2024 (9) TMI 1485 - HC - GST

HP HC restores GST registration after finding Rule 86B cancellation disproportionate and arbitrary punishment

HP HC set aside GST registration cancellation order and directed restoration of petitioner's registration. Court held that cancellation based on Rule 86B ... Cancellation of GST registration - proportionality in administrative punishment - restriction on utilization of input tax credit under Electronic Credit Ledger - Rule 86B and its vires - rule making power under Section 164 - use of prima facie investigation as basis for cancellation - judicial review under Article 226 - violation of Article 14Cancellation of GST registration - Rule 86B and its vires - restriction on utilization of input tax credit under Electronic Credit Ledger - proportionality in administrative punishment - Validity of cancellation of GST registration on the ground of alleged violation of Rule 86B/Rule 21(g) and related proportionality of the penalty. - HELD THAT: - The Court examined Rule 86B which imposes a restriction on using amounts in the Electronic Credit Ledger to discharge more than 99% of output tax where taxable supplies in a month exceed a specified threshold, and noted record indicating the petitioner had used credit in excess of 99% for the stated periods. The petitioner contended that Rule 86B lacked statutory backing; the Court observed Rule 164 empowers rule-making but rules must have support in the statute and found force in the contention that Rule 86B appears to be ultra vires, though the Court did not base its final decision on that ground. Independently, the Court held that because the petitioner's output tax liability stood discharged and no prejudice to the Department was shown, cancellation of registration was a disproportionate and excessive measure; a less drastic, proportionate penalty could have been imposed. Applying the proportionality principle in administrative action, the Court interfered with the cancellation as an excessive penalty in the exercise of writ jurisdiction under Article 226. [Paras 25, 26, 27, 28, 29]Cancellation on account of alleged violation of Rule 86B/Rule 21(g) is interfered with as disproportionate; the Court did not decide the vires issue finally though it found merit in the submission that Rule 86B appears ultra vires.Use of prima facie investigation as basis for cancellation - cancellation of GST registration - violation of Article 14 - judicial review under Article 226 - Validity of cancellation of GST registration based on a 'prima facie' investigation under Rule 21(b) and Rule 21(e). - HELD THAT: - The impugned order acknowledged that the decision to cancel registration under Rule 21(b) and 21(e) was taken on the basis of a 'prima facie' investigation. The Court held that imposing the drastic consequence of cancellation without completion of the investigation and without adequate explanation was arbitrary and unreasonable. Relying on established principles of judicial review, the Court found that action founded on a mere prima facie probe that results in an extreme penalty shocks the conscience and constitutes misuse of administrative power. Such procedural impropriety and arbitrariness rendered the cancellation violative of Article 14 and subject to interference under Article 226. [Paras 30, 31, 32, 33, 34]Cancellation predicated on a 'prima facie' investigation is arbitrary and unlawful; the cancellation is set aside.Final Conclusion: Writ petition allowed; impugned order dated 09.02.2024 cancelling the petitioner's GST registration is set aside and the respondents are directed to restore the GST registration forthwith; other issues are left open for consideration by the respondents. Issues:Challenge to cancellation of GST registration based on Rule 21 (g) and Rule 86B of the Rules framed under the GST Act, 2017. Allegation of violation of fundamental rights under Article 14, Article 19(1)(g), and Article 300A of the Constitution.Analysis:Violation of Rule 86B and Cancellation of GST Registration:The petitioner challenged the cancellation of GST registration based on Rule 21 (g) and Rule 86B. The impugned order cited violation of Rule 86B by the petitioner for using Electronic Credit Ledger in excess of 99% of tax liability. The court acknowledged the violation but questioned the severity of cancellation, noting that the petitioner's tax liability was discharged without causing any loss to the Department. The petitioner argued that Rule 86B lacked statutory backing, violating fundamental rights. The court agreed that Rule 86B appeared ultra vires the HPGST Act, 2017 but decided on disproportionate punishment grounds. Citing Arnab Ranjan Goswami v. Union of India, the court found the cancellation disproportionate and interfered under Article 226 of the Constitution.Validity of Rule 21 (b) and Rule 21 (e):The respondents also cited Rule 21 (b) and Rule 21 (e) as grounds for cancellation based on a 'prima facie' investigation. The court criticized the extreme penalty of cancellation without completing the investigation, citing Jayrajbhai Jayantibhai Patel v. Anilbhai Nathubhai Patel. The court found the action arbitrary, unreasonable, and in violation of Article 14 of the Constitution. Consequently, the court set aside the impugned order and directed the restoration of the petitioner's GST registration.Conclusion:The court allowed the writ petition, setting aside the cancellation order and directing the restoration of the petitioner's GST registration. The court left other issues raised by the petitioner open for consideration by the respondents in the future. No costs were awarded, and pending miscellaneous applications were disposed of.