Summary: In Dharmendra Singh v. Deputy Commissioner of Revenue, the Calcutta High Court held that a voluntary payment made through DRC-03 under Section 73(5) of the CGST Act cannot automatically be treated as a response to or compliance with a show cause notice issued under Section 74. The petitioner had availed Input Tax Credit on transactions with Balaji Trading Co. and, during the proceedings, made two voluntary part-payments through DRC-03 on 24.03.2022 and 27.05.2022. The department treated these payments as compliance with the Section 74 proceedings and passed an ex parte adjudication order confirming the demand without first obtaining an explanation regarding the purpose and intent behind the payments. The High Court found this approach legally unsustainable because Sections 73 and 74 operate on different statutory foundations, particularly regarding allegations of fraud, wilful misstatement and suppression of facts. The Court also examined the department’s recovery of the entire demand by debiting the petitioner’s electronic credit ledger before expiry of the statutory appeal period. Section 78 ordinarily permits recovery only after the prescribed period following service of the order unless reasons exist for requiring earlier payment. The judgment therefore reinforces the need to preserve the statutory distinction between non-fraud and fraud-based GST demand proceedings, ascertain the taxpayer’s intention behind voluntary payments, and follow the prescribed recovery procedure.
- GST Voluntary Payment Under Section 73(5): Can It Be Treated as a Reply to a Section 74 Notice?
- Brief
- Introduction
- Background Facts
- The Statutory Framework: Distinguishing Between Sections 73 and 74
- Key Differences Between Section 73 and Section 74
- The Court’s Rationale
- 1. Admission of Liability and Voluntary Payment
- 2. Pre-Appeal Electronic Credit Ledger Recovery
- Implications for Taxpayers and for Practitioners
- Conclusions
- References
GST Voluntary Payment Under Section 73(5): Can It Be Treated as a Reply to a Section 74 Notice?
Brief
In Dharmendra Singh v. Deputy Commissioner of Revenue (Calcutta High Court, 14 July 2025), Justice Raja Basu Chowdhury observed that a voluntary payment made in DRC-03 under Section 73(5) of the CGST Act cannot be treated by the GST department as a response to a show cause notice issued under Section 74. The verdict clarifies the hard statutory line between the two sections. It also reaffirms the requirement that the department should elicit the taxpayer’s explanation before inferring anything from a partial voluntary payment. The essay analyses the factual matrix, the reasoning adopted by the court, the distinction between the Sections 73 and 74 and the important takeaways for a GST practitioner.
Introduction
The Goods and Services Tax regime under the Central Goods and Services Tax Act, 2017 (CGST Act) makes an important statutory distinction between two demand provisions – Section 73 for cases of non-payment or short-payment of tax without fraud or wilful misstatement and Section 74 for cases where fraud, wilful misstatement or suppression of facts is alleged. The issue is not only procedural; it brings with it significantly different ramifications concerning penalty exposure, restriction periods and the burden on the taxpayer.
One concern that has created a great degree of ambiguity in practice is: what is the position where a taxpayer makes a voluntary part-payment under Section 73(5) of the CGST Act, yet the department has issued, or subsequently issues, a show cause notice under Section 74? Could the Department see the voluntary payment as a considered admission of culpability or a response to the section 74 notice?
This question was answered conclusively by the Calcutta High Court in the case of Dharmendra Singh v. Deputy Commissioner of Revenue & Ors. (WPA No. [2025] on 14 July 2025). The Court decided that it is not constitutionally permissible to treat a Section 73(5) payment as compliance of a Section 74 show cause notice (SCN). This article takes account of that judgement and its pragmatic implications.
Background Facts
The petitioner, Dharmendra Singh, was a registered GST taxpayer and had availed Input Tax Credit (ITC) on the transactions with Balaji Trading Co. for the period June to November, 2019. Subsequently the department revoked the GST registration of the supplier and commenced proceedings against the petitioner under Section 74 of the CGST Act for illegal availment of ITC.
During the pendency of these proceedings, the petitioner made two voluntary part-payments in DRC-03 on 24.03.2022 and 27.05.2022, which he intended as compliance under Section 73(5) of the CGST Act. Crucially, neither payment was an admission of culpability in respect of the full amount claimed under section 74.
The Department passed the ex parte adjudication order dated 17.02.2023 affirming the entire demand, though the petitioner neither appeared before the Adjudicating Authority for a personal hearing nor contested the Section 74 SCN. The worst aspect is that the department has collected the whole demand by debiting the computerised credit ledger of the petitioner even before the end of the statutory period of appeal. The appellant’s appeal filed on 6 January 2024 was dismissed as time-barred. He then addressed the High Court of Calcutta by way of a writ petition.
The Statutory Framework: Distinguishing Between Sections 73 and 74
To understand the court’s ruling, one needs to appreciate the distinction between Section 73 and Section 74 of the CGST Act.
Key Differences Between Section 73 and Section 74
Section 73: Applicable where tax not paid, short paid or obtained ITC improperly WITHOUT fraud, wilful mis-statement or suppression. Regular Prescription: 3 years. Penalty: 10 per cent of the tax or ₹10,000, whichever is higher.
Section 73(5): Provides an option to the taxpayer to close the proceedings voluntarily paying the determined tax, interest and penalty @ 10% BEFORE the issuance of SCN.
Section 73(6) No penalty is imposed if the taxpayer pays the whole amount advised under S.73(1) (DRC-01A) WITHIN 30 days from the date of receipt. The matter is considered closed.
Section 74 : Non-payment on account of FRAUD, intentional falsehood or falsification of facts. Extended Limitation 5 years. Higher penalty: up to 100% of tax (reduced to 15-25% if paid with interest at various stages).
Critical gap: Payment pursuant to s. 73(5) doesn’t apply to settle an s. 74 demand because various components – especially mens rea – are to be adjudicated under s. 74.
The Court’s Rationale
Justice Raja Basu Chowdhury pointed up two separate errors made by the department in law.
1. Admission of Liability and Voluntary Payment
The Court noted that the petitioner’s DRC-03 payments were under Section 73(5) – a provision that clearly envisages voluntary payment by a taxpayer desirous of settling the issue before the issuance of a formal SCN. These sums were paid by the petitioner without any statement admitting guilt under Section 74. But the department took the payments as implied compliance of the Section 74 SCN and gave an ex parte ruling without asking any explanation from the petitioner.
This method was found by the Court to be legally invalid. The department must determine the taxpayer’s intent before drawing any inference from a voluntary payment. No question was asked as to why the payment was made, and to what aspect of the taxpayer’s intent the payment was to apply; and this vitiated the ex parte ruling at its foundation.
2. Pre-Appeal Electronic Credit Ledger Recovery
The Court also pointed out the second mistake: the department had recovered the entire demand from the petitioner’s electronic credit ledger even before the expiry of the statutory appeal period. Normally, an assessed demand can be recovered only after the expiry of a period of 3 months from the date of the order under Section 78 of the CGST Act, unless the proper official has reasons to believe that the delay may harm recovery.
No reasons were noted in the instant case. The Court observed that this premature recovery, without even giving the petitioner the opportunity to exercise his right of appeal, amounted to an independent illegality. The Court further held that it was all the more egregious, as the GST Appellate Tribunals were not functioning at the time, and the petitioner had no recourse to any remedy.
Implications for Taxpayers and for Practitioners
The judgement of the Calcutta High Court in Dharmendra Singh has far-reaching practical implications:
- Voluntary payments under Section 73(5) of DRC-03 shall not be deemed to be, and shall not be recognised as, a reply to or compliance with a SCN issued under Section 74. The two provisions are based upon different foundations and need different adjudicatory procedures.
- The department will request an explanation from the taxpayer as to the objective and rationale of any voluntary payment before such payment will be considered an admission or in response to a SCN. If this is not done, the ensuing order of adjudication may be thrown aside.
- Taxpayers making voluntary DRC-03 payments must ensure that the basis of each payment is adequately documented as a payment under Section 73(5) and not an admission of liability under Section 74 to provide a clear evidentiary record.
- Recovery from the electronic credit ledger before expiry of the statutory period of appeal without recording reasons for urgency is illegal and amenable to writ petition where a statutory remedy of appeal is available but is inoperative due to the vacancies in the tribunal.
- Section 74 requires the department to prove fraud, deliberate falsehood or concealment of facts. Retroactive determination of such aspects cannot be made by an award under section 73(5), which by its express terms applies only if such allegations are not made.
Tax practitioners advising clients facing dual or overlapping SCNs under sections 73 and 74 should note that the mere existence of a voluntary payment should not be allowed by the department to shortcut the adjudicatory process under section 74 requiring independent examination of the fraud/suppression allegations.
Conclusions
The Calcutta High Court’s judgement in Dharmendra Singh is a strong reaffirmation of the procedural safeguards enshrined in the CGST Act. The statutory separation between section 73 and section 74 is not simply a technicality; it represents the basic divergence between the claimed tax default and the obligation put on the taxpayer to respond.
Indeed, construing a Section 73(5) voluntary payment as satisfaction of a Section 74 SCN would be to conflate this distinction and penalise a taxpayer who in good faith attempted to settle a lower liability for a graver charge that they never had the opportunity to contest. The Court appropriately set aside the adjudication order as well as appellate denial and directed fresh adjudication on merits.
The verdict is a timely reminder that GST enforcement, however vital, ought to be based on the procedural and substantive framework laid forth by Parliament. Voluntary compliance and department enforcement are not interchangeable. Both must work in their own statutory channel.
References
1. Dharmendra Singh v. Deputy Commissioner of Revenue, Bally & Salkia Charge & Ors. Writ Petition, Calcutta High Court Order dated 14 July 2025 (Justice Raja Basu Chowdhury)
2. Central Goods and Services Tax Act, 2017 (Sections 73, 74, 75, 78 and 107).
3. Synthroma Laboratories v. State of West Bengal & Ors., WPA 4149 of 2025, Calcutta High Court, 30 June 2025.
4. Nancy Trading Company v. State of U.P., (2024) 20 Centax 429 (All. H.C.), decided on 15 July 2024
5. Bombay Art v. Union of India, 2025 (36) Centax 365 (Gujarat High Court).
