Delhi HC: No 10% GST Penalty Pre-Deposit for SCN Issued Before 1 October 2025

Decision in brief

The Delhi High Court held that the proviso to Section 107(6), substituted with effect from 1 October 2025, could not be applied to appeals arising from adjudication proceedings that had already begun before that date.

The proceedings against the petitioners began when the Department issued a show cause notice on 25 June 2025. At that time, Section 107(6) did not require a percentage-based pre-deposit for an appeal against a wholly disputed penalty-only order under Section 122(1A).

The Court treated the right of appeal as a substantive vested right. The appellate conditions existing when the dispute commenced continued to govern the proceedings because the amendment did not expressly or necessarily operate retrospectively.

Background of the dispute

The Department issued a show cause notice dated 25 June 2025 alleging that the petitioners were key persons and beneficiaries of a network of fictitious entities through which input tax credit was allegedly availed and passed on. Penalties were proposed against them personally under Section 122(1A).

After replies and a personal hearing, an Order-in-Original dated 16 December 2025 imposed penalties aggregating to approximately ₹346.55 crore on each petitioner. No tax demand was raised against them in their individual capacities.

The petitioners wished to file appeals under Section 107. Applying the substituted proviso would have required each petitioner to deposit approximately ₹34.66 crore, being 10% of the disputed penalty, before the appeal could be filed.

What changed on 1 October 2025

Before 1 October 2025, Section 107(6) required payment of admitted amounts and 10% of the remaining disputed tax. Its then-existing proviso separately required a 25% deposit for appeals against orders under Section 129(3).

The Finance Act, 2025 substituted the proviso. From 1 October 2025, an appeal against an order demanding penalty without any tax demand cannot be filed unless 10% of that penalty is deposited.

For Section 129(3) orders, the change reduced the percentage from 25% to 10%. For other penalty-only orders, including wholly disputed penalties under Section 122(1A), it introduced a percentage-based pre-deposit for the first time.

Issue before the Delhi High Court

The narrow question was whether the new 10% condition applied when the show cause notice was issued before 1 October 2025 but the Order-in-Original was passed after the amendment came into force.

The Department argued that the relevant date was the date on which the appeal was filed because the amended provision says that no appeal shall be filed without the deposit. It also argued that the appeal itself could not exist until an adverse order was passed.

The petitioners argued that the complete appellate right, including the conditions governing its exercise, vested when the adjudicatory dispute commenced through the show cause notice.

When did the GST dispute legally begin?

The Court distinguished between the time when a right of appeal vests and the later time when that right becomes capable of exercise. An appeal can be filed only after an adverse order, but the applicable appellate framework attaches to the proceeding when the dispute begins.

Here, the show cause notice identified the petitioners, asserted personal liability under Section 122(1A) and quantified the proposed penalties. The Court held that this definite assertion of liability commenced the legal dispute no later than 25 June 2025.

Replies and hearings conducted after 1 October 2025 were subsequent steps in the same continuous adjudication. They did not shift the commencement date to a point after the amendment.

Why the new pre-deposit was not applied

The Court held that the right of appeal is substantive rather than merely procedural. Once that right vests, a later amendment cannot impair it or impose a more onerous condition unless the legislature clearly expresses such an intention.

For these petitioners, the amendment changed the position from no percentage-based deposit on a wholly disputed penalty-only appeal to a mandatory deposit of about ₹34.66 crore each. The Court regarded this as a substantial new financial burden at the threshold of the appellate forum.

Neither the Finance Act, 2025 nor the substituted proviso stated that the new condition would apply to adjudication proceedings already pending on 1 October 2025. The absence of a saving clause did not by itself give the amendment retrospective effect.

Relief granted by the Court

The Delhi High Court directed the Appellate Authority to register and entertain the petitioners’ appeals without treating non-payment of 10% of the disputed penalties as a deficiency.

The Court clarified that Section 107(6)(a) still applies. Therefore, any tax, interest, fine, fee or penalty admitted by a petitioner must be paid in accordance with that clause.

The period from 20 March 2026, when the writ petition was filed, until 31 July 2026 was excluded for computing the limitation period. The petitioners were directed to file their appeals within four weeks. Coercive recovery of the penalties was also restrained for four weeks, subject to the directions in the judgment.

Important limits of the ruling

The judgment does not remove the 10% pre-deposit requirement from every penalty-only GST appeal. Its protection applies to the petitioners because their adjudicatory proceedings commenced before 1 October 2025.

The Court did not decide the constitutional validity of the substituted proviso because it found that the provision did not apply to these appeals. That constitutional question was expressly left open for an appropriate case.

The Court also did not examine whether the penalties under Section 122(1A) were correct on merits. All factual and legal objections to the penalties remain for consideration by the Appellate Authority.

Who may benefit from this judgment

A taxpayer or other person facing a penalty-only order should first check the date on which formal adjudication began. If a quantified show cause notice was issued before 1 October 2025, the reasoning in this decision may support application of the earlier appellate conditions.

The order date and the appeal filing date are not the only relevant dates. The Delhi High Court focused on the date when the Department asserted liability through the show cause notice and required the noticee to answer it.

The judgment should be applied carefully to the wording of the notice, the type of penalty, the chronology of proceedings and any later appellate decision. Parties should obtain the complete judgment and professional advice before filing an appeal without a deposit.

Practical checklist before filing a GST appeal

• Identify whether the disputed order contains tax, penalty or penalty alone.
• Record the date of the show cause notice and the date on which it was served.
• Check whether the notice quantified and asserted the liability later confirmed in the order.
• Compare the version of Section 107(6) in force when formal adjudication commenced.
• Pay all amounts admitted under Section 107(6)(a).
• Calculate the appeal limitation period and any available condonable delay carefully.
• Attach the show cause notice, Order-in-Original and this Delhi High Court judgment when relying on the earlier pre-deposit regime.
• Do not assume that the ruling decides the merits of the underlying penalty.
• Check for any later Supreme Court order, appeal or legislative amendment before filing.

Key takeaways

• The Delhi High Court pronounced the judgment on 31 July 2026.
• The show cause notice was issued on 25 June 2025, before the amended proviso took effect.
• The Order-in-Original was passed on 16 December 2025, after the amendment.
• The right of appeal and its governing conditions attached when the adjudicatory dispute commenced.
• The new 10% penalty pre-deposit could not be imposed retrospectively on these pending proceedings.
• The Appellate Authority must entertain the appeals without the 10% deposit of disputed penalties.
• Payment of any admitted amount under Section 107(6)(a) remains necessary.
• The merits of the penalties and the constitutional validity of the amendment were not decided.

Conclusion

Gaurav Jain v. Joint Commissioner (Appeals-II) provides important clarity on the transition to the amended pre-deposit rule for penalty-only GST appeals. A later and more onerous condition could not be attached to adjudication that had already commenced under the earlier appellate regime without clear retrospective language.

The practical lesson is to examine the date and content of the show cause notice before calculating a GST appeal pre-deposit. Where proceedings began before 1 October 2025, this judgment may provide substantial relief. However, the decision is limited to the applicable appellate condition and does not cancel the penalty or decide its merits.