2024 (9) TMI 1485 - HC - GST

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

M/s A.M. Enterprises Versus State of Himachal Pradesh & Ors.

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 petitioner’s GST Registration - seeking revocation of cancellation - seeking relief to declare Section 16 (2) (c) and Rule 86B of the Rules framed ultra vires the GST Act, 2017 - HELD THAT:- Section 49A of the Act prescribes conditions for utilization of input tax credit provided under Section 49; and Section 49B provides a restriction for utilization of input tax credit - The respondents have not answered in their reply to the petitioner’s contention that Rule 86B of the Act itself is not backed by any statutory provision. Rule 164 enables the Rule making authority to frame the Rule 86B or other Rules, but the Rules must have backing in the main body of the statute. Otherwise the Rule would be ultra vires - there are no force in the petitioner’s contention that Rule 86B of the Act has no statutory backing and appears to be ultra vires the provisions of the HPGST Act, 2017. Since the tax liability of the petitioner towards output tax stood discharged, no prejudice has been caused to the respondents. It was unnecessary for the respondents to cancel the GST Registration and they could have considered any other penalty which is more proportionate to the violation of law - the cancellation of GST Registration on the pretext of violation of Rule 86B is a disproportionate punishment imposed on petitioner and is liable to be interfered in exercise of the power conferred on this Court under Article 226 of the Constitution of India. Consideration by the court of alleged violation of Rule 21 (b) and Rule 21 (e) - HELD THAT:- How a “prima facie” investigation could be the basis of an order of cancellation of GST Registration without the investigation being completed, is not explained by the counsel for the respondents. The respondents ought to have waited for the investigation to be completed before imposing the drastic penalty of cancellation of GST Registration - It shocks the conscience of the Court to find an extreme penalty of the nature of cancellation of GST Registration being imposed on a business on the basis of a “prima facie” investigation conducted by the respondents - The said action of the respondents is thus clearly arbitrary, unreasonable and violates Article 14 of the Constitution of India. The impugned order Annexure P-1 dt. 09.02.2024 is set aside, and the respondents are directed to restore the GST Registration of the petitioner, forthwith - the Writ petition is allowed. 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.