GST registration cancellation quashed; remanded for fresh adjudication under Rule 21 with proportionate treatment of discrepancies

The HC quashed the cancellation of the petitioner's GST registration and remitted the matter for fresh consideration. The court found the final order impermissibly increased the tax demand beyond the show-cause notice, noted incorrect reliance on non-filing grounds without proper Rule 21 analysis, and identified that discrepancies between deductors' GSTR-7 and the petitioner's GSTR-3B required proportionate treatment. The authority failed to consider less drastic measures and did not apply its mind; cancellation must be a last resort. Petition allowed by way of remand for fresh, proportionate adjudication.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a final order cancelling GST registration is vitiated where the tax demand in the final order exceeds the amount specified in the show cause notice.

2. Whether cancellation of registration is sustainable on the ground of non-filing of returns for the period April-June 2025 where the statutory prescription for cancellation (continuous non-furnishing for six months or two tax periods as applicable) is not attracted.

3. Whether discrepancies between deductors' GSTR-7 and the assessee's GSTR-3B constitute a valid ground for cancellation, and if so, whether cancellation is an appropriate and proportionate remedy.

4. Whether the power to cancel registration under the GST statute must be exercised as a measure of last resort, with consideration of less drastic measures, and the legal consequences of failure to apply such proportionality.

5. What relief and procedural course should follow where cancellation is quashed for the above reasons (restoration of registration, remand for fresh enquiry, and opportunity to file returns and reply).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Consonance between show cause notice and final order (Legal framework): The statutory and procedural principle requires that allegations and quantification in a show cause notice must be consonant with what is finally adjudicated; the final demand may be less than but cannot exceed the amount specified in the show cause notice.

(Precedent Treatment) The Court treats the consonance principle as settled law and applies it directly to the facts.

(Interpretation and reasoning) The show cause notice alleged suppression of turnover of Rs. 45,19,937.77 and tax evasion Rs. 8,13,588.79, whereas the final order recorded suppression of Rs. 2,13,39,325/- with a much larger tax demand. There is no factual or legal basis in the record to justify a final demand exceeding the notice. Lack of consonance denotes failure of procedural fairness and infirmity in jurisdictional exercise.

(Ratio vs. Obiter) Ratio: A cancellation order based on a tax demand exceeding the amount stated in the show cause notice is vitiated for want of consonance and procedural infirmity.

(Conclusion) The impugned cancellation is faulted insofar as the final demand exceeds the amount specified in the show cause notice; this ground alone warrants quashing of the order to the extent relied upon.

Issue 2 - Cancellation for non-filing of returns (Legal framework): Rule 21(h)-(i) read with Section 29(2) prescribes specific temporal thresholds for cancellation: continuous non-furnishing of returns for six months (monthly filers) or two tax periods (quarterly filers); Section 29(2) lists prescribed grounds and requires the proviso opportunity of hearing.

(Precedent Treatment) The Court refers to a decision holding that non-payment or non-filing for three months is not a prescribed ground for cancellation; it adopts that approach to constrain broad readings of cancellation grounds.

(Interpretation and reasoning) The authority relied on non-filing for April-June 2025. The statutory criteria for cancellation on this ground are not satisfied: the petitioner did not fall within the two statutorily specified categories, and the statutory period had not expired. Thus cancellation on this basis is unsustainable.

(Ratio vs. Obiter) Ratio: Cancellation cannot be sustained where the statutory temporal thresholds for non-filing are not met; non-compliance shorter than prescribed periods does not authorize cancellation under the statute.

(Conclusion) The ground of cancellation based on alleged non-filing for the specified months is untenable and contributes to invalidating the impugned order.

Issue 3 - Discrepancy between GSTR-7 and GSTR-3B (Legal framework): Section 29(2)(a) permits cancellation where a registered person has contravened provisions or rules as prescribed; discrepancy between returns and deductor filings constitutes contravention capable of attracting action under Section 29(2).

(Precedent Treatment) The Court acknowledges that such discrepancies are contraventions but treats the identification of contravention as distinct from the proportionality of the remedial measure.

(Interpretation and reasoning) While a divergence between GSTR-7 (deductors' statements) and the assessee's GSTR-3B reflects statutory contravention and can justify inquiry or action, the Court holds that the authority must still assess whether cancellation is necessary and proportionate. Cancellation is a draconian consequence affecting the right to carry on trade and must be a last resort.

(Ratio vs. Obiter) Ratio: Discrepancies in return filings may constitute contravention but do not ipso facto justify cancellation; proportionality and consideration of less drastic measures are required before cancellation is imposed.

(Conclusion) The finding of discrepancy is not by itself sufficient to uphold cancellation; absence of an inquiry showing that less severe remedies were considered renders cancellation disproportionate.

Issue 4 - Requirement of proportionality and exploration of lesser measures (Legal framework): Cancellation/sanctioning powers under the GST Act must be exercised reasonably and proportionately; analogous principles from constitutional rights (right to carry on trade) and administrative law require the authority to consider less drastic alternatives and to apply powers only as a last resort.

(Precedent Treatment) The Court relies on doctrinal guidance in higher court decisions (principles analogous to rarest-of-rare or blacklisting jurisprudence) to import a proportionality standard into review of cancellation orders.

(Interpretation and reasoning) Cancellation of registration can terminate a taxpayer's business and thus has severe economic consequences. Administrative decisions imposing such sanctions require strong, independent, and overwhelming materials and an explicit exercise of mind that lesser measures are inadequate. Failure to undertake this proportionality analysis amounts to non-application of mind and merits quashing.

(Ratio vs. Obiter) Ratio: The power to cancel registration must be exercised after considering proportionality and less onerous alternatives; failure to do so invalidates the order as disproportionate and without application of mind.

(Conclusion) The impugned order is vitiated by lack of proportionality and failure to explore less drastic measures; cancellation must be treated as a measure of last resort and cannot stand here.

Issue 5 - Remedy and procedural directions (Legal framework): Where cancellation is quashed for procedural infirmity or disproportionality, relief may include restoration of registration and remand for fresh adjudication with directions to afford opportunity to file returns and reply and to conduct a fresh enquiry on merits.

(Precedent Treatment) The Court invokes remedial practice of remitting matters for fresh consideration rather than substituting a finding, to ensure adherence to statutory procedure and opportunity of hearing.

(Interpretation and reasoning) Given the identified infirmities (excess demand relative to notice; improper reliance on statutory non-filing ground; lack of proportionality), the appropriate relief is to quash the impugned order, restore registration, and remit the matter to the authority with liberty to the registrant to file returns and reply. The authority must hold enquiry and pass a fresh order on merits in accordance with law.

(Ratio vs. Obiter) Ratio: Where cancellation is quashed for the stated reasons, the correct course is restoration of registration and remand for fresh, lawful adjudication after permitting filing of returns and reply; the authority must reassess proportionality and apply statutory thresholds.

(Conclusion) The cancellation is quashed; registration is restored; the matter is remitted with directions to permit filing of returns, to receive and consider the reply to the show cause notice, and to pass a fresh order on merits and in accordance with law after an enquiry.

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