Case Law Details
Chehak Fashions Vs Commissioner (Delhi High Court)
Background of the Case – Chehak Fashions, a business engaged in the trading of woven fabric, was served with a Show Cause Notice (SCN) on September 20, 2021, for not filing returns for a continuous period of six months. The SCN was vague, lacking specific reasons and not specifying the date and time for a personal hearing. Subsequently, on October 26, 2021, the GST registration of Chehak Fashions was canceled with retrospective effect from July 26, 2017, without providing a clear rationale.
Procedural Flaws in Issuance of SCN – The Delhi High Court observed several procedural flaws in the issuance of the SCN and the subsequent order. The SCN failed to specify detailed reasons for the proposed cancellation and did not notify the petitioner of the possibility of retrospective cancellation. Furthermore, the order dated October 26, 2021, was contradictory, as it referenced a reply from the petitioner but simultaneously stated that no reply had been submitted. The absence of material evidence to justify retrospective cancellation was also noted.
Legal Provisions and Court’s Interpretation – Under Section 29(2) of the Central Goods and Services Tax (CGST) Act, 2017, a proper officer may cancel GST registration from a retrospective date if circumstances warrant such action. However, the Court emphasized that such cancellation should be based on objective criteria and not merely on the non-filing of returns. The decision to cancel retrospectively should consider whether such a move is necessary and justified by the circumstances.
Court’s Decision – The Court found that the SCN and the cancellation order lacked substantive justification and procedural fairness. It was noted that both the petitioner and the respondent agreed on the cancellation of the GST registration but for different reasons. Given that the petitioner had ceased business operations and did not wish to continue the registration, the Court modified the cancellation date to September 20, 2021, the date of the SCN issuance.
Conclusion – The Delhi High Court’s ruling in the case of Chehak Fashions vs. Commissioner sets a precedent on the importance of procedural fairness and detailed justification in the cancellation of GST registrations. It underscores the necessity for tax authorities to adhere to objective criteria and provide clear reasons when issuing notices and making decisions that significantly impact taxpayers.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. Petitioner impugns order dated 01.01.2023 whereby the appeal of the Petitioner has been dismissed solely on the ground that the same is barred by limitation. Petitioner also impugns order dated 26.10.2021 whereby the GST registration of the petitioner was cancelled retrospectively with effect from 26.07.2017 and also impugns Show Cause Notice dated 20.09.2021.
2. Vide Show Cause Notice dated 20.09.2021, petitioner was called upon to show cause as to why the registration be not cancelled for the following reason: –
“Any Taxpayer other than composition taxpayer has not filed returns for a continuous period of six months.”
3. Petitioner was engaged in the business of trading of woven fabric and possessed GST registration.
4. The Show Cause Notice was issued to the petitioner on 20.09.2021. Though the notice does not specify any cogent reason, it merely states “any taxpayer other than composition taxpayer has filed returns for a continuous period of six months”. Further, the said Show Cause Notice fails to mention the date and time for the Petitioner to appear for the personal hearing. Further, it also does not put the petitioner to notice that the registration is liable to be cancelled retrospectively. Accordingly, the petitioner had no opportunity to even object to the retrospective cancellation of the registration.
5. Further, the impugned order dated 26.10.2021 passed on the Show Cause Notice does not give any reasons for cancellation. It states that the registration is liable to be cancelled for the following reason “Whereas no reply to notice to show cause has been submitted”. However, the said order in itself is contradictory. The order states “reference to your reply dated 29/09/2021 in response to the notice to show cause dated 20/09/2021” and the reason stated for cancellation is “Whereas no reply to notice to show cause has been submitted”. The order further states that effective date of cancellation of registration is 26.07.2017 i.e., a retrospective date. There is no material on record to show as to why the registration is sought to be cancelled retrospectively.
6. In our view, order dated 26.10.2021 does not qualify as an order of cancellation of registration. On one hand, it states that the registration is liable to be cancelled and on the other, in the column at the bottom there are no dues stated to be due against the petitioner and the table shows nil demand.
7. Learned counsel for petitioner submits that the petitioner has closed business and is no longer interested in continuing business and has closed down his business activities since the lockdown.
8. We notice that the Show Cause Notice and the impugned order are bereft of any details accordingly the same cannot be sustained and neither the Show Cause Notice, nor the order spell out the reasons for retrospective cancellation.
9. In terms of Section 29(2) of the Act, 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.
10. 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 is 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.
11. It is clear that both the petitioner and the respondent want the GST registration to be cancelled, though for different reasons.
12. In view of the fact that Petitioner does not seek to carry on business or continue the registration, the impugned order dated 26.10.2021 is modified to the limited extent that registration shall now be treated as cancelled with effect from 20.09.2021 i.e., the date when the Show Cause Notice was issued. Petitioner shall make the necessary compliances as required by Section 29 of the Central Goods and Services Tax Act, 2017.
13. It is clarified that Respondents are not precluded from taking any steps for recovery of any tax, penalty or interest that may be due in respect of the subject firm in accordance with law including retrospective cancellation of the GST registration.
14. Petition is accordingly disposed of in the above terms.
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