GST Registration Cannot Be Cancelled Retrospectively Without Objective Criteria:  Delhi High Court

In a recent ruling, the Delhi High Court addressed the retrospective cancellation of GST registration for Kalpatru Industries, emphasizing the necessity for clear and objective criteria when making such decisions. The judgment, delivered by a bench comprising Justices Sanjeev Sachdeva and Ravinder Dudeja, critiqued the procedural deficiencies in the notices issued by the tax authorities and modified the cancellation date to align with the application submitted by the petitioner.

Kalpatru Industries, a Hindu Undivided Family (HUF), held GST registration number 07AAEHK4901N1Z3 under the Central Goods and Services Tax Act, 2017. On May 6, 2019, the petitioner sought the cancellation of their GST registration due to the closure of business operations. However, the application was rejected on June 5, 2020, without specific reasons. Subsequently, a Show Cause Notice was issued on January 13, 2021, and the GST registration was cancelled retroactively to July 1, 2017, via an order dated January 27, 2021. Kalpatru Industries challenged this decision, leading to the present judgment.

The court noted significant flaws in both the Show Cause Notice and the cancellation order. The Show Cause Notice failed to provide specific reasons for the proposed cancellation, merely stating the taxpayer had not filed returns for a continuous period of six months without specifying the date and time for a personal hearing​​. Furthermore, the cancellation order contradicted itself by acknowledging a reply from the petitioner but also citing the absence of a reply as the reason for cancellation​​.

The bench emphasized that retrospective cancellation of GST registration should not be mechanical. As per Section 29(2) of the Act, such actions must be based on objective criteria and not subjective opinions. The court remarked, "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"​​.

The court underscored that retrospective cancellation has significant consequences, including the denial of input tax credit to the taxpayer's customers for the relevant period. Therefore, it should only be employed when such outcomes are warranted and intended. The judgment stated, "A taxpayer's registration can be cancelled with retrospective effect only where such consequences are intended and are warranted"​​.

Justice Sanjeev Sachdeva observed, "Neither the Show Cause Notice, nor the order spell out the reasons for retrospective cancellation. Accordingly, the same cannot be sustained"​​. The judgment further highlighted that any cancellation with retrospective effect must be objectively justified, aligning with the principles of fairness and transparency in tax administration.

The Delhi High Court modified the impugned order to reflect the cancellation of GST registration from May 6, 2019, the date when the application for cancellation was initially filed by Kalpatru Industries. This ruling underscores the judiciary's commitment to ensuring procedural fairness and the necessity for objective criteria in tax administration. The court also clarified that tax authorities are not precluded from pursuing any dues from the petitioner following due process, including providing proper notice and a personal hearing.

Date of Decision: May 27, 2024