GST Registration Cancellation Quashed Due to Absence of Reasons: Bombay HC

Afzal Husain Saiyed Vs PCIT (Bombay High Court)

In Afzal Husain Saiyed Vs PCIT, the Bombay High Court examined the validity of cancellation of GST registration and attachment of bank accounts under the Central Goods and Services Tax Act, 2017. The petitioner, engaged in metal scrap trading and registered under the CGST Act, challenged a show cause notice dated 18 September 2023, a cancellation order dated 5 October 2023, and provisional attachment of bank accounts dated 12 September 2023.

The facts indicate that summons were issued on 5 September 2023 alleging wrongful availment of Input Tax Credit through fake invoices. The petitioner was arrested on 8 September 2023 and remained in judicial custody. Subsequently, authorities issued a show cause notice proposing cancellation of GST registration and attached the petitioner’s bank accounts. The petitioner contended that the show cause notice and cancellation order were invalid as they did not contain any reasons, making them arbitrary and violative of principles of natural justice. It was also argued that due to judicial custody, the petitioner could not respond, resulting in an ex-parte order. Regarding bank attachment, the petitioner submitted that no prior intimation was given and that the action did not comply with statutory requirements under Section 83 of the CGST Act.

The respondents justified their actions by referring to alleged ITC transfers amounting to ₹3.09 crore during the period of custody and statements recorded earlier. They also pointed out inconsistencies in the petitioner’s statements regarding employees. For bank attachment, the respondents argued that the petitioner should avail the statutory remedy under Rule 159(5) of the CGST Rules.

Upon consideration, the Court held that the show cause notice and cancellation order were entirely devoid of reasons. It observed that absence of reasons constituted an incurable defect that could not be rectified through affidavits or subsequent explanations. The Court emphasized that orders affecting rights must demonstrate application of mind and comply with principles of natural justice. Relying on precedent, the Court concluded that such non-speaking orders are arbitrary and legally unsustainable.

Accordingly, the Court quashed and set aside both the show cause notice and the cancellation order, resulting in restoration of the petitioner’s GST registration. However, it clarified that the authorities were not barred from initiating fresh proceedings in accordance with law.

With respect to provisional attachment of bank accounts, the Court declined to interfere under Article 226. It noted that both parties agreed that the petitioner could seek relief under Rule 159(5) of the CGST Rules. The Court permitted the petitioner to file objections within one week, directing the Commissioner to decide the same without raising limitation objections.

The petition was disposed of with these directions, reinforcing that administrative actions must be reasoned and compliant with statutory safeguards, while also directing the petitioner to pursue alternate remedies for challenging bank attachment.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

By this petition filed under Article 226 of the Constitution of India, the petitioner has challenged the cancellation of registration under Central Goods and Service Tax Act by an order dated 5^th October 2023 and attachment of his Bank Account No.4412198904 with Kotak Mahindra Bank and Bank Account No.259904778835 with IndusInd Bank on 12^th September 2023.

2. Brief facts are as under :-

(i) The petitioner is engaged in the business of trading in metal scrap and is registered under Central Goods and Services Act, 2017 (for short “the CGST Act”).

(ii) 5^th September 2023, summons were issued to the petitioner in regard to avail of Input Tax Credit (ITC) by using fake invoices.

(iii) On 8^th September 2023, the petitioner was arrested and was judicially remanded.

(iv) On 18^th September 2023, a show cause notice was issued to the petitioner for cancellation of the registration and on 12^th September 2023, bank accounts were also attached. It is on this backdrop that the present petition is filed.

3. The petitioner has contended that the show cause notice and order for cancellation of the registration do not provide for any reasons which is an incurable defect, and therefore, the same be quashed and set aside. The petitioner also submitted that since he is in judicial custody, he could not respond to the said show cause notice and, therefore, the same is passed ex-parte. The petitioner relied upon the decision of this Court incase of Makesburry India Pvt. Ltd. Vs. State of Maharashtra & Ors. passed in Writ Petition No.7506 of 2023 decided on 3^rd October 2023 in support of his contention that such a notice is bad in law. With respect to the attachment of the bank accounts, the petitioner submitted that no intimation of the same has been given to him by the Respondents and it is only on the intimation from the banks, he came to know that the bank accounts are attached.

4. The petitioner further stated that the attachment is also not in accordance with Section 83 of the CGST Act, inasmuch as, there is no formation of an opinion by the Commissioner. The petitioner, however, alternatively, contended that he may be permitted to avail the remedy available under sub-rule (5) of Rule 159 of Central Goods and Services Tax Rules, 2017 (for short “the CGST Rules”) and to make an application for revocation of the attachments.

5. Per contra, the respondents have drawn our attention to the affidavit-in-reply and more particularly paragraph 22 and submitted that on the date when the show cause notice for cancellation of the registration was issued, the petitioner had transferred ITC amounting to Rs.3,09,60,643/- although he was in judicial custody on that date. The respondents also referred to the statement recorded on 7^th September 2023 to justify the action of cancellation of registration and attachment of the bank accounts. The respondents further submitted that in the statement of the petitioner, he has stated that he does not have any employee in the firm whereas in the petition, he has, on oath, stated that attachment of the bank accounts needs to be lifted since he has to make payment of salaries to his various employees. The respondents also relied upon the decision of this Court in case of Ashok Kumar Vishwakarma Vs. Union of India & Ors. passed in Writ Petition No.11326 of 2023 decided on 4^th October 2023 and contended that insofar as the attachment of the bank accounts are concerned, the petitioner needs to adopt the remedy by invoking sub-rule (5) of Rule 159 of the CGST Rules. The respondents prayed for dismissal of the present petition.

6. We have heard learned counsel for the petitioner and the respondents and with their assistance. We also have perused the documents annexed to the petition and the reply affidavit filed by respondent nos.1 and 2.

7. Having heard learned counsel for the parties, in our view, the show cause notice and order cancelling the registration clearly does not provide for any reason whatsoever for such action being taken against the petitioner and, therefore, there is an incurable defect in the order which cannot be improvised in the reply of the respondents. In our view, the order cancelling the registration ought to have contained reasons for the said cancellation of the registration and in the instant case, no such reason can be found in the order cancelling the registration. This bench in an identical situation, has quashed and set aside such order of cancellation of registration which was bereft of any reason. The petitioner is justified in placing reliance on the decision in case of Makesburry India Pvt. Ltd. (supra). Para 12 of the said decision reads thus:-

“12. Learned counsel for the petitioner would thus be correct in submitting that the impugned order cancelling the petitioner’s registration as also rejecting the petitioner’s appeal are ex-facie without application of mind, as no reasons are set out in both the orders. The petitioner’s contention that the impugned orders are in breach of principles of natural justice and has resulted into unwarranted harassment to the petitioner as much substance. In support of his contention, reliance is placed on the decision of this Court in C.P. Pandey & Co. Vs. Commissioner of State Tax¹, Monit Trading Pvt. Ltd. Vs. Union of India², Ramji Enterprises & Ors. Vs. Commissioner of State Tax & Ors.³ and Nirakar Ramchandra Pradhan Vs. Union of India & Ors.⁴ ”

8. We are, therefore, of the view that insofar as the order cancelling the registration and show cause notice for such cancellation are concerned, the same is arbitrary and illegal.

9. Insofar as the attachment of the bank accounts is concerned, the petitioner and the respondents are at ad idem that the petitioner should avail the remedy provided by sub-rule (5) of Rule 159 of the CGST Rules. We are, therefore, of the opinion that the petitioner needs toinvoke sub-rule (5) of Rule 159 of the CGST Rules to the order of attachment in question as the rule itself would permit. Thus, in the facts and circumstances of the case, we are not inclined to exercise our discretionary jurisdiction under Article 226 of the Constitution of India to interfere in the impugned attachment order.

10. We accordingly dispose of the petition in terms of the following order : –

ORDER

(i) The impugned show cause notice dated 18^th September, 2023 is quashed and set aside. The consequential order dated 5th October, 2023 cancelling the petitioner’s registration also would stand quashed and set aside.

(ii) We also clarify that we have not precluded the respondents from exercising any other powers as may be available to the respondents in law as the facts and circumstances may warrant.

(iii) Needless to observe that setting aside the impugned order would result in the registration of the petitioner being restored. It is, however, clarified that this would not preclude the revenue from issuing any fresh order to suspend the registration as may be permissible in law.

(iv) Insofar as the attachment of the bank accounts is concerned, the petitioner is free to adopt the remedy available under sub-rule (5) of Rule 159 of the CGST Rules as the petitioner was bonafide pursuing the present petition. We permit the petitioner to raise an objection by invoking sub-rule (5) of Rule 159 of the CGST Rules within a period of one week from the date of uploading this order. If the same is filed, let the same be decided by the Commissioner in accordance with law without raising any objection as to limitation. All contentions of the parties in that regard are expressly kept open.

(v) Petition is disposed of in the above terms. No costs.

Notes:

¹ (2023) 10 Centax 11 (Bom.)

² (2023) 8 Centax 248 (Bom.)

³ Writ Petition No.277 of 2023 dated 10.07.2023

⁴ Writ Petition No.2534 of 2023 dated 11.09.2023