2025 (5) TMI 1275 - HC - GST

Cancellation of registration retrospectively - Issuance of Non-reasoned SCNs - HELD THAT - In view of the case Riddhi Siddhi Enterprises vs. Commissioner of Goods and Services Tax (CGST) South Delhi Anr 2024 (10) TMI 278 - DELHI HIGH COURT and when the impugned order is tested on the aforenoted precepts it becomes apparent that absence of reasons in the original SCN in support of a proposed retrospective cancellation as well as a failure to place the petitioner on prior notice of such an intent clearly invalidates the impugned action. We are thus of the considered opinion that the writ petition is entitled to succeed on this short ground alone. We accordingly allow the writ petition by modifying the impugned order and providing that the cancellation of the petitioner s GST registration shall come into effect from the date of the SCN i.e. 27 September 2024. The stipulation in the impugned order of cancellation to come into effect from 25 November 2021 is consequently quashed.

Summary

The core legal questions considered in the judgment revolve around the validity and propriety of retrospective cancellation of Goods and Services Tax (GST) registration under Section 29(2) of the Central Goods and Services Tax Act, 2017. Specifically, the issues include:

1. Whether a GST registration can be cancelled retrospectively without explicit notice or reasons provided in the Show Cause Notice (SCN) issued to the taxpayer.

2. The scope and limits of the power conferred on the tax authorities under Section 29(2) to cancel GST registration with retrospective effect.

3. The requirement of reasoned orders and due application of mind when exercising the power of retrospective cancellation.

4. The procedural fairness owed to the taxpayer, including the right to be informed of retrospective cancellation and opportunity to respond.

5. The consequences and implications of retrospective cancellation on taxpayers and third parties, such as denial of input tax credit to customers.

Issue-wise Detailed Analysis

Issue 1: Validity of Retrospective Cancellation Without Prior Notice or Reasons in SCN

Legal Framework and Precedents: Section 29(2) of the CGST Act empowers the proper officer to cancel GST registration from such date, including retrospective dates, if specified conditions are satisfied. However, judicial precedents emphasize that this power is not to be exercised mechanically or arbitrarily. The judgment refers extensively to Riddhi Siddhi Enterprises and Ramesh Chander cases, where courts held that the SCN and cancellation order must disclose reasons for retrospective cancellation and the taxpayer must be given an opportunity to respond to such a proposal.

Court's Interpretation and Reasoning: The Court reiterates that the mere existence of the power to cancel registration retrospectively does not justify its routine or mechanical exercise. The SCN in the present case did not disclose any intent or grounds for retrospective cancellation, thereby depriving the petitioner of the opportunity to contest such a drastic measure. The impugned order lacked any reasoned explanation for choosing a retrospective date, violating principles of natural justice and statutory mandate.

Key Evidence and Findings: The SCN dated 27 September 2024 did not mention retrospective cancellation. The final order dated 22 October 2024 cancelled registration retrospectively from 25 November 2021 without prior notice or reasons. This procedural lapse was fatal.

Application of Law to Facts: Applying the principles from Riddhi Siddhi and Ramesh Chander, the Court found the impugned retrospective cancellation invalid due to absence of reasons and failure to provide prior notice of retrospective intent.

Treatment of Competing Arguments: The respondents' reliance on the power under Section 29(2) was rejected as insufficient without due process and reasoned justification. The Court emphasized that retrospective cancellation affects not only the taxpayer but also third parties, necessitating careful and reasoned exercise of power.

Conclusion: The retrospective cancellation without prior notice or reasons in the SCN is invalid.

Issue 2: Requirement of Reasoned Orders and Due Application of Mind in Retrospective Cancellation

Legal Framework and Precedents: The Court referred to the judgment in Delhi Polymers and reiterated that Section 29(2) requires the proper officer to be objectively satisfied before cancelling registration retrospectively. The order must reflect reasons and demonstrate due application of mind, especially given the serious consequences of retrospective cancellation.

Court's Interpretation and Reasoning: The impugned order failed to provide cogent reasons for retrospective cancellation and was internally contradictory regarding the petitioner's response to the SCN. The Court held that retrospective cancellation must be based on objective criteria and not mere non-filing of returns for a period, especially when returns were filed subsequently and the taxpayer was compliant during the retrospective period.

Key Evidence and Findings: The order cited "no reply to show cause notice" as reason for cancellation, yet acknowledged receipt of a reply. No reasons were given for choosing the retrospective date. The SCN and order lacked clarity and reasoned justification.

Application of Law to Facts: The Court applied the principle that retrospective cancellation is an exceptional power and must be exercised with care and reason. The impugned order did not meet this standard.

Treatment of Competing Arguments: The authorities' contention that retrospective cancellation is permissible under Section 29(2) was accepted only subject to the requirement of reasoned orders and objective satisfaction. The Court rejected any mechanical or routine application.

Conclusion: The impugned order is unsustainable for lack of reasoned explanation and due application of mind.

Issue 3: Consequences of Retrospective Cancellation and Consideration of Third-Party Interests

Legal Framework and Precedents: The Court noted that retrospective cancellation can deny input tax credit to customers of the taxpayer, which is a significant consequence. This aspect was highlighted in Ramesh Chander and Delhi Polymers judgments, which require the proper officer to consider such consequences before ordering retrospective cancellation.

Court's Interpretation and Reasoning: The Court acknowledged the serious repercussions of retrospective cancellation beyond the taxpayer, emphasizing the need for the tax authority to weigh these consequences carefully and justify the retrospective effect accordingly.

Key Evidence and Findings: The respondents did not demonstrate that consequences such as denial of input tax credit were considered or warranted in the impugned order.

Application of Law to Facts: The absence of any such consideration further undermined the validity of the retrospective cancellation.

Treatment of Competing Arguments: While the authorities pointed to their statutory power, the Court underscored that power must be exercised with due regard to consequences and fairness.

Conclusion: Retrospective cancellation without consideration of its wider consequences is impermissible.

Issue 4: Appropriate Effective Date of Cancellation

Legal Framework and Precedents: The Court referred to precedents where retrospective cancellation was modified to take effect from the date of the SCN, which was the earliest date the taxpayer was put on notice.

Court's Interpretation and Reasoning: Since the SCN in the present case was dated 27 September 2024 and did not disclose retrospective cancellation before that date, the Court held that cancellation can only be effective from the SCN date and not from an earlier retrospective date.

Key Evidence and Findings: The impugned order fixed the retrospective cancellation date as 25 November 2021, which was not disclosed or justified in the SCN.

Application of Law to Facts: The Court modified the effective date of cancellation to 27 September 2024, aligning with the date of the SCN to ensure procedural fairness.

Treatment of Competing Arguments: The Court rejected the mechanical retrospective date fixed by the authority and adopted a fairer approach consistent with notice principles.

Conclusion: Cancellation shall be effective only from the date of the SCN, 27 September 2024, and the retrospective date of 25 November 2021 is quashed.

Significant Holdings

"The mere existence or conferral of that power would not justify a revocation of registration. The order under Section 29 (2) must itself reflect the reasons which may have weighed upon the respondents to cancel registration with retrospective effect. Given the deleterious consequences which would ensue and accompany a retroactive cancellation makes it all the more vital that the order be reasoned and demonstrative of due application of mind."

"The power to cancel retrospectively can neither be robotic nor routinely applied unless circumstances so warrant."

"The show cause notice does not even state that the registration is liable to be cancelled from a retrospective date."

"A taxpayer's registration can be cancelled with retrospective effect only where such consequences are intended and are warranted."

"Absence of reasons in the original SCN in support of a proposed retrospective cancellation as well as a failure to place the petitioner on prior notice of such an intent clearly invalidates the impugned action."

Core principles established include:

• The power to cancel GST registration retrospectively under Section 29(2) is subject to strict procedural safeguards, including reasoned orders and prior notice.
• Retrospective cancellation cannot be arbitrary or mechanical; it requires objective satisfaction and due application of mind.
• The taxpayer must be given an opportunity to respond to any proposal of retrospective cancellation.
• The consequences of retrospective cancellation, including impact on third parties such as denial of input tax credit, must be considered.
• Effective date of cancellation cannot precede the date of the SCN that notifies the taxpayer of cancellation proceedings.

Final determinations:

• The impugned retrospective cancellation order dated 22 October 2024, effective from 25 November 2021, is set aside.
• The cancellation of GST registration is modified to take effect from the date of the SCN, i.e., 27 September 2024.
• The writ petition is allowed on the ground of procedural infirmity and lack of reasoned justification for retrospective cancellation.