Retrospective GST registration cancellation invalid where SCN lacked retrospective basis; cancellation effective from December 31, 2024

HC held that retrospective cancellation of GST registration was impermissible where the SCN did not contemplate retrospective effect and the order exceeded the SCN's reasons. The court set aside the impugned retrospective cancellation and directed that cancellation be effective from 31 December 2024, the SCN issuance date. Petition allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a cancellation order under Section 29 of the Central Goods and Services Tax Act, 2017 (the Act) can operate with retrospective effect where the Show Cause Notice (SCN) did not put the taxpayer to notice of retrospective cancellation or the additional grounds relied upon in the cancellation order.

2. Whether the proviso to Rule 22(4) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) mandates dropping of cancellation proceedings where, after issuance of an SCN under Section 29(2)(b) or (c), the person furnishes all pending returns and makes full payment of tax dues with interest and late fee.

3. Whether issuance of an alert notice to third parties against the taxpayer consequent to an impugned retrospective cancellation is sustainable where the cancellation order is not supported by the reasons disclosed in the SCN.

4. Whether physical verification results not disclosed in the SCN can be relied upon in the cancellation order to justify retrospective cancellation and whether principles of reasoned decision-making and natural justice require prior notice of such grounds.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Retrospective cancellation where SCN does not contemplate retrospective effect

Legal framework: Section 29(2) of the Act permits cancellation of GST registration from such date, including retrospective dates, as the proper officer may deem fit where specified circumstances are satisfied. The procedural requirement to issue an SCN under Rule 22(1) and to pass orders in prescribed forms is governed by the CGST Rules.

Precedent treatment: The Court follows earlier decisions holding that retrospective cancellation cannot be mechanically applied and that an order of cancellation must reflect reasons that were weighed to justify retrospective effect. Prior rulings cited establish that if the SCN does not put a person to notice of retrospective cancellation, the order cannot validly impose retrospective effect.

Interpretation and reasoning: The SCN in the present matter notified liability to cancel for non-filing of returns under Section 29(2)(c) and suspended registration from the date of the SCN. It did not propose retrospective cancellation nor disclose an allegation that the business premises did not exist. The cancellation order, however, adds the ground of non-existence of business premises and cancels registration retrospectively from a date years earlier. Given the deleterious and far-reaching consequences of retrospective cancellation (including denial of input tax credit to customers), the Court reasons that such a step must be predicated on reasons disclosed in the SCN and a demonstrable application of mind; absent that, retrospective cancellation is unsustainable.

Ratio vs. Obiter: Ratio - Retrospective cancellation is impermissible where the SCN does not contemplate retrospective cancellation or the additional grounds relied upon in the cancellation order were not put to the taxpayer. Observations on the policy consequences (e.g., input tax credit denial) are supportive reasoning but not the dispositive statutory test; they form part of the ratio affirming the requirement of objective satisfaction for retrospective effect.

Conclusion: The cancellation order's retrospective effect is invalid because the SCN did not put the taxpayer on notice of retrospective cancellation or of the additional factual ground (non-existence at premises) relied upon in the order. The impugned retrospective cancellation is set aside and modified to operate from the date of the SCN.

Issue 2 - Operation of proviso to Rule 22(4) where returns and dues are furnished after issuance of SCN

Legal framework: Rule 22(4) provides that if the reply under sub-rule (2) is satisfactory the proper officer shall drop proceedings and pass an order in FORM GST REG-20. The proviso to Rule 22(4) states that where the person, instead of replying, furnishes all pending returns and makes full payment of tax dues with applicable interest and late fee, the proper officer shall drop proceedings and pass FORM GST REG-20.

Precedent treatment: The Court applies Rule 22(4) in accordance with its plain terms and consistent with precedents that enforce procedural safeguards embodied in the Rules.

Interpretation and reasoning: In the present case, the taxpayer filed pending returns and paid due taxes with interest and late fee after the SCN was issued and before the cancellation order was passed. The statutory language of the proviso is mandatory: upon such compliance the proper officer "shall drop the proceedings." The authority did not drop proceedings; rather, it proceeded to cancel registration. That course is contrary to the mandatory statutory prescription and undermines the remedial opportunity afforded to taxpayers to cure default.

Ratio vs. Obiter: Ratio - Where the conditions of the proviso to Rule 22(4) are satisfied, the proper officer is obliged to drop cancellation proceedings; failure to do so renders the cancellation order unsustainable insofar as it relates to the grounds addressed by the proviso.

Conclusion: The authority should have dropped the cancellation proceedings under the proviso to Rule 22(4) upon filing of pending returns and payment of dues; the cancellation order cannot be sustained to the extent it ignores that mandatory provision.

Issue 3 - Validity of alert notice issued to third parties consequent to impugned cancellation

Legal framework: Administrative action affecting a taxpayer that is subsequently set aside entails that consequential actions taken on account of that action may also be invalidated to the extent they rest on the flawed order.

Precedent treatment: Consistent with prior decisions, the Court treats ancillary public notifications issued as a consequence of an unsustainable cancellation as compellable to be set aside to prevent continuing adverse effects on the taxpayer.

Interpretation and reasoning: The alert notice was issued after and because of the impugned cancellation. Since the cancellation order was not sustainable (see Issues 1 and 2), and the alert notice adversely affected the taxpayer's business relations, the Court finds it appropriate to set aside the alert notice as consequential relief.

Ratio vs. Obiter: Ratio - An alert notice predicated on an unsustainable cancellation order must be set aside.

Conclusion: The alert notice issued to buyers and business associates is set aside as it was based on the untenable cancellation order.

Issue 4 - Reliance on physical verification not disclosed in SCN; requirements of reasoned decision-making and natural justice

Legal framework: Principles of natural justice and statutory procedural safeguards require that material grounds relied upon for adverse administrative action be disclosed in the SCN so that the affected person has an opportunity to meet the case; orders must reflect reasons demonstrating application of mind.

Precedent treatment: The Court reiterates established holdings that an order cancelling registration must be reasoned and demonstrative of objective satisfaction; undisclosed factual findings (such as physical verification results) cannot be shoehorned into the order without having been the subject of notice.

Interpretation and reasoning: The cancellation order in the present case invoked a physical verification finding not mentioned in the SCN. The taxpayer was not afforded opportunity to respond to that factual premise. The order thus departs from the SCN and fails to satisfy requirements of notice and reasoned decision-making, rendering it unsustainable.

Ratio vs. Obiter: Ratio - Material factual grounds not disclosed in the SCN cannot be relied upon in a cancellation order; failure to disclose such grounds violates natural justice and invalidates the order.

Conclusion: The authority could not lawfully rely on the physical verification result for retrospective cancellation without having disclosed it in the SCN; the cancellation order fails for want of reasoned application of mind and breach of procedural fairness.

Relief and ancillary directions (as applied)

The Court set aside the impugned cancellation order and directed that cancellation operate from the date of the SCN (date of suspension), restored the registration accordingly, set aside the consequential alert notice, and observed that the Department remains free to initiate any other legally available action if other violations are found.

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