2025 (7) TMI 386 - HC - GST

Cancellation of GST of petitioner with retrospective effect from 1 July 2017 - during physical verification the taxpayer was found non-existent at the principal place of business - HELD THAT - Reliance placed in the case of Riddhi Siddhi Enterprises v. Commissioner of Goods and Services Tax (CGST) South Delhi Anr. 2024 (10) TMI 278 - DELHI HIGH COURT where it was held that In view of the fact that Petitioner does not seek to carry on business or continue the registration the impugned order dated 15-12-2021 is modified to the limited extent that registration shall now be treated as cancelled with effect from 4-9-2021 i.e. the date when the Show Cause Notice was issued. The final order of cancellation cannot be sustained - the impugned final order of cancellation dated 6 September 2024 is quashed - petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the cancellation of GST registration with retrospective effect from 1 July 2017 was validly executed by the tax authorities.

- Whether the Show Cause Notice (SCN) issued prior to cancellation adequately informed the petitioner of the intention to cancel registration retrospectively.

- The extent and manner in which the power under Section 29(2) of the Central Goods and Services Tax Act, 2017 (CGST Act) to cancel GST registration retrospectively can be exercised.

- Whether the impugned cancellation order complied with the requirement of reasoned and demonstrative application of mind.

- The legal consequences of retrospective cancellation on the taxpayer and third parties, including denial of input tax credit.

- The procedural fairness owed to the taxpayer, including adequate opportunity to respond to the SCN and clarity of reasons for cancellation.

- The permissibility of retrospective cancellation in the absence of clear reasons and objective satisfaction by the proper officer.

- The scope for the tax authorities to re-initiate proceedings with proper SCN and opportunity to be heard.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Retrospective Cancellation of GST Registration

Relevant legal framework includes Section 29(2) of the CGST Act, which permits cancellation of GST registration from such date, including retrospectively, as the proper officer may deem fit if certain conditions are met. Precedents considered include Riddhi Siddhi Enterprises and Ramesh Chander, where the Court emphasized that retrospective cancellation is a power to be exercised sparingly and only on cogent, objective grounds.

The Court interpreted that mere conferral of retrospective cancellation power does not justify mechanical or routine application. The order must reflect clear reasons demonstrating due application of mind, especially given the deleterious consequences on the taxpayer and their customers.

Key findings were that the impugned order lacked any reasoned basis or objective satisfaction for retrospective cancellation. The SCN issued did not indicate any intention to cancel registration retrospectively, depriving the petitioner of fair notice and opportunity to respond to such a serious consequence.

The Court applied the law to facts by holding that since the order and SCN failed to meet the statutory and procedural requirements, the cancellation could not be sustained. Competing arguments from the tax authorities that retrospective cancellation was permissible were rejected on the ground of lack of reasoned order and absence of clarity in the SCN.

The conclusion was that retrospective cancellation without clear reasons and notice is invalid.

Issue 2: Adequacy and Clarity of Show Cause Notice and Cancellation Order

The legal framework requires that a SCN must clearly specify the grounds for cancellation and the consequences, including if retrospective cancellation is proposed, to enable the taxpayer to mount a meaningful defense. Precedents from Ramesh Chander and Delhi Polymers reinforce this principle.

The Court found that the SCN did not mention retrospective cancellation as a possible outcome, nor did the cancellation order provide any cogent reasons for such retrospective effect. Contradictory statements were noted in the cancellation order regarding receipt of replies and reasons for cancellation.

The Court emphasized that an order of cancellation must be reasoned and not contradictory or vague. The lack of clarity and failure to specify retrospective cancellation in the SCN amounted to a breach of natural justice and procedural fairness.

Arguments by the respondents that retrospective cancellation was justified were treated as insufficient without proper notice and reasoning. The Court concluded that the SCN and cancellation order were vitiated due to lack of clarity and reasoned basis.

Issue 3: Consequences of Retrospective Cancellation and Consideration of Input Tax Credit Impact

The Court noted that retrospective cancellation affects not only the taxpayer but also their customers, who may lose input tax credit for supplies made during the retrospective period. This consequence requires the proper officer to carefully consider whether retrospective cancellation is warranted.

The Court referred to precedents holding that the power to cancel retrospectively must be exercised with due regard to such consequences and cannot be arbitrary or mechanical. The respondents' failure to demonstrate that these consequences were considered was a significant flaw.

The Court rejected any contention that retrospective cancellation could be imposed without weighing its impact on third parties and taxpayers, underscoring the need for objective satisfaction and reasoned orders.

Issue 4: Procedural Fairness and Opportunity to Respond

The Court observed that the petitioner was given an extremely short window to respond to the SCN and was not informed of the retrospective nature of the proposed cancellation. This deprived the petitioner of a fair opportunity to present their case effectively.

The Court reiterated the principle that procedural fairness requires adequate notice of the grounds and consequences of proposed action, especially when retrospective cancellation is involved.

Competing arguments that the petitioner failed to respond were rejected in light of the inadequate notice and unfair procedure. The Court granted liberty to the petitioner to respond afresh and directed the authorities to finalize proceedings expeditiously with proper opportunity.

Issue 5: Scope for Re-initiation of Proceedings

The Court clarified that the quashing of the impugned cancellation order did not preclude the tax authorities from initiating fresh proceedings with a proper SCN that clearly specifies retrospective cancellation if so advised. The authorities must follow due process and provide opportunity for hearing.

This preserves the statutory power of the authorities while ensuring compliance with principles of natural justice and reasoned decision-making.

3. SIGNIFICANT HOLDINGS

"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."

"Registration cannot be cancelled with retrospective effect mechanically. It can be cancelled only if the proper officer deems it fit to do so. Such satisfaction cannot be subjective but must be based on some objective criteria."

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

"The impugned show cause notice and the order of cancellation are themselves vitiated on account of lack of reason and clarity."

The Court ultimately quashed the retrospective cancellation order dated 6 September 2024 and restored the petitioner's GST registration, subject to filing of requisite returns. The Court granted liberty to respond to the SCN and directed the authorities to finalize proceedings with expedition and proper adherence to procedural fairness and statutory requirements.