Registration

Cancellation of GST Registration Needs to be Accompanied by Reasons

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Short Note

In a recent decision[1], the Delhi High Court held that the cancellation of an assessee’s registration under GST cannot be done in an arbitrary fashion and needs to be accompanied by objective reasons. 

Facts 

The assessee in the impugned case was carrying on the business as a sole proprietorship under the name ‘M/s P.S. Metal’ but closed business on 11.11.2019 on account of her ill health. The assessee filed an application on the same date for cancellation of her registration and her application was acknowledged, but not processed. Thereafter, on 12.021.2021, the proper officer issued a showcause notice to the petitioner proposing to cancel the assessee’s registration on the ground of non-filing of returns for a period of six months. The assessee was requested to appear before the proper officer failing which the case would be decided ex parte. The proper officer thereafter passed an ex parte order cancelling the petitioner’s registration, with the order stating that no reply was received to the showcause notice. However, the order did not mention any reasons for cancelling the registration even though the petitioner’s registration was cancelled with retrospective effect from 01.07.2017.  

The assessee challenged the order on various grounds: while the showcause notice asked the assessee to appear for a personal hearing, it did not mention the date, time or venue for personal hearing, the order for cancellation of registration was passed in violation of principles of natural justice, and that the order does not contain any reasons for cancellation of the assessee’s registration. 

Decision

The Delhi High Court accepted the assessee’s contention. The High Court referred to Section 29(2), CGST Act, 2017 which states that the proper may cancel the registration of a person from such date, including any retrospective date, as he may deem fit. The provision specifies various grounds under which the registration may be cancelled with retrospective effect including the registered person having contravened any of the provisions of the Act or not having filed returns for a financial year beyond three months from the due date, etc. The High Court observed that the discretion provided to the proper officer under Section 29(2) cannot be exercised arbitrarily and the decision to cancel registration from retrospective effect must be accompanied with some objective criteria. (para 6)

The Delhi High Court specifically noted the Revenue’s contention that cancellation of registration would have the effect of denying ITC to customers of assessee. The High Court observed that assuming that such a contention is true, it is incumbent on the proper officer to be ‘fully satisfied’ that the registration needs to be cancelled, and that too with retrospective effect. Though in the instant case no reason for cancellation of registration was provided, let alone a reason for cancellation of registration with retrospective effect. 

Accordingly, the Delhi High Court granted the assessee’s request that her registration be cancelled w.e.f. 11.11.2019 since she ceased her business from the said date. 

Conclusion

The Delhi High Court’s succinct decision in the impugned case throws light on certain practices that the Revenue Department sometimes tends to adopt: issuance of a showcause notice without providing adequate details to the person such as the date and venue for hearing on the notice and the exercise of discretion without providing adequate reasons. The officers have been granted wide and extensive powers under the GST laws to assist in implementation of GST laws and it is necessary that the same are exercised prudently.      

[1] Pratima Tyagi v Commissioner of GST & Anr 2023: DHC: 9025-DB. 

Andhra HC Sets Aside SCN: Holds that it is Vague and Dubious

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The Andhra Pradesh High Court in a recent judgment[1] set aside the showcause notice (‘SCN’) issued by the Revenue Department on the ground that the SCN was vague and dubious. The High court held that the SCN did not contain sufficient details and particulars to enable the taxpayer to reply or file appropriate objections. 

Facts 

The petitioner in the impugned case, M/s Sakhti Steel Industries Pvt Ltd, was in the business of trading TMT bars, billets and ferrous scrap and importing iron scrap from foreign countries. The parent company of the petitioner, M/s Sakhti Ferroy Alloys Pvt Ltd, manufactured TMT bars and billets. The petitioner used to purchase the TMT bars and billets from its parent company and sell them to various States. The petitioner stated that to maintain better operational efficiency it took on lease vacant land with small builtup area that belonged to its parent company and in a portion of the said premises the parent company also operated. The petitioner had obtained registration in Andhra Pradesh where the said premises were located. 

The concerned Deputy Assistant Commissioner visited the business premises of the petitioner and issued a SCN with allegations that the petitioner had obtained registration by ‘fraud, wilful misstatement or misrepresentation of facts’ and the petitioner was asked to file a reply within 7 days. The SCN was issued because the Deputy Assistant Commissioner based on commonality of premises of the petitioner and its parent company concluded that the former had obtained registration by fraud. The petitioner filed a reply denying all allegations of fraud and refuting the fact that its business was not genuine, but the report of Deputy Assistant Commissioner was accepted by the appellate authorities and petitioner’s registration was cancelled. Against the said orders, the petitioner approached the Andhra Pradesh High Court. 

High Court Sets Aside SCN 

The Andhra Pradesh High Court was precise and unforgiving in its observations about the conduct of the Revenue Department. The High Court cited Section 29, Andhra Pradesh Goods and Services Tax, 2017 and noted that the grounds on which the registration of a taxpayer can be cancelled are specifically enumerated in the provision. Some of the grounds in the provision are: registered taxpayer has contravened any of the provisions of the Act or rules made thereunder, not filing of returns and obtaining registration by fraud, misstatement or misrepresentation of facts. The High Court noted that the SCN issued to the petitioner only mentioned the latter and observed that grounds mentioned in SCN were vague, dubious and did not furnish enough details for the taxpayer to respond to them meaningfully. The High Court added that the purpose of SCN is to state the formal grounds of accusation to enable the accused to reply in satisfaction of principles of natural justice and equity. (para 7) The nature of SCN was enough for the High Court to conclude that principles of natural justice had bene flagrantly violated and that the ‘very foundation for invocation of cancellation is feeble as it has no legal sanctity.’ (para 7)

While the vagueness in the SCN was enough for the Andhra Pradesh High Court to quash it, the High Court nonetheless added that the petitioner in its reply to SCN had stated that it was not involved in any fake business and vouched for the authenticity of its bills and details of all its invoices involving purchases and sales. The petitioner was willing for its records to be scrutinized to disprove allegations of it running a fake business. However, the High Court observed, instead of resorting to such a ‘logical and legal exercise’ the authorities relied on the conjecture of the inspecting authority who suspected the petitioner to be involved in bill trading without movement of goods, for which there was no proper basis. (para 10)

The Andhra Pradesh High Court was thus unsparing in its comments on the Revenue Department’s conduct at the time of issuance of SCN and thereafter. And its observations about the lackadaisical approach of the Revenue Department were certainly not inaccurate. 

Conclusion 

The Andhra Pradesh High Court adopted a pro-taxpayer approach in the impugned case without detracting from the basic principles of law. It interpreted the relevant provision – Section 29, Andhra Pradesh Goods and Services Tax, 2017 – reasonably to cast a burden on the State to articulate specific grounds of accusation in a detailed manner to enable the taxpayer to respond meaningfully. Merely reproducing the language of the statutory provision in the SCN was not sufficient to prove that the ground for cancellation of taxpayers’ registration were satisfied. And the High Court went further to castigate the authorities to follow a logical path once the taxpayer replies to the SCN instead of merely providing their stamp of approval to the suspicions of the inspecting officer.    

[1] M/s Sakhti Steel Industries Pvt Ltd v Appellate Additional Commissioner Sales Tax (Tirupati) TS-496-HCAP-2023-GST. 

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