order itself, where under the head “appropriation” a sum of ₹2,07,868/- was recorded as received by the department.

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Counsel for the department confirmed that the tax amount had indeed been deposited. However, the department argued that since the case involved a large number of buyers and recipients of fake firms, a penalty was imposed on the petitioner.

The petitioner countered that under Section 74(5), a person chargeable with tax may pay the amount along with interest and a penalty equivalent to 15% before service of SCN, in which case no further notice should be issued. Reliance was also placed on Section 74(8), which deals with payment after issuance of SCN, requiring a 25% penalty within 30 days to conclude proceedings.

The Court carefully examined the statutory scheme. It noted that Section 74(5) and Section 74(8) are distinct: the former applies to payments made before SCN, while the latter applies to payments made after SCN.

In the present case, summons were issued to the petitioner on 6 July 2022, and in response, the petitioner paid the tax and interest on 31 August 2022. Since this payment preceded the SCN dated 7 June 2024, the case fell squarely within Section 74(5).

The Court observed that relegating the petitioner to an appellate remedy would unnecessarily prolong the matter, especially when the payment was already acknowledged in the impugned order

The division bench comprising Justice Prathiba M Singh and Justice Shail Jian held that if the petitioner deposits 15% of the penalty amount, the SCN would be deemed closed under Section 74(5).

The Court directed the petitioner to make this deposit within four weeks, subject to which the impugned order and Form DRC‑07 would stand quashed qua the petitioner. Importantly, the Court clarified that this relief was confined to the petitioner and would not extend to other noticees involved in the proceedings.

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