2025 (9) TMI 669 - HC - GST

Retrospective GST cancellation unsustainable where SCN lacked proposal; cancellation effective from SCN date, February 2, 2022.

M/s. Smart World Communications Versus Commissioner Of Central Tax And CGST Delhi North Commissionerate.

The HC allowed the writ petition given that one partner died, the firm was dissolved and ceased business, finding retrospective GST cancellation ... Retrospective cancellation of GST registration of petitioner - non-filing of returns - case of Petitioner is that the SCN did not propose retrospective cancellation - violation of principles of natural justice - HELD THAT:- Considering the circumstances that one partner of the firm has passed away, the firm itself has been dissolved, and it is no longer doing business, the Court is inclined to entertain the writ petition, even at the belated stage. It is now a settled position in law that if the SCN does not propose retrospective cancellation, the cancellation cannot be given effect retrospectively. This Court in the decision in Akash Bansal (Proprietor M/S Shri Prem Ji Traders) V. Superintendent Range [2025 (8) TMI 986 - DELHI HIGH COURT] held that in such cases, where the SCN does not propose retrospective cancellation, the cancellation shall be effected from the date of the issuance of SCN. In view of the above legal and factual position, the retrospective cancellation is accordingly unsustainable. The impugned order shall take effect from the date of issuance of the SCN i.e., 2nd February 2022. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether an order cancelling GST registration with retrospective effect can be sustained where the Show Cause Notice (SCN) did not propose retrospective cancellation. 2. Whether principles of natural justice and requirement of reasoned satisfaction under Section 29(2) require the SCN and cancellation order to articulate reasons justifying retrospective cancellation. 3. Whether retrospective cancellation can be mechanically applied for non-filing of returns, without objective criteria and consideration of consequential prejudice (e.g., denial of input tax credit to third parties). 4. Whether the writ petition should be entertained despite delay in challenging the impugned cancellation order. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of retrospective cancellation where SCN did not propose retrospective effect Legal framework: Section 29(2) confers power on the proper officer to cancel GST registration 'from such date including any retrospective date, as he may deem fit' if specified circumstances are satisfied. Precedent treatment: The Court follows a consistent line of authority holding that retrospective cancellation cannot be effected where the SCN does not put the taxpayer on notice of retrospective cancellation; prior decisions require the SCN to contemplate retrospective effect before it can be ordered. Interpretation and reasoning: The power to cancel retrospectively is not unfettered. If the SCN is silent on retrospective cancellation, the taxpayer is denied an opportunity to respond to that extreme consequence. Therefore, an order imposing retrospective cancellation on grounds not foreshadowed in the SCN is unsustainable. Ratio vs. Obiter: Ratio - where an SCN does not propose retrospective cancellation, a subsequent order making cancellation retrospective is invalid; cancellation must instead be effective from the date of the SCN (or another properly notified date). Conclusion: Retrospective cancellation in such circumstances cannot be sustained; cancellation must be made operative from the date when the SCN was issued (here, 2nd February 2022). Issue 2 - Requirement of reasoned satisfaction and principles of natural justice for retrospective cancellation Legal framework: Section 29(2) permits retrospective cancellation only when the proper officer is satisfied on objective grounds; administrative action must demonstrate application of mind and provide reasons when invoking retrospective effect. Precedent treatment: The Court relies on earlier decisions emphasizing that retrospective cancellation has 'deleterious consequences' and therefore the order must be reasoned and the SCN must indicate the intention to cancel retrospectively so the affected person can respond; orders lacking reasons or inconsistent records have been held invalid. Interpretation and reasoning: Retrospective cancellation impacts third-party rights (notably input tax credit). Such consequences demand that the proper officer's satisfaction be founded on objective criteria and articulated reasons. A cancellation order that neither states reasons for retrospectivity nor provides a meaningful opportunity to be heard violates principles of natural justice and the statutory scheme. Ratio vs. Obiter: Ratio - retrospective cancellation requires demonstrable, reasoned satisfaction and compliance with natural justice; absence of reasons and notice in SCN renders retrospective cancellation invalid. Conclusion: Where the authority fails to assign rudimentary reasons for retroactivity and the SCN is silent on retrospective effect, the cancellation order is invalid insofar as it is retrospective. Issue 3 - Propriety of mechanically applying retrospective cancellation for non-filing of returns Legal framework: Non-filing of returns is among grounds that may warrant cancellation, but Section 29(2) must be applied with care before invoking retrospectivity. Precedent treatment: Courts have held that mere non-filing for some period does not automatically justify cancelling registration retrospectively, particularly for periods during which returns were filed and the taxpayer was compliant. Interpretation and reasoning: A mechanical application of retrospective cancellation based solely on non-filing is untenable. The proper officer must consider objective factors, the period of compliance, and potential prejudice to recipients of supplies; retrospective cancellations should not be routine but reserved for cases where consequences are intended and warranted. Ratio vs. Obiter: Ratio - non-filing alone does not suffice to justify retrospective cancellation absent objective reasons and consideration of consequences. Conclusion: Retrospective cancellation cannot be routinely applied for non-filing; proper officer must record objective satisfaction and consider collateral effects before imposing retroactivity. Issue 4 - Entertaining delayed challenge to cancellation order Legal framework: Writ jurisdiction under Articles 226/227 permits equitable consideration of challenges, subject to delay and latches principles. Precedent treatment: Courts may entertain belated petitions where satisfactory explanation exists and justice requires intervention. Interpretation and reasoning: The Court exercised discretion to entertain the petition despite delay, having regard to exceptional circumstances (death of a partner, dissolution/closure of business) and the substantial legal issue regarding retrospective cancellation and natural justice. Ratio vs. Obiter: Obiter (procedural discretion) - the Court's decision to condone delay was fact-specific and based on the petitioner's circumstances; it does not lay down a general rule for condonation. Conclusion: The petition was entertained despite procedural delay because of specific mitigating circumstances and the importance of the legal question regarding retrospective cancellation. Remedial Conclusion and Direction Combining the foregoing analyses, the Court concluded that retrospective cancellation is unsustainable where the SCN did not propose it and where the proper officer failed to give reasons demonstrating objective satisfaction for retroactivity. Consequently, the impugned cancellation order is modified to be effective from the date of issuance of the SCN (2nd February 2022), leaving the Department free to proceed in accordance with law if it intends to seek retrospective cancellation after following appropriate notice, reasoning and opportunity to be heard.