Delhi HC changes GST registration cancellation date to SCN date with retrospective effect

Deepali Kapoor vs. Avato Ward-63, State Goods and Services Tax and another (Delhi High Court)

In a recent decision, the Delhi High Court has changed the effective date of cancellation of GST registration for the petitioner, Deepali Kapoor, from a retroactive date to a more recent date. Kapoor had challenged the order of Avato Ward-63, the State Goods and Services Tax (SGST) office, which initially canceled her GST registration with retrospective effect from July 2, 2017. This decision came after a detailed investigation of both the show’s Cause Notice issued to Kapoor and her appeal against the retroactive cancellation.

Background to the case

The petitioner, Deepali Kapoor, has filed an appeal against the cancellation of her GST registration, which the authorities had made effective from July 2, 2017. Kapoor’s GST registration was canceled following a show cause notice (SCN) dated February 3, 2023. In this notification, she had to give reasons why her registration should not be withdrawn.

The show-cause notice cited her “inability to file charges for a continuous six-month period” as the basis for the action. However, Kapoor argued that the notice did not provide adequate justification for the cancellation, especially a retroactive notice. She stated that she had been unable to respond due to financial and mental health issues.

Details of the Show Cause Notice and the impugned order

The SCN issued on February 3, 2023 required Kapoor to appear before the authority and address the allegations regarding her failure to file GST returns under Section 39 of the Central Goods and Services Tax (CGST) Act, 2017 The notice did not explicitly state that her registration could be revoked retroactively, a key point of contention in Kapoor’s case.

When the final order was issued on July 26, 2023, the registration was canceled for failure to comply with its response to the SCN. Moreover, the order invoked Section 29(2)(c) of the CGST Act, which allows cancellation of registration if the taxpayer fails to file the required returns. However, the effective date of the cancellation was set as July 2, 2017, well before the publication of the SCN and Kapoor’s stated reasons for non-compliance.

The petitioner’s allegations

Kapoor submitted that she had already closed down her business with effect from February 3, 2023, and had filed an application for cancellation of her GST registration on that basis. She filed a supplementary declaration stating that she was no longer doing business and had no intention of reinstating her GST registration.

The petitioner’s legal counsel submitted that the retroactive cancellation of GST registration could lead to unforeseen consequences. Notably, Kapoor’s clients would face disallowance of input tax credits availed during the period of her registration, which would negatively impact business transactions that had satisfied tax obligations.

Legal considerations

Under Section 29(2) of the CGST Act, a tax officer has the power to cancel the registration of a taxpayer from any date, including with retrospective effect, provided there is sufficient cause and the requirements of the Act are complied with. However, the Delhi High Court observed that such cancellation must be based on objective criteria and not on mechanical application of rules. Retroactive termination is not justified solely because a taxpayer has failed to file returns for a period of time, especially if the taxpayer had been in compliance prior to the alleged non-compliance period.

The court further noted that the retroactive cancellation of registration could impact customers who availed input tax credit on transactions with the taxpayer. Therefore, the court emphasized the need for careful consideration by the tax authorities before applying a retroactive remission.

Decision of the Court

After considering the case, the Delhi High Court held that the retroactive cancellation of Kapoor’s GST registration was not justified in this context. The court changed the cancellation date to February 3, 2023 and aligned it with the date of the SCN issuance.

The High Court ordered Kapoor to file all outstanding returns till the newly fixed date of cancellation to ensure compliance. Furthermore, the court clarified that tax authorities retain the right to collect outstanding taxes, penalties or interest, as may be applicable under the law.

Implications of the decision

This ruling reinforces the requirement that authorities provide a clear and justified reason for any retroactive measures, especially when they affect the legal and financial rights of the parties involved. The court’s ruling underlines that cancellations of GST registrations must be carefully considered, especially where customers’ tax credits may be affected by the retrospective application of such cancellations.

The court further indicated that the SCN and revocation orders must provide clear information to taxpayers about the exact basis and possible effective dates of such actions so that taxpayers have the opportunity to respond appropriately.

FULL TEXT OF THE JUDGMENT/ORDER OF THE HIGH COURT OF DELHI

1. The petitioner challenges the order dated 26.07.2023 whereby the GST registration of the petitioner was canceled with retrospective effect from 02.07.2017 and also challenges the Show Cause Notice dated 03.02.2023.

2. Video Show Cause Notice dated 03.02.2023, petitioner was requested to show cause why registration was not canceled for the following reasons:

“returns provided by you under section 39 of the Central Goods and Services Tax Act 2017”

3. Although the notice does not mention any compelling reason, there is a comment in the notice: “failure to provide returns for a continuous period of six months.” The show cause notice requires the petitioner to appear before the undersigned i.e. the authority issuing the notice.

4. Further, the impugned decision dated 26 July 2023 merely states that “no response to the show cause notice was filed and you did not appear in person or through an authorized representative on the day before the personal hearing”. It further states that registration may be canceled for the following reason:Section 29(2)(c) person, other than paying tax U/s 10, has not filed returns for prescribed periods”. The order further states that the effective date of cancellation of registration is 02.07.2017 i.e. a retroactive date.

5. The Show Cause Notice and the contested decision do not inform the applicant that the registration can be canceled with retroactive effect. Accordingly, the petitioner had no opportunity to even object to the retrospective cancellation of registration.

6. Counsel for the petitioner submits that the petitioner was unable to respond to the said show-cause notice due to financial problems and mental depression.

7. He states that the petitioner is no longer doing business and claims that he closed the business on February 3, 2023 and applied for deregistration of GST registration.

8. He further states that the petitioner has filed a supplementary affidavit stating that the petitioner is no longer interested in carrying on the business and is not interested in restoration of GST registration and her business may be considered closed.

9. In terms of section 29(2) of the Central Goods and Services Tax Act, 2017, the competent officer may cancel the GST registration of any person from such date, including any date with retrospective effect, if he deems it fit if the conditions set out in the said subsection are met. The registration cannot be mechanically canceled retroactively. It can only be canceled if the appropriate official deems it appropriate. Such satisfaction cannot be subjective, but must be based on some objective criteria. The mere fact that a taxpayer has not filed the returns for a certain period does not mean that the taxpayer’s registration must be canceled with a retroactive effect that also covers the period in which the returns were filed and the taxpayer complied.

10. It is important to note that, according to the defendant, one of the consequences of retroactively canceling the registration of a taxable person is that the taxable person’s customers are denied the input tax credit enjoyed in respect of the supplies made by the taxable person have been carried out during such period. While we do not find it appropriate to examine this aspect, but assuming that the contention of the respondent in this regard is correct, it would follow that the appropriate officer is also bound to consider this aspect while passing an order for cancellation of GST registration with retroactive effect. . A taxpayer’s registration can therefore only be canceled retroactively if such consequences are intended and justified.

11. In view of the above facts and circumstances, the order of cancellation is modified in that it will take effect from 03.02.2023 i.e. the date on which GST registration was suspended by a notification for urgent reasons dated 03.02.2023. The petitioner will provide all required returns updated up to the date of cancellation of registration.

12. It is clarified that the respondents are also not prohibited from taking steps for recovery of taxes, penalties or interest which may be due under the petitioner’s law.

13. The request will be processed accordingly in the above terms.