DRC-01 show cause notice: how to read it and reply

What a DRC-01 is

Before the department can confirm a demand for tax, interest and penalty, it must send a show cause notice. On the portal you see a DRC-01 summary, with the full notice attached as a document.

For periods up to FY 2023-24 the notice is issued under Section 73 (no fraud alleged) or Section 74 (fraud, wilful misstatement or suppression alleged). For FY 2024-25 onwards, Section 74A applies and replaces both. Check which section your notice cites, because the time limits and the ways of settling differ.

A DRC-01A may come first

In many cases the officer first sends a pre-notice intimation, DRC-01A. This is a chance to accept the amount and pay, or to explain, before a formal notice is issued. If you received one, answer it. It is much easier to settle a matter at this stage than after a notice is issued.

Read the notice carefully before anything else

• Which section, which period and which return is it about?
• How much is demanded as tax, interest and penalty, split by IGST, CGST, SGST and cess?
• What exactly is the allegation, and what documents or data does it rely on?
• By what date must you reply, and is a personal hearing date given?
• Was the notice issued within the time limit allowed for that section? For Section 74A the limit is 42 months from the due date of the annual return. If a notice looks late, raise it in your reply.

Step by step: how to reply

1. Download the notice and every attachment from the portal and calendar the reply date today.
2. Reconcile the figures the department used with your books, returns and documents.
3. Split the demand into the parts you agree with, the parts you dispute, and the parts that are simply wrong.
4. If you accept an amount, pay it through DRC-03 and mention the payment in your reply. How much penalty applies if you pay depends on the section and on when you pay, so confirm this with your CA before paying.
5. Draft the reply for the disputed parts with facts, documents and the legal grounds, one point at a time.
6. File the reply in DRC-06 with attachments before the date, and ask for a personal hearing.
7. Keep the acknowledgement and attend the hearing with your documents.

What happens next

After considering your reply and hearing you, the officer passes an order, shown on the portal as DRC-07. If the order drops the demand, the matter ends. If it confirms a demand and you disagree, you can file an appeal within the statutory time (generally three months from the order), usually with a pre-deposit of part of the disputed tax. Ask your CA for the exact time limit and amount for your case.

Common mistakes

• Treating a show cause notice like a final order and paying in a panic, or like junk and doing nothing.
• Replying late. A notice not answered in time can lead to an order based only on the department's view.
• Skipping the personal hearing.
• Sending a reply with arguments but no documents.
• Paying an amount that includes a penalty you could have avoided with the right payment route.