Case Law Details
Deepali Kapoor Vs Avato Ward-63, State Goods and Services Tax & Another (Delhi High Court)
In a recent decision, the Delhi High Court has modified the effective date of GST registration cancellation for the petitioner, Deepali Kapoor, from a retrospective date to a more recent one. Kapoor had contested the order issued by Avato Ward-63, State Goods and Services Tax (SGST) office, which initially cancelled her GST registration retroactively from July 2, 2017. This decision came after a detailed examination of both the show cause notice issued to Kapoor and her appeal against the retrospective cancellation.
Background of the Case
The petitioner, Deepali Kapoor, 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 cancelled following a show cause notice (SCN) dated February 3, 2023. In this notice, she was required to provide reasons as to why her registration should not be revoked.
The show cause notice cited her “failure to furnish returns for a continuous period of six months” as the basis for the action. However, Kapoor argued that the notice did not provide adequate justification for cancellation, particularly not one with a retrospective effect. She stated that she had been unable to respond due to financial difficulties and mental health issues.
Details of the Show Cause Notice and 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 cancelled retroactively, a key point of contention in Kapoor’s case.
When the final order was issued on July 26, 2023, the registration was cancelled due to her non-compliance in responding to the SCN. Additionally, the order invoked Section 29(2)(c) of the CGST Act, which allows for the cancellation of registration if the taxpayer fails to file the required returns. However, the effective date of cancellation was set as July 2, 2017—well before the issuance of the SCN and Kapoor’s cited reasons for non-compliance.
Petitioner’s Claims
Kapoor argued that she had already shut down her business as of February 3, 2023, and had applied for cancellation of her GST registration on that basis. She filed an additional affidavit stating that she was no longer conducting business and had no intention of reinstating her GST registration.
The petitioner’s legal counsel argued that cancellation of GST registration with a retrospective effect could lead to unforeseen consequences. Notably, Kapoor’s customers would face disallowances of input tax credit availed during the period of her registration, adversely impacting business transactions that had complied with tax obligations.
Legal Considerations
Under Section 29(2) of the CGST Act, a tax officer has the authority to cancel a taxpayer’s registration from any date, including a retrospective one, provided there is sufficient cause and adherence to the requirements of the Act. However, the Delhi High Court observed that such cancellation must be based on objective criteria rather than a mechanical application of rules. Cancellation with retrospective effect is not warranted solely because a taxpayer has missed filing returns for a specific period, particularly if the taxpayer had been compliant before the alleged non-compliance period.
The court further noted that retroactive cancellation of registration could have implications for customers who availed input tax credit on transactions with the taxpayer. Therefore, the court emphasized the need for careful consideration by tax authorities before applying a retrospective cancellation.
Court’s Decision
After reviewing the case, the Delhi High Court ruled that the retrospective cancellation of Kapoor’s GST registration was not justified in this context. The court modified the cancellation date to February 3, 2023, aligning it with the date of the SCN issuance.
The High Court ordered Kapoor to submit all outstanding returns up to the newly established date of cancellation to ensure compliance. Additionally, the court clarified that the tax authorities retain the right to pursue any pending tax, 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 justifiable rationale for any retrospective action, particularly when it affects the legal and financial rights of the involved parties. The court’s decision underscores that GST registration cancellations must be carefully considered, especially when customers’ input tax credits might be affected by the retrospective application of such cancellations.
The court further indicated that the SCN and cancellation orders should provide clear information to taxpayers on the exact basis and potential effective dates of such actions, ensuring that taxpayers have the opportunity to respond adequately.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. Petitioner impugns order dated 26.07.2023, whereby the GST registration of the Petitioner was cancelled retrospectively with effect from 02.07.2017 andalso impugns Show Cause Notice dated 03.02.2023.
2. Vide Show Cause Notice dated 03.02.2023, petitioner was called upon to show cause why the registration be not cancelled for the following reasons:-
“returns furnished by you under Section 39 of the Central Goods and Services Tax Act,2017”
3. Though the notice does not specify any cogent reason, there is an observation in the notice stating, “failure to furnish returns for a continuous period of six months.” The show cause notice requires the petitioner to appear before the undersigned i.e. authority issuing the notice.
4. Further the impugned order dated 26.07.2023 merely states that “no reply to the show cause notice has been submitted and on day for personal hearing, you did not appear in person or through an authorized representative”. It, further, states that the registration is liable to be cancelled for the following reason “Section 29(2)(c)-person, other than paying tax U/s 10, failed to furnish returns for prescribed periods”. The order further states that effective date of cancellation of registration is 02.07.2017 i.e., retrospective date.
5. The Show Cause Notice and the Impugned Order donot 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.
6. Learned Counsel for the Petitioner submits that the petitioner was unable to reply to the said show cause notice due to financial hardship and mental depression.
7. He submits that the Petitioner is no longer carrying on business and claims to have shut the business w.e.f03.02.2023 and applied for cancellation of GST registration.
8. He further submits that an additional affidavit has been filed by the Petitioner stating that petitioner is no longer interested in continuing the business and is not interested in restoration of the GST registration and her business may be treated as closed.
9. 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.
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 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.
11. 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 03.02.2023 i.e., datewhen the GST registration was suspended by show cause notice dated 03.02.2023 .Petitioner shall furnish all the requisite returns updated to the date of cancellation of registration.
12. 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.
13. Petition is accordingly disposed of in the above terms.
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