2025 (6) TMI 1238 - HC - GST

Challenge to impugned order and impugned notice - initiation of proceedings u/s 73 of the Central/State Goods and Services Tax Act 2017 (GST Act) against a company that has been dissolved pursuant to voluntary liquidation - non-application of mind - violation of principles of natural justice - HELD THAT - It appears that respondent no. 2 has initiated proceedings against a dissolved company which is not tenable as M/s. Zeb IT Service Limited has already been dissolved with effect from 30/09/2022 which is duly recorded in the Orders-in-Original passed by respondent no. 2. The impugned orders passed by the respondents are without application of mind and contrary to the record being passed against the dissolved company which cannot be sustained. Conclusion - i) Proceedings initiated against a dissolved company are not tenable and cannot be sustained. ii) The impugned orders passed without application of mind and contrary to the record being passed against a dissolved company are hereby quashed and set aside. In view of above settled legal position impugned orders are hereby quashed and set aside. Consequent recovery proceedings also therefore do not survive - Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether proceedings under Section 73 of the Central/State Goods and Services Tax Act, 2017 (GST Act) can be initiated against a company that has been dissolved pursuant to voluntary liquidation.

(b) Whether cancellation of GST registration under Section 29(3) of the GST Act affects the liability of the company or its directors to pay tax dues or discharge obligations for periods prior to cancellation.

(c) Whether the failure to provide relevant supporting documents in response to a show cause notice justifies confirmation of tax demand against a dissolved company.

(d) Whether the issuance of notices and orders under the GST Act against a dissolved company is valid and sustainable.

(e) The applicability of settled legal principles regarding liability and jurisdiction in tax proceedings against entities that have ceased to exist, with reference to relevant precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of initiating GST proceedings against a dissolved company

Legal framework and precedents: The GST Act governs tax liability and proceedings under its provisions. Section 73 relates to determination of tax not paid or short paid or erroneously refunded. The National Company Law Tribunal (NCLT) order dated 30/09/2022 dissolved the company with effect from that date. The question arises whether proceedings can be initiated against a company that no longer exists.

Court's interpretation and reasoning: The Court observed that the company was dissolved effective 30/09/2022 and this fact was acknowledged by the tax authorities in their orders. The impugned orders were passed after dissolution, raising demand in the name of the dissolved entity. The Court held that initiating proceedings against a dissolved company is not tenable and contrary to the record.

Key evidence and findings: The petitioner submitted the NCLT order of dissolution and correspondence intimating voluntary liquidation and cancellation of GST registration. The respondent acknowledged the dissolution but proceeded with demand notices and orders.

Application of law to facts: The Court applied the principle that a dissolved company ceases to exist as a legal entity, and hence cannot be proceeded against. The orders passed post-dissolution without proper application of mind were held unsustainable.

Treatment of competing arguments: The respondent contended that cancellation of registration does not absolve tax liability and that the demand was within time and jurisdiction. However, the Court distinguished the issue of liability from the validity of proceedings against a non-existent entity.

Conclusion: Proceedings under Section 73 against a dissolved company are invalid and cannot be sustained.

Issue (b): Effect of cancellation of GST registration on liability under Section 29(3)

Legal framework: Section 29(3) of the GST Act states that cancellation of registration shall not affect liability to pay tax or other dues for any period prior to cancellation, whether determined before or after cancellation.

Court's interpretation and reasoning: The Court acknowledged the respondent's reliance on Section 29(3), which preserves liability despite cancellation. However, the Court emphasized that while liability may survive cancellation, the entity against which proceedings are initiated must exist. The liability cannot be enforced by continuing proceedings against a dissolved company.

Key evidence and findings: The respondent's affidavit detailed the legal position under Section 29(3) and the reasons for confirming demand, including mismatch in returns and ineligible input tax credit (ITC).

Application of law to facts: The Court held that Section 29(3) preserves liability but does not authorize proceedings against a dissolved company. The liability must be enforced against proper legal representatives or successors, if applicable.

Treatment of competing arguments: The respondent argued that cancellation does not extinguish liability, and the petitioner failed to provide supporting documents. The Court found that this argument does not validate proceedings against a dissolved company.

Conclusion: Cancellation of registration preserves liability but does not permit proceedings against a non-existent entity.

Issue (c): Failure to provide supporting documents in response to show cause notice

Legal framework: The GST Act requires that a taxpayer respond to show cause notices with relevant evidence to contest the demand.

Court's interpretation and reasoning: The respondent noted that the petitioner only submitted the NCLT order but did not provide documents addressing the substantive issues raised in the show cause notice, such as discrepancies in returns and ITC claims. The respondent relied on this to confirm demand.

Key evidence and findings: The petitioner's reply focused on dissolution but did not adequately address the five substantive issues listed in the show cause notice.

Application of law to facts: The Court observed that while failure to provide supporting documents may justify confirming demand, this cannot override the fundamental legal principle that proceedings against a dissolved company are invalid.

Treatment of competing arguments: The respondent emphasized non-compliance with procedural requirements; the petitioner stressed the company's dissolution. The Court gave primacy to the legal status of the company.

Conclusion: Failure to provide supporting documents does not validate proceedings against a dissolved company.

Issue (d): Validity of notices and orders issued against the dissolved company

Legal framework and precedents: The Court referred to principles established in tax jurisprudence, including the binding effect of dissolution on legal personality and liability enforcement.

Court's interpretation and reasoning: The Court found that the impugned orders were passed without proper application of mind, ignoring the dissolution status. The notices and orders were therefore without jurisdiction and liable to be quashed.

Key evidence and findings: The record showed that the tax authorities issued show cause notices and orders post-dissolution, despite being informed of the company's status.

Application of law to facts: The Court applied settled legal principles to hold that the tax authorities cannot proceed against a non-existent entity.

Treatment of competing arguments: The respondent argued procedural compliance and jurisdiction; the Court found these arguments insufficient to uphold the orders.

Conclusion: Notices and orders issued against the dissolved company are invalid.

Issue (e): Applicability of settled legal principles on tax liability and jurisdiction in cases of ceased entities

Legal framework and precedents: The Court extensively relied on the Supreme Court's decision in a landmark case involving tax proceedings against entities that ceased to exist due to amalgamation or death. The principles established include:

• Liability to pay tax is founded on substantive charging provisions, not procedural notices.
• Proceedings against non-existent entities are void or at least unsustainable.
• Participation in proceedings by legal representatives does not estop the law's requirement for proper jurisdiction and valid notices.
• Certainty, consistency, and uniformity in tax litigation are paramount.

Court's interpretation and reasoning: The Court applied these principles to hold that the tax authorities erred in proceeding against a dissolved company, as the legal entity ceased to exist on dissolution.

Key evidence and findings: The Court noted the factual similarity with the precedent where the assessing authority issued notices to a non-existent entity post-amalgamation, which was held impermissible.

Application of law to facts: The Court found that the present case aligns with the precedent that proceedings against a dissolved company are invalid and cannot be sustained.

Treatment of competing arguments: The respondent's reliance on liability preservation under Section 29(3) was distinguished from the jurisdictional requirement to proceed against a valid legal entity.

Conclusion: The settled legal position mandates quashing of orders passed against a dissolved company.

3. SIGNIFICANT HOLDINGS

The Court held:

"Proceedings initiated against a dissolved company are not tenable and cannot be sustained."

"Section 29(3) of the GST Act preserves liability despite cancellation of registration but does not authorize proceedings against a non-existent entity."

"The impugned orders passed without application of mind and contrary to the record, being passed against a dissolved company, are hereby quashed and set aside."

"Consequent recovery proceedings also do not survive."

"The settled legal position as elucidated by the Supreme Court in cases involving ceased entities and tax liability emphasizes that liability is founded on substantive provisions and proceedings must be validly initiated against existing legal entities."

"The Court must promote certainty, consistency, and uniformity in tax litigation and uphold the principle that participation in proceedings does not estop the law's jurisdictional requirements."