In tax law, a single word can sometimes determine the fate of an entire proceeding.
The Allahabad High Court has recently examined the interplay between Section 74(5) of the CGST Act and Rule 142(1A) of the CGST Rules and held that, notwithstanding the use of the word “may” in the Rule, a taxpayer cannot be deprived of the statutory right to settle proceedings before issuance of a show-cause notice by paying tax, interest and a reduced penalty of 15%.
The judgment, delivered on 25th May, 2026 in M/s World Phone Internet vs Superintendent, Range and Another – 2026-VIL-576-ALH is significant not only for the relief granted to the taxpayer but also for the larger debate it revives on the true nature and purpose of Form GST DRC-01A.
Brief Facts and Decision
The petitioner was issued a show-cause notice in Form GST DRC-01 alleging wrongful availment of input tax credit. Admittedly, no pre-notice intimation in Form GST DRC-01A had been issued.
The petitioner contended that the omission deprived it of the statutory option available under Section 74(5) to settle the proceedings before issuance of the show-cause notice upon payment of tax, interest and a penalty of only 15%.
Rejecting the Revenue’s contention that Rule 142(1A) is merely directory because it employs the word “may”, the Court held that Section 74(5) and Rule 142(1A) must be read harmoniously. Since Section 74(5) creates a substantive right in favour of the taxpayer, Rule 142(1A) cannot be interpreted in a manner that renders that right illusory.
The Court accordingly held that the issuance of DRC-01A is mandatory to the extent necessary to preserve the taxpayer’s entitlement under Section 74(5). However, it stopped short of holding that the subsequent show-cause notice itself becomes invalid for want of DRC-01A. Instead, it ruled that the taxpayer continues to retain the right to seek settlement under Section 74(5) up to the stage of filing a reply to the show-cause notice.
Since the petitioner had asserted that right, the Court permitted settlement upon payment of tax, interest and penalty at 15%.
Significance
The judgment adopts a nuanced middle course.
While declining to treat the absence of DRC-01A as a jurisdictional defect invalidating the proceedings, the Court nevertheless ensures that the taxpayer is not deprived of the substantive benefit flowing from Section 74(5). In effect, it preserves the statutory right while declining to invalidate the consequential proceedings.
A Larger Question Remains
While the judgment is noteworthy for what it decides, the larger controversy may still remain unresolved.
The concept of pre-notice consultation did not emerge accidentally. It was introduced as a conscious policy measure following the recommendations of the Tax Administration Reform Commission (TARC) headed by Dr. Parthasarathi Shome. The objective was not merely to provide a concession in penalty; it was to reduce avoidable litigation, encourage voluntary compliance and ensure that coercive adjudication is resorted to only after a meaningful opportunity for dialogue.
Seen in that light, Form GST DRC-01A is not merely a procedural formality preceding a show-cause notice. It is a statutory embodiment of the principle that litigation should be the last resort.
That is why one may legitimately argue that the amendment substituting the word “shall” with “may” in Rule 142(1A) cannot be read in isolation. It is a settled principle that the interpretation of the words “may” and “shall” depends not merely upon their textual form but upon the legislative purpose, the consequences of non-compliance and the overall scheme of the enactment. If a literal interpretation defeats the object sought to be achieved, a seemingly directory provision may still be construed as mandatory.
Viewed from this perspective, the omission to issue DRC-01A may arguably constitute a jurisdictional defect going to the root of the proceedings rather than a procedural irregularity capable of being cured by subsequently extending the benefit of Section 74(5).
The Allahabad High Court has chosen a middle path. Whether future courts will accept that approach or regard the absence of DRC-01A as fatal to the very validity of the show-cause notice remains an issue that is yet to attain finality.
The Unfinished Conversation
The judgment is a reminder that procedural provisions exist to serve substantive rights and not to defeat them. At the same time, it leaves open an important jurisprudential question: if pre-notice consultation is indeed an integral component of the statutory framework, can its omission ever be treated as a mere procedural lapse?
The answer to that question may well shape the future contours of GST adjudication.
दिलों की उलझनें बढ़ती रहेंगी
अगर कुछ मशवरे बाहम न होंगे
— हफ़ीज़ होशियारपुरी
(“The heart’s complexities will keep increasing, if there are no mutual consultations.”)
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