2024 (3) TMI 333 - HC - GST

Judicial Review Overturns Retrospective GST Registration Cancellation, Establishes Fair Date of Termination for Paper Products Firm

Amar Enterprises Through Its Proprietor Versus Commissioner of Delhi Goods And Services Tax And Anr.

HC examined a GST registration cancellation case involving a paper products proprietorship firm. The court modified the retrospective cancellation order, ... Cancellation of GST registration of the petitioner with retrospective effect - SCN does not put the petitioner to notice that the registration is liable to be cancelled retrospectively - Violation of principles of natural justice - HELD THAT:- The impugned Show Cause Notice and the impugned order are also bereft of any details and accordingly the same cannot be sustained. Neither the impugned Show Cause Notice, nor the impugned order spell out the reasons for retrospective cancellation. In terms of Section 29(2) of the Act, the proper officer may cancel the GST registration of a person from such date including any retrospective date, as he may deem fit if the circumstances set out in the said sub-section are satisfied. 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. It is important to note that, according to the respondent, one of the consequences for cancelling a taxpayer’s registration with retrospective effect is that the taxpayer’s customers are denied the input tax credit availed in respect of the supplies made by the taxpayer during such period. Although, it is not considered apposite to examine this aspect but assuming that the respondent’s contention in required to consider this aspect while passing any order for cancellation of GST registration with retrospective effect. Thus, a taxpayer's registration can be cancelled with retrospective effect only where such consequences are intended and are warranted. In view of the fact that Petitioner does not seek to carry on business or continue the registration, the impugned order dated 08.08.2023 is modified to the limited extent that registration shall now be treated as cancelled with effect from 29.10.2021 i.e., the date when the Show Cause Notice was issued. Petitioner shall make the necessary compliances as required by Section 29 of the Central Goods and Services Tax Act, 2017. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether cancellation of GST registration under Section 29(2) may be ordered with retrospective effect where the Show Cause Notice does not inform the taxpayer that retrospective cancellation is being contemplated. 2. Whether an order cancelling GST registration retrospectively can be sustained where the Show Cause Notice and the cancellation order do not state reasons or objective grounds for selecting a retrospective effective date. 3. The extent to which the taxpayer's cessation of business or lack of interest in continuing registration affects relief against retrospective cancellation. 4. Whether the department is precluded from recovering tax, interest or penalty or from subsequently seeking retrospective cancellation notwithstanding modification of the cancellation date by the Court. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Retrospective cancellation when Show Cause Notice is silent on retrospectivity Legal framework: Section 29(2) permits the proper officer to cancel GST registration 'from such date including any retrospective date, as he may deem fit' upon satisfaction of the circumstances set out in the sub-section. Precedent Treatment: The Court treats the discretion to order retrospective cancellation as one that must be exercised on objective grounds rather than mechanically; no prior case law is cited or overruled in the judgment, but the reasoning aligns with the principle that administrative discretion requires fair notice where consequences are substantial. Interpretation and reasoning: The Court holds that a Show Cause Notice which seeks cancellation of registration must put the taxpayer on notice if retrospective cancellation is being considered because retrospective cancellation has distinct and significant consequences (e.g., affecting input tax credit of other parties). Where the notice is silent on retrospectivity, the taxpayer is denied an opportunity to rebut that specific consequence and therefore procedural fairness is compromised. Ratio vs. Obiter: Ratio - The proper officer cannot validly cancel registration retrospectively without giving the taxpayer notice that retrospective cancellation is under consideration; lack of such notice renders the process unfair. Obiter - The Court's observation about the consequence of denying input tax credit to customers is noted as a relevant consideration but is not exhaustively decided. Conclusions: The Court concludes that retrospective cancellation ordered without prior notice of retrospectivity in the Show Cause Notice is procedurally infirm and cannot be sustained. Issue 2 - Requirement of reasons/objective basis for retrospective effective date in cancellation order Legal framework: Section 29(2) grants the power to cancel registration from any date, including retrospectively, but the exercise of that power must be based on satisfaction of the conditions and appropriate reasons. Precedent Treatment: The Court emphasizes that the 'satisfaction' required under Section 29(2) must be based on objective criteria; it rejects a mechanical application of retrospective cancellation merely because returns were not filed for some period. No precedent is expressly followed or distinguished; the Court applies statutory interpretation and principles of administrative fairness. Interpretation and reasoning: The Court reasons that retrospective cancellation impacts periods when returns were filed and compliance existed; therefore, a proper officer must record objective reasons explaining why cancellation from a retrospective date is warranted. A bare recital that 'no reply to the show cause notice has been submitted' and a formulaic reference to Section 29(2)(c) without factual or reasoned justification is inadequate. Ratio vs. Obiter: Ratio - Cancellation with retrospective effect requires objective, recorded reasons showing why retrospectivity is necessary; perfunctory statements without reasons are invalid. Obiter - The Court's statement that satisfaction 'cannot be subjective but must be based on some objective criteria' reinforces the ratio but also serves as general guidance for future cases. Conclusions: The impugned order lacking reasons for retrospective cancellation is unsustainable; proper officers must articulate the factual and legal basis for selecting any retrospective date. Issue 3 - Effect of taxpayer's cessation of business on relief against retrospective cancellation Legal framework: Statutory power to cancel registration remains exercisable irrespective of the taxpayer's present intention, but equitable and practical considerations may influence the relief a court grants. Precedent Treatment: The Court applies equitable discretion rather than following or overruling precedent; it treats the taxpayer's present non-interest in continuing registration as a relevant factor in tailoring relief. Interpretation and reasoning: Recognizing that both parties sought cancellation albeit for differing reasons, and that the petitioner no longer intended to conduct business, the Court exercised its discretion to modify the effective date of cancellation to the date of the Show Cause Notice. This modification addressed procedural defects while accommodating the petitioner's present position and avoiding unjust retrospective consequences that were not notified. Ratio vs. Obiter: Ratio - Where procedural infirmity exists and the taxpayer no longer seeks continuation of registration, the Court may suitably limit the retrospective effect of cancellation to a date that reflects procedural notice (here, the date of the Show Cause Notice). Obiter - The Court's practical balancing of interests offers guidance but is fact-specific. Conclusions: The Court modified the cancellation to take effect from the date of the Show Cause Notice (29.10.2021), directing the petitioner to comply with Section 29 requirements; this ameliorative relief is permissible where the taxpayer does not wish to continue registration and the original order lacked procedural and reasoned foundation for retrospectivity. Issue 4 - Whether the department is precluded from pursuing recovery or future retrospective cancellation Legal framework: Statutory provisions permit recovery of tax, penalty and interest and empower the department to take enforcement steps in accordance with law. Precedent Treatment: The Court explicitly preserves departmental rights; no preclusive estoppel is applied against future lawful enforcement or reconsideration. Interpretation and reasoning: The Court clarifies that its modification of the effective date of cancellation does not bar the department from pursuing recovery of any tax, penalty or interest due, nor from seeking retrospective cancellation in accordance with law if justified by objective grounds. This preserves statutory remedies and departmental procedural rights while correcting the immediate procedural defect. Ratio vs. Obiter: Ratio - Judicial modification of an order for procedural infirmity does not operate as a bar to future lawful recovery steps or fresh reconsideration by the department in accordance with statutory procedure. Obiter - None beyond explanatory clarification. Conclusions: The respondents are entitled to pursue recovery and are not precluded from seeking retrospective cancellation in a procedurally and substantively proper manner; the Court's order is limited to correcting the defective notice and cancellation date. Cross-references and Final Observations 1. Issues 1 and 2 are interlinked: adequacy of notice (Issue 1) and requirement of objective reasons for retrospectivity (Issue 2) together form the core procedural fairness standard applied by the Court. 2. Issue 3 demonstrates the Court's exercise of equitable discretion to give practical relief (limiting cancellation to the Show Cause Notice date) where the taxpayer no longer wishes to continue registration, without endorsing the defective retrospective cancellation. 3. Issue 4 preserves the department's substantive and enforcement rights despite quashing or modifying the procedural defect in the cancellation order.