The Delhi High Court has recently emphasized the necessity for tax authorities to adhere strictly to due process when retrospectively canceling Goods and Services Tax (GST) registrations. In a series of judgments, the Court underscored that any retrospective cancellation must be grounded in objective criteria, with clear reasons and intentions explicitly stated in the Show Cause Notices (SCNs) issued to the taxpayers.
Case of Pratima Tyagi: Objective Criteria for Retrospective Cancellation
In the matter of Pratima Tyagi v. Commissioner of G.S.T. & Anr., the petitioner, a sole proprietor of 'M/s P. S. Metal,' ceased business operations on November 11, 2019, due to health issues and applied for cancellation of her GST registration on the same date. Despite the application, the tax authorities did not process it and subsequently issued an SCN proposing cancellation of her registration for non-filing of returns over six months. The SCN lacked specifics regarding the personal hearing schedule, and the final order canceled her registration retrospectively from July 1, 2017, without providing explicit reasons.
The High Court observed that while Section 29(2) of the Central Goods and Services Tax Act, 2017, grants authorities the discretion to cancel registrations retrospectively, such discretion must not be exercised arbitrarily. The Court noted that the petitioner had filed returns during certain periods, and there was no justification for canceling her registration for those compliant periods. Consequently, the Court directed that the cancellation be effective from November 11, 2019, aligning with her cessation of business activities, rather than the earlier date of July 1, 2017.
Case of M/S Akash Garments India Pvt. Ltd.: Necessity of Explicit Reasons in SCNs
In another significant case, M/S Akash Garments India Pvt. Ltd. v. Union of India & Anr., the petitioner applied for cancellation of its GST registration on January 30, 2021. The authorities sought additional details, but due to the petitioner's non-response, the application was rejected. Subsequently, an SCN dated January 15, 2023, was issued, alleging failure to file returns for six consecutive months, leading to an order canceling the registration retrospectively from July 2, 2017.
The High Court highlighted that neither the SCN nor the final cancellation order provided reasons justifying the retrospective effect. Emphasizing the importance of due process, the Court reiterated that any order under Section 29(2) must reflect the reasons for retrospective cancellation, demonstrating due application of mind. In the absence of such reasons, the Court quashed the retrospective effect of the cancellation, making it effective from the date of the SCN issuance, January 15, 2023.
Legal Precedents: Riddhi Siddhi Enterprises and Ramesh Chander Cases
The Court's decisions are consistent with its earlier rulings. In Riddhi Siddhi Enterprises v. Commissioner of Goods and Services Tax (CGST), South Delhi & Anr., the Court held that the power to cancel GST registration retrospectively under Section 29 does not justify arbitrary revocation. The order must reflect the reasons for such cancellation, especially considering the severe consequences of retroactive cancellation.
Similarly, in Ramesh Chander v. Assistant Commissioner of Goods and Services Tax, Dwarka Division, CGST Delhi & Anr., the Court emphasized that retrospective cancellation should not be mechanical. The proper officer's satisfaction must be based on objective criteria, and non-filing of returns alone does not warrant retrospective cancellation covering periods when returns were duly filed.
Implications for Tax Authorities and Taxpayers
These judgments collectively underscore the judiciary's insistence on adherence to due process and objective assessment in tax administration. For tax authorities, it is imperative to ensure that SCNs explicitly state the reasons and intent for proposing retrospective cancellations. This practice not only upholds the principles of natural justice but also provides taxpayers with a clear understanding of the allegations, enabling them to respond appropriately.
For taxpayers, these rulings offer a safeguard against arbitrary administrative actions. They highlight the importance of timely compliance and proactive communication with tax authorities, especially when seeking cancellation of registrations. In cases where retrospective cancellation is proposed, taxpayers should scrutinize the SCNs for explicit reasons and challenge any arbitrary decisions that lack proper justification.
Conclusion
The Delhi High Court's recent rulings reinforce the necessity for transparency, objectivity, and adherence to due process in the retrospective cancellation of GST registrations. By mandating that SCNs reflect clear reasons and the intent for such cancellations, the Court ensures that the discretionary powers granted under Section 29(2) of the CGST Act are exercised judiciously, protecting the rights of taxpayers and maintaining the integrity of tax administration.
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