Penalty Invalid if Not Specified in GST DRC-01 Notice | Biz Flow Kit

An adjudication order has been quashed by the Allahabad High Court, confirming a penalty of more than Rs 4.36 crore, holding that a penalty not mentioned in the statutory Show cause notice in Form GST DRC-01 cannot be kept only on the grounds of information specified in an annexure.

The bench of Justice Saumitra Dayal Singh and Justice Swarupama Chaturvedi shows the statutory right available u/s 74(8) of the CGST Act, which permits a taxpayer to file tax, including a reduced penalty 25%, within 30 days of notice to conclude proceedings. The Court said that the same right shall be rendered illusory if the penalty is not mentioned in the DRC-01 notice.

The main issue in this case arose from a discrepancy between the detailed show cause notice and the statutory summary in Form GST DRC-01.

The show cause notice alleged that there was wrongful availing of input tax credit (ITC) amounting to ₹4.36 crore and proposed a penalty equivalent to this ITC. However, the DRC-01 form indicated a penalty amount of “zero.”

The petitioner argued that this inconsistency violated Section 75(7) of the CGST Act. This section states that the final order cannot confirm a demand that exceeds what was proposed in the show cause notice. Since the penalty amount was not specified in the DRC-01 form, affirming it in the adjudication order was legally invalid.

The Revenue claimed that the detailed SCN proposed the penalty, and thus the omission in the DRC-01 summary must not invalidate the demand.

Denying the claim of revenue, the HC outlined the statutory significance of Form GST DRC-01, noting that it is not a mere procedural formality but a specified format under Rule 142 of the CGST rules that needs clear and complete disclosure of all proposed demands along with tax, interest, and penalty.

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The Court emphasized that permitting authorities to use annexures or detailed notices to address deficiencies in the statutory form would create ambiguity and undermine procedural safeguards. It is determined that the demand should be fully and clearly specified in the DRC-01 form itself; otherwise, such a demand cannot be confirmed.

The Court found that this omission constituted a significant procedural defect and ruled that the penalty demand could not stand in its current form. Consequently, the adjudication order dated December 15, 2025, was overturned.

However, the Court allowed the tax department to correct this defect by issuing a fresh or revised show cause notice (SCN) that clearly specifies the exact demand for tax, interest, and penalty within one week.

The applicant is granted two weeks to file a response thereafter. Following this, the adjudicating authority must provide at least 15 days’ notice for a personal hearing and must conclude the proceedings by June 30, 2026.