GST registration cancellation order modified; court allows retrospective effect from business discontinuation date.

Case Name:

Polytec Industries Through Its Proprietor Mr. Rohit Gupta Vs Commissioner of Delhi Goods And Services Tax And Others (Delhi High Court)

Key Takeaways:

1. The court held that GST registration cannot be canceled retrospectively in a mechanical manner without objective criteria.

2. Canceling registration retrospectively may deny input tax credit to the taxpayer’s customers, which the proper officer must consider.

3. The court modified the cancellation order to take effect from February 1, 2019, when the petitioner discontinued the business.

Issue:

Whether the cancellation of the petitioner’s GST registration with retrospective effect from July 1, 2017, was valid and justified.

Facts:

Polytec Industries was registered under the GST Act and engaged in manufacturing and trading of plastic products.

On May 8, 2019, the petitioner applied for cancellation of GST registration due to discontinuation of business.

On June 5, 2020, the application for cancellation was rejected by the authorities.

On September 1, 2020, a show cause notice was issued for cancellation of registration for failure to file returns for six consecutive months.

On September 12, 2020, an order was passed canceling the petitioner’s GST registration retrospectively from July 1, 2017.

Arguments:

1. Petitioner’s Argument:

The retrospective cancellation from July 1, 2017, was arbitrary and without notice or opportunity to object.

2. Respondent’s Argument:

The cancellation was justified under Section 29(2) of the CGST Act, which allows retrospective cancellation if deemed fit by the proper officer.

Key Legal Precedents:

Section 29(2) of the Central Goods and Services Tax Act, 2017 (“CGST Act”)

Judgment:

The court held that while Section 29(2) of the CGST Act allows retrospective cancellation, it cannot be done mechanically. The proper officer must have objective criteria and consider the consequences, such as denial of input tax credit to the taxpayer’s customers.

The court modified the cancellation order to take effect from February 1, 2019, the date when the petitioner discontinued the business. However, the petitioner was directed to furnish requisite details to enable the respondents to ascertain any tax, penalty, or interest due, which the respondents could recover in accordance with the law.

FAQs:

Q1: What was the main issue in this case?

A1: The main issue was the validity of the retrospective cancellation of the petitioner’s GST registration from July 1, 2017, despite the petitioner having applied for cancellation from February 1, 2019, when the business was discontinued.

Q2: What was the court’s decision?

A2: The court modified the cancellation order to take effect from February 1, 2019, the date when the petitioner discontinued the business, instead of the retrospective date of July 1, 2017.

Q3: What was the legal reasoning behind the court’s decision?

A3: The court held that while Section 29(2) of the CGST Act allows retrospective cancellation, it cannot be done mechanically. The proper officer must have objective criteria and consider the consequences, such as denial of input tax credit to the taxpayer’s customers.

Q4: What were the implications of the court’s decision?

A4: The court’s decision prevented the retrospective denial of input tax credit to the petitioner’s customers for the period before February 1, 2019. However, the petitioner was directed to furnish details to enable the respondents to recover any tax, penalty, or interest due.

Q5: What is the significance of this case?

A5: This case clarifies that the power to cancel GST registration retrospectively under Section 29(2) of the CGST Act cannot be exercised arbitrarily and must be based on objective criteria, considering the potential consequences for the taxpayer and its customers.

1. Petitioner impugns order in appeal dated 11.01.2024 whereby the appeal filed by the Petitioner has been dismissed solely on the ground of. Petitioner filed the appeal impugning order dated whereby the GST registration of the petitioner was cancelled retrospectively with effect from 01.07.2017. petitioner also impugns order dated 05.06.2020, where by the application for cancellation of GST registration was rejected and also impugns show Cause Notice dated 01.09.2020.

2. Vide Show Cause Notice dated 01.09.2020,petitioner was called upon to show cause as to why the registration be not cancelled for the following reasons:-

"Any taxpayer other than composition taxpayer has not filed returns for a continuous period of six months"

3. Petitioner was the proprietor of M/s Polytec Industries and was in business of manufacturing and trading of Plastic products and was registered under Goods and Services Tax Act, 2017.

4. Petitioner claims to have shifted his business to Bhiwadi and therefore submitted an application for Cancellation of Registration Certificate on ground of discontinue of business with effect from 01.02.2019.

5. Pursuant to the said application, notice was given to the Petitioner on 17.03.2020 seeking additional information and documents relating to application for cancellation of registration. on account of non apply of the said documents, order dated 05.06.2020 was passed rejecting the application for cancellation.

6. Thereafter, subject show cause notice dated 01.09.2020 was issued to the petitioner with an observation in the notice stating “failure to furnish returns for a continuous period of six months”

7. It may be noticed that the impugned order dated 12.09.2020 states that the registration is liable to be cancelled for the following reason “whereas no reply to notice to show cause has been submitted". The order also seeks to cancel the registration with retrospective effect from 01.07.2017.

However, there is no material on record to show as to why the registration is sought to be cancelled retrospectively.

8. The Show Cause Notice dated 01.09.2020 also does not put the petitioner to notice that the registration is liable to be cancelled retrospectively. Accordingly, petitioner had no opportunity to even object to the retrospective cancellation of the registration.

9. Records clearly demonstrate that the Petitioner had submitted an application seeking cancellation of the GST registration on 08.05.2019 and thereafter, vide order dated 12.09.2020, the registration of the Petitioner had been cancelled. We note that the cancellation of registration has been done with retrospective effect.

10. In terms of Section 29(2) of the Central Goods and Services Tax Act, 2017, the proper officer may cancel the GST registration of a person from such date including any retrospective date, as he may deem fit if the circumstances set out in the said sub-section are satisfied. Registration cannot be cancelled with retrospective effect mechanically. It can be cancelled only if the proper officer deems it fit to do so. Such satisfaction cannot be subjective but must be based on some objective criteria. Merely, because a taxpayer has not filed the returns for some period does not mean that the taxpayer’s registration is required to be cancelled with retrospective date also covering the period when the returns were filed and the taxpayer was compliant.

11. It is important to note that, according to the respondent, one of the consequences for cancelling a tax payer's registration with retrospective effect is that the taxpayer’s customers are denied the input tax credit availed in respect of the supplies made by the tax payer during such period. Although, we do not consider it apposite to examine this aspect but assuming that the respondent’s contention in this regard is correct, it would follow that the proper officer is also required to consider this aspect while passing any order for cancellation of GST registration with retrospective effect. Thus, a taxpayer’s registration can be cancelled with retrospective effect only where such consequences are intended and are warranted.

12. In view of the above, facts and circumstances, the order of cancellation is modified to the extent that the same shall operate with effect from 01.02.2019. i.e., the date on which the petitioner discontinued the business.

13. However, the petitioner shall furnish all requisite details to the respondents as required to be submitted by the petitioner in respect of letter dated 07.03.2020 to enable the respondents to ascertain if any demand is liable raised against the petitioner.

14. It is clarified that respondents are also not precluded from taking any steps for recovery of any tax, penalty or interest that may be due from the petitioner in accordance with law.

15. The petition is accordingly disposed of in the above terms.

SANJEEV SACHDEVA, J

RAVINDER DUDEJA, J

January 24, 2024