VAT Registration Cannot Be Cancelled Ab Initio for Unpaid Tax Dues: Gujarat HC

Arshil Enterprise Vs State of Gujarat (Gujarat High Court)

SEO Title: Gujarat HC Quashes Retrospective VAT Registration Cancellation Over Tax Dues

Summary: The Gujarat High Court allowed the appeal of Arshil Enterprise, a dealer engaged in trading old machinery parts and metal scrap, challenging the retrospective cancellation of its registration under the Gujarat Value Added Tax Act, 2003. The dispute arose from allegations concerning purchases made during 2010–11 and 2011–12 from dealers allegedly involved in bogus billing activities. Following disallowance of input tax credit and demands for tax, interest and penalty, the Commercial Tax Officer cancelled the appellant’s registration from inception under Section 27(5) of the GVAT Act, citing non-payment of outstanding dues and suspicious transactions. Although the appellant subsequently cleared the outstanding tax dues and sought restoration, the first appellate authority and the Gujarat Value Added Tax Tribunal upheld the cancellation.

The High Court examined Section 27(5) of the GVAT Act and held that the provision permits retrospective cancellation of registration, but the discretion must be exercised according to the nature and seriousness of the statutory violation. Mere non-payment of assessed tax dues may justify prospective cancellation from the date of the order or, where appropriate, from the date of violation, but not cancellation from inception or from a date preceding the violation. The Court emphasised that retrospective cancellation can invalidate otherwise genuine transactions and adversely affect innocent purchasing dealers. Cancellation from inception may be justified where registration was fraudulently obtained and no genuine transactions were undertaken from the beginning. The Court accordingly held that the Tribunal was not justified in confirming the appellant’s ab initio cancellation.

The Court further distinguished State of Gujarat v. Nageshi Enterprise, (2017) 104 VST 204 (Guj.), relied upon by the Tribunal. In that case, the dealer had expressly admitted wrongful availment of input tax credit, whereas Arshil Enterprise had not admitted that its purchases were bogus. The appellant’s decision to restrict its earlier second appeal to the penalty component, after paying tax and interest, could not be treated as an admission that the underlying transactions were invalid. The Court also found that the cancellation order travelled beyond the original show-cause notice. While the notice principally concerned unpaid tax dues, the authorities subsequently relied on suspicious transactions, alleged bogus billing and additional material not forming part of the notice. Such enlargement of the proceedings violated the principles of natural justice and could not be sustained by the appellate authorities.

Consequently, the High Court answered all three substantial questions of law in favour of the appellant. It held that the retrospective cancellation was unjustified, that the Tribunal had incorrectly applied the Nageshi Enterprise decision, and that the appellate authorities could not uphold cancellation on grounds beyond those stated in the original notice. The Court quashed the Tribunal’s order dated 16 August 2017, the first appellate authority’s order dated 3 August 2016 and the Commercial Tax Officer’s order dated 12 January 2016. The appellant’s registration certificate was restored, with no order as to costs.

Cases Discussed

1. State of Gujarat v. Nageshi Enterprise, (2017) 104 VST 204 (Guj.)
2. Chhabra Electric Stores v. The Chief Commissioner, Delhi, (1972) 30 STC 85 (Delhi)
3. M.C. Agarwal v. Sales Tax Officer, Kesinga, (1987) 64 STC 298
4. Deputy Commissioner of Sales Tax (Law) v. Debi Prasad Shyam Sunder & Sons, (1991) 82 STC 305 (Ker.)
5. Santumal v. Assistant Commissioner of Sales Tax, [1963] 14 STC 287 (Bom)
6. Devinder Kumar Kewal Kumar v. State, [1972] 30 STC 352 (P&H)
7. Commercial Tax Officer v. Jasodalal Ghosal Private Ltd., [1979] 44 STC 31 (Cal)
8. Suresh Trading Company v. State of Maharashtra, [1981] 48 STC 207 (Bom)
9. Tarulata Trading Pvt. Ltd. v. State of Gujarat, (2019) 61 GSTR 372 (Guj.)
10. M.S. Traders v. Commercial Tax Officer, (1998) 109 STC 604
11. Sudhakar Oil Traders v. Asst. Commercial Tax Officer, [1995] 99 STC 401
12. Sai Traders v. Commissioner of Commercial Taxes, (2011) 46 VST 552 (All.)
13. M.A. Rahman v. State of Andhra Pradesh, (1961) 12 STC 392
14. State of Kerala v. Vijaya Stores, (1978) 42 STC 418
15. Advanced Systek Private Limited v. State of Gujarat, Tax Appeals Nos. 157 and 158 of 2014
16. State of Gujarat v. Jain Marbo India (P.) Ltd., (2018) 67 GST 495 (Guj.)
17. State of T.N. v. Arooran Sugars Limited, (1997) 1 SCC 326
18. State of Gujarat v. Raman Lal Keshav Lal Soni, (1983) 2 SCR 287
19. T.R. Kapur v. State of Haryana, 1986 Supp SCC 584
20. Union of India v. Tushar Ranjan Mohanty, (1994) 5 SCC 450
21. Raghavendra Wines v. State of Karnataka, (2012) 56 VST 238 (Kar.)

FULL TEXT OF THE HIGH COURT JUDGMENT/ORDER

1. By this appeal under section 78 of the Gujarat Value Added Tax Act, 2003, the appellant has challenged the order dated 16.8.2017 passed by the Gujarat Value Added Tax Tribunal (hereinafter referred to as “the Tribunal”) in Second Appeal No.13 of 2017 whereby the appeal has been dismissed.

2.While admitting the appeal, this court by order dated 24.11.2017 had formulated the following three substantial questions of law:- “(1) Whether on the facts and in the circumstances of the case, the Gujarat Value Added Tax Tribunal was justified in confirming ab initio cancellation of the registration certificate of the appellant?

(2) Whether the Gujarat Value Added Tax Tribunal was justified in holding that the judgment of this court in the case of State of Gujarat v. Nageshi Enterprise, (2017) 104 VST 204 (Guj.) would be applicable to the facts of the appellant?

(3)Whether the Gujarat Value Added Tax Tribunal was justified in confirming the order of the first appellate authority confirming the cancellation of registration certificate of the appellant on the basis of the allegations and grounds neither made out nor established in the original order cancelling the registration certificate?”

3. The facts stated briefly are that, the appellant was engaged in the business of trading in old machinery parts and metal scrap and was duly registered under the Gujarat Value Added Tax Act, 2003 (hereinafter referred to as “the GVAT Act”) as well as the Central Sales Tax Act, 1956. Search proceedings were conducted at the premises of the appellant on 3.10.2013. During the course of search, it was alleged that the appellant had made purchases from dealers during the years 2010-11 and 2011-12 who were engaged in billing activities and, therefore, the concerned officers were of the view that the input tax credit claimed by the appellant in respect of such purchases was liable to be disallowed resulting in demand of tax, interest and penalty under the GVAT Act.

4. Provisional assessment proceedings were initiated against the appellant for both the years in respect of the disputed purchases. The appellant submitted evidences in respect of purchases including tax invoice, transport receipts and bank statements. It is the case of the appellant that the Commercial Tax Officer, however, disregarded such evidences and proceeded to impose tax with interest and penalty for the years 2010-11 and 2011-12. In the said orders, the Commercial Tax Officer observed that he was imposing maximum penalty under the GVAT Act as a deterrent against any future tax evasion by the appellant.

5. Against the said order, the appellant preferred first appeals. Insofar as the first appeal for the year 2011-12 is concerned, while tax and interest liability were confirmed by the first appellate authority, the rate of penalty was reduced from 150% to 75%. The appellant carried the matter in second appeal before the Tribunal. In the meanwhile, the Commercial Tax Officer issued notice to the appellant on 3.7.2015 requiring it to deposit the outstanding dues for the years 2010-11 and 2011-12. Since the second appeal of the appellant for the year 2010-11 was pending before the Tribunal and the first appeal for the year 2011-12 was pending before the first appellate authority, the appellant requested the Commercial Tax Officer to wait for the outcome of the appeals.

6. The second appeal for the year 2010-11 came to be disposed of by the Tribunal by order dated 7.10.2015, whereby the Tribunal, without entering into the sustainability of the tax and interest, deleted the penalty, as confirmed by the first appellate authority. After the disposal of the second appeal for the year 2010-11 and during the pendency of the first appeal for the year 2011-12 before the first appellate authority, the Commercial Tax Officer issued the notice dated 17.12.2015 to the appellant in Form 104 proposing to cancel the registration certificate of the appellant on the ground that it had failed to pay outstanding dues for the year 2011-12 and partial dues for the year 2010-11. It is the case of the appellant that the notice had been served at the godown of the appellant and the proprietor of the appellant was out of station and hence, could not respond to such notice immediately. However, the Commercial Tax Officer proceeded to pass the impugned order under section 27(5) of the GVAT Act cancelling the registration certificate of the appellant ab initio on the ground of default in payment of tax. The Commercial Tax Officer also observed that the transactions of the appellant were suspicious and, therefore, with a view to protect the interest of the revenue, the registration certificate of the appellant was being cancelled ab initio.

7. The appellant thereafter, immediately addressed a letter dated 6.2.2016, to the Commercial Tax Officer submitting that it had been unable to pay the outstanding dues due to severe financial crunch; however, it had arranged finances and had cleared the entire amount of outstanding tax dues. The appellant further submitted that after its experience for the years 2010-11 and 2011-12 of purchasing from intermediary traders leading to disallowance of input tax credit because of defaults made by the traders, the appellant had started making purchases directly from ship breakers and reputed companies. On the basis of such facts, the appellant prayed for restoration of the registration certificate.

8. Since the Commercial Tax Officer did not restore the certificate, the appellant preferred a first appeal before the first appellate authority challenging the order dated 12.1.2016 passed by the Commercial Tax Officer before the first appellate authority. The learned advocate for the appellant submitted that it had cleared all the outstanding dues under the GVAT Act. It was further submitted that the transactions in respect of which input tax credit had been disallowed were genuine and that the appellant had subsequently started purchasing goods directly from ship breakers and reputed companies in order to avoid issues arising because of defaults and frauds committed by selling traders. However, by an order dated 3.8.2016, the first appellate authority dismissed the appeal.

9. The appellant carried the matter in further appeal before the Tribunal, being Second Appeal No.13 of 2017. By the impugned order dated 16.8.2017, the Tribunal has dismissed the appeal.

10. Mr. Uchit Sheth, learned advocate for the appellant invited the attention of the court to section 21 of the GVAT Act, which provides for registration. Reference was made to sub- section (1) thereof, which lays down that no dealer shall, while being liable to pay tax under the Act carry on business as a dealer unless he possesses a valid certificate of registration, as provided by the Act. It was pointed that sub-section (6) thereof provides for mandatory grant of registration to a dealer; and sub-section (7) thereof provides for cancellation of registration on an application by the dealer. Reference was also made to section 22 of the GVAT Act, which provides for voluntary registration. Adverting to section 27 of the GVAT Act, which provides for suspension or cancellation of registration, it was pointed out that sub-section (1) thereof provides for cancellation of registration in case of discontinuance of the business, or the incorporated body being wound up, or death of the proprietor leaving no successor, dissolution of firm, etc. Referring to sub-section (5) of section 27, which is relevant for the purpose of the present case, it was pointed out that in the present case the Commercial Tax Officer had issued a notice to the petitioner in respect of clause (c) of sub-section (5), which provides for cancellation of certificate in case where a dealer has failed to pay the tax due for three consecutive tax periods from him under the provisions of the Act. It was pointed out that sub-section (5) of section 27 vests under the Commissioner discretion to cancel the certificate of registration and it is not mandatory to cancel the registration merely because there is a default in terms of the clauses enumerated under sub-section (5) of section 27.It was submitted that sub-section (5) of section 27 of the GVAT Act permits the Commissioner to cancel the certificate of registration from such date as may be specified by him. It was submitted that ordinarily the registration has to be granted to a dealer and should be continued as it directly affects the rights of the dealer under article 19(1)(g) of the Constitution of India.

10.1 It was submitted that the power of cancellation of registration under sub-section (5) of section 27 of the GVAT Act is discretionary as the expression employed therein is “may”. It was further submitted that the words “from such date as may be specified” do not vest in the Commissioner the power to cancel the registration retrospectively, in a case where the infraction does not go to the root of the matter rendering the registration liable to be cancelled ab initio, for example where the registration has been obtained by fraud, or where the dealer has indulged solely in billing activities and has not carried out any genuine transactions.

10.2 Reference was made to the provisions of rule 5 of the Gujarat Value Added Tax Rules, 2006 (hereinafter referred to as “the GVAT Rules”) and more particularly sub-rules (2), (11), (13) to (17) thereof, to point out the procedure for obtaining registration. Referring to rule 6 of the GVAT Rules, it was submitted that if an application for registration is in order and the registering authority is satisfied that the goods of the applicant are reasonably identifiable in case of godown or warehouse shared with one or more dealers, the registering authority shall issue a certification of registration in Form 102. It was submitted that while the grant of registration is not discretionary, the cancellation thereof is discretionary. It was submitted that cancellation is warranted in case of gross evasion of tax, for recovery of tax, in case where the dealer deals with a vendor after notice of evasions; however, in such cases the registration can be cancelled prospectively.

10.3 Referring to the order dated 12.1.2016 passed by the Commercial Tax Officer, it was pointed out that the reason for cancellation of registration in this case was non-payment of tax dues. It was submitted that non-payment of tax dues cannot result in retrospective cancellation of registration. It was pointed out that the second ground for cancellation in the original order is suspicion, to submit that there is no power to cancel registration on the ground of suspicion. On facts, it was pointed out that only 15% to 20% of the transactions made by the appellant are doubted, in such a case the appellant’s registration cannot be cancelled with retrospective effect as that would amount to his not having carried on any valid business. It was contended that even evasion qua some transaction would not attract cancellation; however, in the assessment, tax and penalty can be imposed. It was submitted that retrospective cancellation can be where originally registration has been obtained fraudulently; or where the dealer has not carried on any valid business right from the inception. It was submitted that in the case of the appellant there is no finding of any such gross irregularities.

10.4 Referring to the original order of cancellation of registration, it was pointed out that the said order is a non- speaking order whereas in the appellate order, it has been recorded that some transactions are suspicious. It was urged that no prejudice would be caused to the revenue if the registration is restored. It was emphatically argued that retrospective cancellation invalidates all the appellant’s genuine transactions and has serious consequences. In this regard, the attention of the court was invited to the provisions of sub-section (6) of section 27 of the GVAT Act, which provides that every person whose registration is cancelled under sub-section (5) shall pay in respect of every taxable goods held as stock on the date of cancellation, an amount equal to the tax that would be payable in respect of the goods if the goods were sold at fair market price on that date or the total tax credit previously claimed in respect of such goods, whichever is higher.

10.5 Reference was made to sub-section (11) of section 27 of the GVAT Act, which provides that the Commissioner shall publish in the manner as may be prescribed the particulars of dealers whose certificate of registration has been cancelled under the provisions of the GVAT Act. The attention of the court was also invited to the provisions of rule 11 of the rules, which provides for publication of details of suspension or cancellation of certificate of registration. It was pointed out that the appellate authority has sustained the order of cancellation on the basis of the search record and based on details obtained. It was pointed out that while the cancellation of registration relates to the years 2010-11 and 2011-12, the registrations of the parties with whom the petitioner had transactions in terms of the list relied upon by the first appellate authority, were cancelled long thereafter. It was submitted that therefore, at the time when the petitioner entered into the transactions, the concerned parties were duly registered under the GVAT Act.

10.6 Next, it was argued that the original order cannot go beyond the notice and, therefore, the appellate order also cannot go beyond the original order, whereas in the facts of the present case, the first appellate order has re-adjudicated the entire case. It was submitted that in the first appeal, the first appellate authority has enhanced the original order, which is not permissible in law. It was urged that in the appellant’s appeal, the first appellate authority could not have gone beyond the original order.

10.7 It was further pointed out that the Tribunal, in the impugned order, has recorded that the appellant has paid tax and interest accepting indirectly that the purchases were not genuine and has applied the decision of this court in the case of State of Gujarat v. Nageshi Enterprise, (2017) 104 VST 204 (Guj.). It was submitted that the Tribunal has not appreciated the facts of the present case in proper perspective, inasmuch as, in Second Appeal No.732 of 2015 for the year 2010-11, while the appellant had challenged the order of tax, interest as well as penalty, the appellant was informed by the learned advocate appearing on its behalf that the routine practice of the Tribunal in cases involving disallowance of input tax credit because of subsequent cancellation of the registration certificate of the vendors, was that if the tax and interest were paid then penalty amount was fully deleted. It was submitted that to buy peace of mind and achieve finality of proceedings, the appellant permitted the learned advocate to restrict the challenge to the penalty amount. It was submitted that merely because the appellant had restricted the challenge to the penalty amount, can by no stretch of imagination be said to be an admission on the part of the appellant that input tax credit had been wrongly availed of.

10.8 In support of his submissions, the learned advocate placed reliance upon the decision of the Delhi High Court in Chhabra Electric Stores v. The Chief Commissioner, Delhi (1972) 30 STC 85 (Delhi) wherein it has been held that the words in clause (d) of rule 12(1) of the Delhi Sales Tax Rules, 1951 “from such date as may be specified in the order”, in its opinion should be construed to mean either the date of the order or a date subsequent to the date of the order and not a date prior to the date of the order.

10.9 Reliance was also placed upon the decision of the Orissa High Court in the case of M.C. Agarwal v. Sales Tax Officer, Kesinga, and another, (1987) 64 STC 298, wherein the court was dealing with the question as to whether cancellation of registration certificate of a dealer under the Orissa Sales Tax Act can be given retrospective effect. The court held thus:-

“4.Rule 16(1) of the Orissa Sales Tax Rules, 1947, empowers the Assistant Sales Tax Officer on the Sales Tax Officer, as the case may be, after making such inquiry as he may consider necessary, cancel the registration of a dealer with effect from the date to be specified by him, subject to any modification under sub- rule (3) by the Commissioner. The Sales Tax Officer, therefore, has to specify the date from which the cancellation will take effect. But, it is well-settled that he cannot fix a date with retrospective effect. That question, apart from other principles to be followed for cancellation of registration certificate, has been set at rest by a Bench decision of this Court in S.J.C. Nos. 101 and 102 of 1975 disposed of on 14th September, 1977, wherein it has been held that the provision in rule 16 B(1) authorising the Sales Tax Officer to specify a date in the order would not permit him to fix a date retrospectively and would always mean that a date which may be the date of making of the order or a date at any point in future could only be indicated.”

10.10 Reference was also made to the decision of the Kerala High Court in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Debi Prasad Shyam Sunder & Sons, (1991) 82 STC 305 (Ker.), wherein the court held thus:-

“5. It should be remembered that a certificate is granted by the prescribed authority only after making such enquiries as he may consider necessary and only if he is satisfied that the application is in order and that the particulars furnished therein are correct, etc. It is not as if the certificate is granted mechanically. An enquiry is contemplated, on the basis of which the concerned officer should be satisfied that the person who has applied for registration is a real person, that the particulars furnished in the application are correct, and that in the circumstances, the officer is of opinion that the certificate of registration is to be granted for the applicant. When once such a certificate is granted, it clothes the person with certain privileges. Under section 22 of the Kerala General Sales Tax Act, a registered dealer alone can collect tax payable by him on the sale of any goods from the person to whom he sells the goods. It is only a registered dealer who can give form No. 25 declaration, as envisaged by rule 32(14) of the Kerala General Sales Tax Rules, for the goods purchased by him, which are taxable at the last purchase point. In effect, by the grant of the certificate of registration, the Revenue holds out to the world at large that the person to whom the certificate is granted is a registered dealer under the Act, entitled to take advantage of all rights and privileges provided by the Act and the Rules. It is true, that it is open to the prescribed authority to cancel the registration certificate for good and sufficient reasons, after providing an opportunity to the concerned dealer of being heard. But, such cancellation of registration can take effect only from the date when the order was so passed. It cannot have any retrospective effect. It cannot in any manner affect the past transactions bona fide entered into by persons, who relying on the certificate of registration, entered into business deals and arranged their affairs. This is all the more so, in a case where no collusion between the selling dealer and the purchasers is neither alleged nor established. We are fortified in taking this view in the light of the following decisions: (1) Santumal v. Assistant Commissioner of Sales Tax [1963] 14 STC 287 (Bom), (2) Chhabra Electric Stores v. Chief Commissioner [1972] 30 STC 85 (Delhi); (3) Devinder Kumar Kewal Kumar v. State [1972] 30 STC 352 (P& H), (4) Commercial Tax Officer v. Jasodalal Ghosal Private Ltd. [1979] 44 STC 31 (Cal) and (5) Suresh Trading Company v. State of Maharashtra [1981] 48 STC 207 (Bom).”

10.11 Reliance was also placed upon the decision of this court in the case of Tarulata Trading Pvt. Ltd. v. State of Gujarat, (2019) 61 GSTR 372 (Guj.), wherein the court held thus:-

“7. Facts being identical in all petitions, they are not separately recorded. We clarify that that we are taking up the issue only of interim protection to the petitioner pending revision petition before the Tribunal. We would therefore be slow in making any observation which might prejudice one side or other in pending litigation at any rate. It is provided that no such observation would handicap either side in the revision petition pending before the Tribunal.

8. With this preamble, we may recall that the petitioner’s registration as a dealer continued right from the year 2008 till it was recently cancelled with retrospective effect. Even if the cancellation of registration was to be upheld, the question is, should the same has been ordered with retrospective effect providing for cancellation of registration from inception. Even if such registration is cancelled, the purchasing dealers in their assessments can always argue that their transactions with the petitioner were genuine and that therefore they cannot be deprived of the input tax credit concerning such transactions. On the other hand, even if such registration is not cancelled with retrospective effect and the department has material to believe that certain transactions of the past carried out by the petitioner were nongenuine, it would always open for the department to pursue such issue with the purchasing dealers. Be that as it may, pending the Revision Petition before the Tribunal, in facts of the case we would like to stay the retrospective operation of the cancellation of registration.”

10.12 The decision of the Madhya Pradesh High Court in the case of M.S. Traders v. Commercial Tax Officer, Circle No.2, Ratlam and others, (1998) 109 STC 604, was cited, wherein the court held thus:-

“10.Petitioner has placed reliance on a judgment reported in [1995] 99 STC 401 (Sudhakar Oil Traders v. Asst. Commercial Tax Officer), wherein the Division Bench of the Andhra Pradesh High Court has held that under article 19(1)(g) of the Constitution of India, a citizen has a fundamental right to carry on any occupation, trade or business, subject of course to reasonable restrictions imposed by the State under article 19(6), on the exercise of that right in the interest of general public. This legal position cannot be disputed.

11. The question before this Court is, whether a proper enquiry was held by respondent No.1 in conformity with the provisions of section 22 of the Act. After going through the impugned order, I find that the basis on which the show cause notice was issued to the petitioner, no proper enquiry was conducted before coming to the conclusion that the petitioner has some direct or indirect nexus with the defaulters. Mere relationship is not sufficient to come to this conclusion. It can be just a chance that the petitioner happens to be relation of a defaulting party. It can also be a matter of chance that he is carrying on the same business which was being carried on by the defaulting party and from the same premises. But for coming to the conclusion that petitioner being a name-lender, actual business is being carried on by the defaulting party, clinching and substantial evidence was required to be collected by respondent No.1 while holding an enquiry in this regard.”

10.13 Reference was made to the decision of the Allahabad High Court in the case of Sai Traders v. Commissioner of Commercial Taxes, U.P., Lucknow, (2011) 46 VST 552 (All.), wherein it has been held thus:-

“12.The other ground that the purchases shown from Jai Ambay Enterprises are bogus are not borne out from the record. In fact the said purchases have also been shown by the said firm in its return submitted to the Department as is evident from annexure No.13 to the revision. Moreover, the ground that the purchases are bogus has not been dealt with by the Tribunal. The Tribunal only records that the said firm from which the revisionist had made purchases was found to be involved in evasion of tax. Involvement of the said firm in tax evasion may not be attributed to the revisionist as there is no finding that the revisionist was in any way linked with the affairs of the said firm and was instrumental in such tax evasion.”

10.14 Reliance was placed upon the decision of the Supreme Court in the case of M.A. Rahman and others v. the State of Andhra Pradesh and others, (1961) 12 STC 392, wherein it was contended on behalf of the petitioners that the effect of cancellation was that a person whose registration is cancelled cannot carry on business in motor spirit as he was doing before the cancellation. It was submitted that cancellation results in the total extinction of the business of the person whose registration is cancelled and thus the provision as to cancellation is an unreasonable restriction on the fundamental right to carry on business. The court held that there was no doubt that if a registration is cancelled under sub-section (6) of the Madras Sales of Motor Spirit Taxation Act, 1939, it will not be possible for the person whose registration is so cancelled to carry on his business.

10.15 Reliance was placed upon the decision of the Supreme Court in The State of Kerala v. Vijaya Stores, (1978) 42 STC 418, reference to which shall be made at an appropriate stage in the judgment.

10.16 Reliance was also placed upon an unreported decision of this court in Advanced Systek Private limited v. State of Gujarat, rendered on 28.3.2014 in Tax Appeals No.157 and 158 of 2014, wherein the court observed that the scope of the appeal before the Tribunal was confined to the legality of the order of assessment passed by the Assessing Officer under the central sales tax regime and the legality of the order of the Commissioner (Appeals) dismissing the appeal of the assessee. The Tribunal in exercise of jurisdiction under appellate powers under section 73 of the GVAT Act could not have set aside that portion of the order of the Assessing Officer which was not even in appeal before itself.

10.17 It was accordingly, urged that the appeal deserves to be allowed and that the questions formulated by the court are required to be answered in favour of the appellant.

11.Opposing the appeal, Ms. Maithili Mehta, learned Assistant Government Pleader, invited the attention of the court to the order passed by the first appellate authority, to point out that the authority has referred to numerous transactions made by the appellant which are suspicious in nature. It was submitted that even if the transactions referred to by the first appellate authority are not taken into consideration, the court may take into consideration the fact that in the assessment proceedings, two transactions were proved to be doubtful for which the appellant’s input tax credit came to be disallowed.

11.1 Referring to the provisions of sub-section (5) of section 27 of the GVAT Act, it was submitted that the words “as may be specified” vest discretion in the Commissioner to cancel the registration from any date, and such cancellation may be retrospective and even ab initio from the date of grant of registration. In support of such submission, the learned Assistant Government Pleader placed reliance upon the decision of this court in the case of State of Gujarat v. Jain Marbo India (P.) Ltd., (2018) 67 GST 495 (Gujarat), for the proposition that as a matter of first principle there is no reason for the court to restrict, by a process of construction, the legislative intent in regard to the imposition of a penalty by holding that the discretion would extend only to the imposition of a penalty and not with regard to the extent of the penalty. The legislature is undoubtedly empowered in its plenary jurisdiction to determine whether a penalty is or is not mandatory. It was submitted that, therefore, the provisions of sub-section (7) of section 27 of the GVAT Act may not be construed to limit the power of the Commissioner to cancel the registration only prospectively.

11.2 Reliance was also placed upon the decision of the Supreme Court in the case of State of T.N. v. Arooran Sugars Limited, (1997) 1 SCC 326, wherein it has been held thus:-

“13.The legislature by different deeming clauses and through statutory fiction requires the Court to treat that amendments so introduced by Act 7 of 1974 had never been introduced in the principal Act. The power of the legislature to amend, delete or obliterate a statute or to enact a statute prospectively or retrospectively cannot be questioned and challenged unless the court is of the view that such exercise is in violation of Article 14 of the Constitution. It need not be impressed that whenever any Act or amendment is brought in force retrospectively or any provision of the Act is deleted retrospectively, or any provision of the Act is deleted retrospectively, in this process rights of some are bound to be effected one way or the other. In every case, it cannot be urged that the exercise by the legislature while introducing a new provision or deleting an existing provision with retrospective effect per se shall be violative of Article 14 of the constitution. If that stand is accepted, then the necessary corollary shall be that legislature has no power to legislate retrospectively, because in that event a vested right is effected; of course, in special situation this court has held that such exercise was violative of Article 14 of the constitution. Reference in this connection may be made to the cases of State of Gujarat & Another v. Raman Lal Keshav Lal Soni & others,,(1983) 2 SCR 287; T. R. Kapur V. State of Haryana, 1986 (Supp) SCC 584; and Union of India v. Tushar Ranjan Mohanty, 1994(5) SCC 450. In the case of State of Gujarat v. Raman Lal (supra) a Constitution Bench on the facts and circumstances of that case observed:

“The legislation is pure and simple, self-deceptive, if we may use such an expression with reference to a legislature-made law. The legislature is undoubtedly competent to legislate with retrospective effect to take away or impair any vested right acquired under existing laws but since the laws are made under a written Constitution, and have to conform to the do’s and don’ts of the constitution neither prospective nor retrospective laws can be made so as to contravene Fundamental Rights. The law must satisfy the requirements of the Constitution today taking into account the accrued or acquired rights of the parties today. The law cannot say, twenty years ago the parties had no rights, therefore, the requirements of the Constitution will be satisfied if the law is dated back by twenty years. We are concerned with today’s rights and not yesterday’s. A legislature cannot legislate today with reference to a situation that obtained twenty years ago and ignore the march of events and the constitutional rights accrued in the course of the twenty years. That would be most arbitrary, unreasonable and a negation of history.”

In same terms this Court expressed the opinion in the cases of T.R. Kapur v. State of Haryana (supra) and Union of India v. Tushar Ranjan Mohanty (supra) in respect of alterations in rules framed under Article 309 of the Constitution retrospectively regarding conditions of service.

11.3 The learned Assistant Government Pleader produced the original file of the first appellate authority for the perusal of the court and pointed out that a print out of all the on-line details of transactions of the appellant with the firms, both registered as well as those whose registrations were cancelled, was placed reliance upon. Reference was made to a statement showing dealings with firms whose registrations had not been cancelled. It was submitted that the show cause notice was issued for the years 2010-11 and 2011-12. At the time of passing the original order transactions with two parties were proved to be doubtful. It was submitted that the order of the first appellate authority is based upon online details of transactions. It was pointed out that the Tribunal, in the impugned order, has recorded a finding to the effect that the appellant did not produce sufficient evidence before the cancelling authority (Commercial Tax Officer) and, therefore, the view taken by the cancelling authority was correct.

11.4 It was urged that having regard to the overall facts, the cancellation of registration with retrospective effect has rightly been upheld by the first appellate authority as well as the Tribunal, and that the impugned order passed by the Tribunal, being just, legal and proper, does not warrant interference.

12. Before adverting to the merits of the rival contentions, it may be germane to quickly refer to the facts of the case. The record of the case shows that a notice dated 3.7.2015 came to be issued to the appellant in Form 401 under rule 48 of the GVAT Rules calling upon the appellant to pay the outstanding assessed tax dues for the years 2010-11 and 2011-12 and submit a challan evidencing payment thereof within eight days. The above notice was followed by a notice dated 17.12.2015, issued under sub-section (5) of section 27 of the GVAT Act in Form 104 prescribed under sub-rule (3) of rule 10 of the rules. A perusal of the said notice indicates that the Commercial Tax Officer has formed the belief that from 17.11.2010, with a view to evade payment of taxes, the appellant has:

(c)not paid the outstanding tax/interest/penalty of Rs.11,85,465/- for the period 1.4.2011 to 31.3.2012;

(d)has not paid tax/interest/penalty of Rs.74,573/- for the period 16.11.2010 to 31.3.2011; and

(k) he has failed to produce the books of accounts.

13. Thereafter, the Commercial Tax Officer passed an order dated 12.1.2016, cancelling the registration of the appellant. The reasons set out therein are that the dealer was issued notice in Form 401 dated 4.7.2015 and in Form 104 on 21.12.2015, in the context of recovery. The evidence of payment is placed on file but the challans in connection therewith are not produced. Also no submissions have been made. Also, the transactions of sale and purchase being suspicious, in the interest of the Government revenue, the registration is cancelled from the next day after the day on which it was obtained. Thus, the Commercial Tax Officer has cancelled the registration of the appellant on two grounds; firstly on the ground that evidence of payment of tax/interest/penalty was not produced; and secondly, on the ground that the transactions of sale and purchases were suspicious; and, therefore, in the interest of the revenue, the registration was required to be cancelled.

14. The appellant carried the matter in appeal before the first appellate authority. Before the first appellate authority, the appellant had put forth two grounds of appeal: (i) the order cancelling the registration is not clear and though the outstanding recovery was fully paid, the same was not taken into consideration, and hence, registration is required to be restored; and (ii) cancellation of registration by stating that the transactions are suspicious is unjust. On facts, it was pointed out that no amount was outstanding for 2010-11 and whatever amount was due towards tax, interest or penalty for 2011-12 has been fully paid. Thus, no amount was outstanding for other than the two years and in this regard, a communication dated 6.2.2016 had been addressed to the Commercial Tax Officer. It was further contended that by the order dated 12.1.2016, the registration has been cancelled, in connection with which notice under section 27(5) of the GVAT Act had been issued on 21.12.2015. The authority has passed the order based on evidence which ought to have been furnished to the appellant, absence whereof is required to be considered as breach of the principles of natural justice. Reliance was placed upon a decision rendered in the case of Rajendra Wines, 58 VST 238, for the proposition that if the copies of the evidence on which reliance has been placed by the department in proceedings against the dealer are not supplied to the dealer, the same amounts to breach of the principles of natural justice.

15. The appellate authority, in the order dated 3.8.2016, has placed reliance upon the record of the search proceedings and referred to transactions with numerous parties on the basis of details obtained from the list of transactions, and has observed that the dealer has stated that their assessment for 2010-11 and 2011-12 is completed. Against the order passed for 2010- 11, the Tribunal has given its decision and it is required to be noted that the dealer had admitted that their transactions were bogus, and in the appeal preferred before the Tribunal the dealer had asked for relief only qua the penalty. The appellate authority has further noted that the purchase and sales from the dealers referred to in the order are ab initio void and that the dealers are involved in planned tax evasion with the intention of evading payment of tax to the Government, in view whereof, there is reason to believe that the appellant is also involved in evasion of tax. The appellate authority has thereafter referred to various main symptoms of bogus billing as enumerated in the said order. Thereafter the appellate authority has observed that the appellant has admitted that its transactions were bogus and that it had paid the tax and interest as per the demand and had preferred the appeal qua the penalty. The appellate authority has further recorded that the appellant has placed reliance upon the decision of the Karnataka High Court in Raghavendra Wines v. State of Karnataka, (2012) 56 VST 238 (Kar.) and has held that the analogy of the decision will not help the appellant for the reason that:

1. The dealer is involved in evasion of tax;

2. Has admitted on its own and paid tax, interest and penalty;

3. During the course of the proceedings the appellant had remained present for scrutiny on five occasions;

4. During the course of appellate proceedings, the evidence relied upon has been communicated to the appellant.

15.1 The appellate authority has further recorded that the appellant has submitted that that they have paid the amount in respect of the bogus purchases made by them. The appellant has contended that the decision of the Tribunal against the demand that has arisen for the years 2010-11 and 2011-12 and on account of the search at the premises has not been taken into account. The appellate authority has held that however, the appellant being involved in evasion of tax, this contention is not tenable at the stage of appeal. The appellate authority was of the view that that itself was an admission of involvement in bogus billing. The appellate authority has observed that the dealer whose purchases are bogus, he must naturally have also made bogus sales and the mutual transactions are reflected in the statements; and has accordingly, held that considering the matter in its entirety, the dealer is a bead in the necklace of bogus billing; on a perusal of the bills and other details produced by it, the dealer does not appear to be entitled to the benefit of the decisions relied upon; the dealer has failed to prove that all its transactions were genuine; and has, accordingly, dismissed the appeal.

16. A perusal of the impugned order passed by the Tribunal reveals that before the Tribunal, the matter was argued on the merits of the order passed by the appellate authority. While it was contended on behalf of the appellant that the transactions were genuine, on behalf of the revenue it was contended that the appellant had knowingly furnished incorrect and incomplete particulars to defraud the Government revenue. Reliance was placed upon the decision of this court in State of Gujarat v. Nageshi Enterprise, rendered on 23.11.2016 in Special Civil Application No.1122 of 2016 and it was submitted that since the appellant had paid the tax and interest amount, it is deemed to have accepted the tax liability. Thus, indirectly the appellant was not an honest tax payer, and the payment made by him, indicates that the transfers were not genuine.

16.1 Before the Tribunal, on behalf of the appellant, it was submitted that as per the provisions of section 27(5)(i) of the GVAT Act, if the appellant had without entering into a transaction of sale, issued any tax invoice, retail invoices, bill or cash memorandum then and then only the authority had the right to cancel the registration. It was submitted that the payment of tax could not be considered as covered under the provisions of that sub-section. The Tribunal has referred to paragraph 7.1 of the above decision in the case of State of Gujarat v. Nageshi Enterprise (supra) and has referred to the order passed by the cancelling authority wherein it has tick marked the reason for cancellation as ‘failed to pay tax due from you’. The Tribunal has noticed that though the notice for cancellation was given to pay tax, the order of cancellation of registration was passed for doubtful purchases or billing activity.

16.2 The Tribunal noticed that against the order of cancelling authority, first appeal was preferred and the appellant had stated in the appeal memo that in order to prove physical movement of respective goods from the selling dealers all evidences of transportation were produced before the CTO. The Tribunal has thereafter held thus:

“The appellant has produced purchase register with paper book. The appellant has mentioned vehicle in the column but does not mention the number of vehicle in which particular goods was transported. This in our view does not amount to evidence of transportation. Therefore, in our view the decision of learned cancelling authority was justified in holding that the appellant had not produce evidences”.

16.3 The Tribunal has thereafter referred to the proceedings taken pursuant to the search whereby the adjudicating authority had disallowed input tax credit and raised demands for the period 2010-11 and 2011-12 and the appellant had paid the tax and interest involved in the said demand for the tax period 2010-11, and ultimately, the demand for penalty for the tax period 2010-11 was deleted by the Tribunal in Second Appeal No. 732 of 2015 decided on 7.10.2015. The Tribunal further noted that the appellant had pleaded before the first appellate authority that the cancellation of registration under section 27(5) of the Act on the ground of non-payment of tax was not justified. The Tribunal then referred to the findings recorded by the first appellate authority and held that the appellant did not produce sufficient evidence before the cancelling authority. Therefore, the view taken by the cancelling authority was correct. The Tribunal further held that the appellant paid tax and interest accepting indirectly that the purchases were not genuine. Accordingly, placing reliance upon the decision of this court in M/s Nageshi Enterprise (supra), the Tribunal held that the authority was justified in cancelling the registration of the appellant on the ground mentioned in the order and dismissed the appeal.

17.It is in the aforesaid backdrop that the questions formulated by this court are required to be considered.

18.Insofar as the first question is concerned, namely, whether, on the facts and in the circumstances of the case, the Gujarat Value Added Tax Tribunal was justified in confirming ab initio cancellation of the registration certificate of the appellant, it may be germane to refer to sub-section (5) of section 27 of the GVAT Act which reads as under:-

“(5) If a dealer-

(a) has failed to file three consecutive returns under this Act;

(b) knowingly furnishes incomplete or incorrect particulars in his returns with a view to evade tax;

(c) has failed to pay the tax due for three consecutive tax periods from him under the provisions of this Act;

(d) having issued tax invoice or retail invoices, has failed to account for the said invoices in his books of account;

(e) holds or accepts or furnishes or causes to be furnished a declaration, which he knows or has reason to believe to be false;

(f) [….DELETED]

(g) has been convinced of an offence under this Act, or under the earlier law;

(h) discontinues his business and has failed to furnish information regarding such discontinuing,

(i) without entering into a transaction of sale issues to another dealer tax invoice, retail invoice, bill or cash memorandum, with intention to defraud the Government revenue,

(j) who has been found evading tax on account of variation in physical stock compared with his regular books of accounts;

the Commissioner may at any time, for reasons to be recorded in writing and after giving the dealer an opportunity of being heard, cancel his certificate of registration from such date as may be specified by him.”

19.Thus, sub-section (5) of section 27 of the GVAT Act empowers the Commissioner to cancel the certificate of registration from such date as may be specified by him. On a plain reading of the sub-section, it appears that it is permissible for the Commissioner to cancel the registration even with retrospective effect.

20.At this juncture, reference may be made to sub-section (5A) of section 27 of the GVAT Act, which to the extent the same is relevant for the present purpose, reads as under:-

“(5A) (1) If a dealer,-

(a) has failed to inform changes as required under sub-section (1) of section 26;

(b) has failed to furnish return under section 29;

(c) has failed to pay tax under section 30;

(d) has failed to file declaration or intimate the changes as required under section 65 or 66; or

(e) has failed to produce the books of accounts required under section 67,

the Commissioner may, at any time, for reasons to be recorded in writing and after giving the dealer an opportunity of being heard, suspend his certificate of registration from such date not earlier than the date of order of suspension, as may be specified by him in the order.”

21. Thus under sub-section (5) of section 27 of the GVAT Act, the Commissioner is empowered to cancel the certificate of registration from such date as may be specified by him; under clause (1) of sub-section (5A) thereof, the Commissioner is empowered to suspend the certificate of registration from such date not earlier than the date of order of suspension. In other words, it has been provided that an order of suspension will be operative from a date not earlier than the date of the order, namely that it cannot be made effective retrospectively; whereas, in case of cancellation of registration, it has not been so provided, and date from which the cancellation should be effective is left to the discretion of the Commissioner. Since sub-section (5) of section 27 of the GVAT Act does not contain the words “from a date not earlier than the date of the order”, this is a clear indication of the legislative intent, not to curtail the date of cancellation of registration to the date of the order of cancellation of registration. In other words, sub-section (5) of section 27 of the GVAT Act permits the Commissioner to cancel the certificate of registration even with retrospective effect.

22. The question that then arises for consideration is, whether in the facts of the present case, the Commercial Tax Officer was justified in retrospectively cancelling the registration of the appellant from the next date after it was issued.

23. From the facts referred to hereinabove, it is evident that the sole valid ground on which the notice under sub-section (5) of section 27 of the GVAT Act was issued was on the ground of non-payment of assessed tax dues. Insofar as production of books of accounts is concerned, the said ground is a ground for suspension of registration and not a ground for cancellation. In the opinion of this court, such an infraction with regard to non- payment of assessed tax dues, though may invite an order of cancellation depending on the facts and circumstances of the case, it is not so serious a default so as to entail retrospective cancellation of the registration right from the next date of its registration. This court is of the considered view that in case of non-payment of tax dues, the registration may be cancelled prospectively from the date of the order or at best from the date of violation; but not ab initio from the date of grant of registration or any date prior to the violation of the statutory provision. The registration of a dealer cannot be cancelled retrospectively to even include the period where the transactions were legal and valid and there was no violation in terms of any of the clauses contained in sub-section (5) of section 27 of the GVAT Act. While cancelling the registration of a dealer, the authority should consider the nature of the violation as well as the effect that the cancellation of the registration has, not only on the dealer but on all other dealers who have dealt with him. In case of mere non-payment of assessed tax dues, there is no illegality in the transactions entered into by the parties, and hence, the concerned authority should exercise discretion accordingly, and if it finds on facts that a case for cancellation is made out, it may cancel the registration prospectively. In cases involving evasion of payment of taxes or furnishing a false particulars etc., the registration may be cancelled from the date of such transactions or from the date when false particulars are filed; whereas in case where registration has been obtained fraudulently and no valid transactions have been made right from the inception, the authority would be justified in cancelling the registration ab initio.

24. In the case of the appellant, even if the order of the first appellate authority were to be accepted, at best, on the basis thereof it could be said that the appellant had indulged in certain transactions which were doubtful in nature, whereas majority of the transactions were valid transactions. In such a case when registration is cancelled retrospectively, it has the effect of invalidating valid transactions and the consequence thereof is that the persons who had entered into valid transactions with the dealer are penalised for no fault of their own on account of cancellation of the registration of the dealer with retrospective effect. Thus, retrospective cancellation has a cascading effect and innocent parties have to bear the brunt of such cancellation; and as experience shows, once the registration of a dealer is cancelled ab initio, the Department treats even those transactions which were valid at the time when they were made, to be invalid and initiates proceedings against all those dealers who have made transactions in the past with such dealer whose registration is cancelled retrospectively. However, if the registration of such a dealer is cancelled prospectively, it affects only the dealer concerned, and in respect of those past transactions that are proved to be invalid they can be dealt with in the assessment and action can also be taken against those parties who have entered such invalid transactions. When the registration of a dealer is cancelled in accordance with law and such cancellation is published by the Commissioner in the manner provided under sub-section (11) of section 27 of the GVAT Act, those who deal with such dealer knowing full well that his registration has been cancelled, deal with him at their own peril. However, a person who deals with a dealer having a valid registration and the transaction entered into with the dealer is a legal and valid transaction, on account of retrospective cancellation of the registration of the said dealer, he should not be visited with severe consequences by considering the transaction which was valid at the time when it was made, to be invalid, merely because the registration of the dealer has been retrospectively cancelled covering the period during which such transaction was made.

25. Question No.1 is answered accordingly, namely that on the facts and in the circumstances of the case, the Tribunal was not justified in confirming ab initio cancellation of the registration certificate of the appellant.

26. Moving on to the second question viz. whether the Gujarat Value Added Tax Tribunal was justified in holding that the judgment of this court in the case of State of Gujarat v. Nageshi Enterprise, (2017) 104 VST 204 (Guj.), would be applicable to the facts of the appellant.

27. In this regard, a perusal of the impugned order reveals that such finding of the Tribunal is based on the fact that the appellant by paying the tax and interest has indirectly accepted that the purchases were not genuine. Reference may be made at this stage to the order dated 7.10.2015 passed by the Tribunal in Second Appeal No.732 of 2015, a perusal whereof shows that being aggrieved by the order of the first appellate authority confirming tax and interest and upholding penalty to the extent of Rs.74,574/-, the appellant had preferred the appeal. From the said order, it also appears that the appellant had paid the entire tax demand of Rs.99,432/- and interest of Rs.46,236/- prior to the assessment order and had also paid an amount of Rs.12,430/- at the first appellate stage, and hence, the entire tax and interest was paid by the appellant. When the appellant approached the Tribunal, the outstanding amount was only on account of penalty. In paragraph (6) of the order, the Tribunal has recorded thus: “

(6) Though several grounds were raised by the appellant in the statement of facts and grounds of appeal with respect to disallowance and input tax credit and consequent levy of tax, interest and penalty, Mr. Shukla has made it clear at the outset that he confines his challenge only to the levy of remaining amount of penalty of Rs.74,573/-. He has submitted that as per the normal practice adopted by this Tribunal, when the tax and interest are paid, penalty is normally deleted. Even otherwise, there was no justification of levying penalty at the rate of 150% of tax and even there is no justification of retaining of 75% of penalty in appeal by the learned Deputy Commissioner. He has therefor submitted that the entire penalty should be deleted.”

28.Thus, while levy of tax, interest and penalty had been challenged by the appellant in the appeal, in view of the normal practice adopted by the Tribunal, the learned advocate for the appellant confined the challenge only to the levy of the remaining amount of penalty. In the opinion of this court, confining the challenge only to the penalty component in the light of the normal practice of the Tribunal can by no stretch of imagination be construed as an admission on the part of the appellant that the transactions in question were invalid. In State of Gujarat v. Nageshi Enterprise (supra), on which reliance has been placed by the Tribunal, this High Court has recorded thus:

“7.1. xxxxxxxx

“At this stage it is required to be noted that in the present case the respondent has specifically admitted that it was not entitled to ITC of Rs.4,45,645 and that he wrongly claimed/availed the ITC of Rs.4,45,645. Even the learned Tribunal has specifically observed in the impugned order that the respondent (original applicant) has admitted that it was not entitled to ITC of Rs.4,45,645/- and that it had willingly paid the said amount, therefore, it will not have the right to claim said ITC in any assessment. If that be so and when found that though he was not entitled to claim of Rs.4,45,645/-, it wrongly claimed and got the same, meaning thereby, respondent admitted that it had indulged into billing activities only, its registration was required to be cancelled and as such was rightly cancelled by the first revisional authority.”

Thus, the decision of this court in State of Gujarat v. Nageshi Enterprise (supra) has been rendered in the peculiar facts of the said case wherein the dealer had specifically admitted that he was not entitled to input tax credit, whereas in the facts of the present case, the appellant has challenged the tax, interest and penalty till the stage of second appeal, and there is no admission on its part that the transactions in question were invalid. Question No.2 is also, therefore, required to be answered in favour of the appellant and against the respondent, namely, that the Tribunal was not justified in holding that the decision of this court in the case of State of Gujarat v. Nageshi Enterprise (supra) would be applicable to the facts of the appellant.

29. Proceeding to the last question, namely, whether the Gujarat Value Added Tax Tribunal was justified in confirming the order of the first appellate authority confirming the cancellation of registration certificate of the appellant on the basis of the allegations and grounds neither made out nor established in the original order cancelling the registration certificate.

30. On a perusal of the show cause notice for cancellation of registration, it is evident that such notice was issued on two grounds; firstly, that the tax, interest and penalty had not been paid; and secondly, on the ground of failure to produce books of accounts. As noticed earlier, insofar as failure to produce books of accounts is concerned, it is a ground for suspension of registration and not for cancellation. Therefore, the sole ground for cancellation of registration in the show cause notice is non-payment of tax, interest and penalty. However, the order cancelling the registration has been passed on two grounds; firstly that the appellant had not produced challan evidencing payment of the outstanding dues; and secondly, in the interest of the Government revenue as the transactions were suspicious. Thus, while the notice in Form 104 was issued on one ground, in the order cancelling the registration, the cancelling authority has travelled beyond the grounds stated in the show-cause notice and has added a new ground, namely, in the interest of the Government revenue as the transactions were suspicious.

31. Section 27 of the GVAT Act bears the heading, ‘Suspension or Cancellation of Registration’. Sub-section (1) of section 27 provides for cancellation of registration on the ground of discontinuance or transfer of business or the dealer having ceased to be liable to pay tax. Sub-section (5) of section 27 provides for the contingencies in which the Commissioner can cancel the certificate of registration of a dealer. Sub-section (5A) of section 27 provides for suspension of the registration on the grounds set out therein. One such ground as contemplated in clause (e) thereof is that if a dealer has failed to produce the books of accounts required under section 67, the Commissioner may, at any time, for reasons to be recorded in writing and after giving the dealer an opportunity of being heard, suspend his certificate of registration from such date not earlier than the date of order of suspension, as may be specified by him in the order. Rule 10 of the GVAT Rules provides for cancellation or suspension of certificate of registration. Sub-rule (3) thereof, which is relevant for the present purpose, provides that if the Commissioner intends to cancel or suspend the registration under sub-section (5) or sub-section (5A) of section 27 of the GVAT Act, he shall give a notice to the dealer in Form 104.

32. Form 104 provides for the format for notice for suspension/cancellation of certificate of registration under sub- section (5) of section 27 of the GVAT Act. While sub-section (5) of section 27 of the GVAT Act provides for cancellation of registration only in the contingencies referred to in clauses (a) to (j), in paragraph 2 of Form 104, two more contingencies are provided viz. (k) failed to produce books of accounts when called to do so, and (l) failed to intimate the changes as required in sections 26, 65 and 66, which are contingencies provided for suspension of registration under sub-section (5A) of section 27 of the GVAT Act. Thus, while the heading of the form refers to suspension/cancellation of certificate of registration under sub-section (5) of section 27, the form in fact also includes the grounds for suspension of registration under sub-section (5A) thereof. Thus, in the notice issued in Form 104, while one ground relates to cancellation of registration, the other relates to suspension of registration. In the opinion of this court while a certificate of registration can be suspended on the grounds on which it can be cancelled, it being a lesser punishment, the certificate of registration cannot be cancelled on a ground for suspension thereof.

33. It may be noted that sub-section (5) of section 27 of the GVAT Act provides for the contingencies in which registration can be cancelled. While non-payment of tax, interest and penalty is a ground for cancellation of registration, ‘transactions being suspicious’ and ‘interest of the revenue’ are not grounds provided thereunder. Therefore, the order cancelling the registration of the appellant is bad on two counts; firstly, it travels beyond the show cause notice and is, therefore, in breach of the principles of natural justice; and secondly, the registration has been cancelled on grounds extraneous to sub-section (5) of section 27 of the GVAT Act.

34. In the appeal preferred by the appellant, the appellate authority has found that the tax and interest had been paid and penalty had been waived by the Tribunal, but instead of allowing the appeal on the ground that the sole ground on which the show cause notice was issued stood complied with, has proceeded to enter into an inquiry of the transactions entered into by the appellant with different entities which were downloaded from the details found online and relying upon such material, has upheld the order of cancellation. The appellate authority has also found that the appellant had admitted that the purchases were bogus and presumed that the purchases being bogus, the sales also must be bogus. The appellate authority has therefore, travelled much beyond the scope of the show cause notice and has placed reliance upon the material which was not subject matter of the show cause notice issued to the appellant for cancellation of registration.

35. In this regard, reference may be made to the decision of the Supreme Court in the State of Kerala v. Vijaya Stores, 1973 (42) STC 418 <=> (1978) 4 SCC 41, wherein it has been held thus:-

“4.The question raised before us really turns upon the correct interpretation to be placed on section 39(4) of the Act, but sub sections (1), (2), (3) and (4) of section 39 are material for our purposes which run thus:

“39. Appeal to the Appellate Tribunal. (1) Any officer empowered by the Government in this behalf or any other person objecting to an order passed by the Appellate Assistant Commissioner under sub section (3) of section 34 and any person objecting to an order passed by the Deputy Commissioner under subsection (1) of section 35, and any person objecting to an order passed by the inspecting Assistant Commissioner under clause (c) of sub-section (4) of section 28 may, within a period of sixty days from the date on which the order was served on him in the manner prescribed, appeal against such order to the Appellate Tribunal; Provided that the Appellate Tribunal may admit an appeal presented after the expiration of the said period if it is satisfied that the appellant had sufficient cause for not presenting the appeal within the said period.

(2) The officer authorised under sub-section (1) or the person against whom an appeal has been preferred, as the case may be on receipt of notice that an appeal against the order of the Appellate Assistant Commissioner has been preferred under sub-section (1) by the other party, may, notwithstanding that he has not appealed against such order or any part thereof, file, within thirty days of the receipt of the notice, a memo random of cross-objections, verified in the prescribed manner against any part of the appellate Assistant Commissioner, and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in sub- section (1).

(3) The appeal or the memorandum of cross- objections shall be in the prescribed form and shall be verified in the prescribed manner, and, in the case of an appeal preferred by any person other than an officer empowered by the Government under sub-section (1), it shall be accompanied by such fee not exceeding one hundred rupees as may be prescribed.

(4) In disposing of an appeal, the Appellate Tribunal may, after giving the parties a reasonable opportunity of being head either in person or by a representative. (a)in the case of an order of assessment or penalty.

(i) confirm, reduce, enhance or annul the assessment or penalty or both;

(ii) set aside the assessment and direct the assessing authority to make a fresh assessment after such further enquiry as may be directed; or (iii)pass such other orders as it may think fit; or

(b) in the case of any other order, confirm, cancel or vary such order.”

5. Considerable emphasis was laid by counsel for ‘the appellant upon sub-section(4) which indicates what things the Appellate Tribunal may do while disposing of an appeal and in particular it was pointed out that under ‘sub-section(4) (a)(i) the Appellate Tribunal has been given power ‘to enhance the assessment” while disposing of an appeal against an order of assessment after giving the party a reasonable opportunity of being heard and it was urged that such power could be exercised even when the appeal against the Appellate Assistant Commissioner’s assessment order had been preferred by the assessee and not by the Department. To place such a construction on sub-section (4) (a)(i) would amount to ignoring the scheme of section 39. Sub-section (1) provides for an appeal being preferred against an assessment order passed by the Appellate Assistant Commissioner under section 34(3) either by the assessee or by the Department through an officer empowered by the Government in that behalf. Further, sub-section (2) provides for filing of cross-objections by a party, against whom an appeal has been preferred, notwithstanding that he has not himself appealed against the decision or any part thereof and such cross-objections are to be disposed of by Appellate Tribunal as if it were an appeal. Then comes sub-section (4) which enumerates the various powers conferred upon the Appellate Tribunal while disposing of such appeals (including cross- objections) and the power conferred upon the Appellate Tribunal under section 4(a)(i) is “to confirm, reduce, enhance or annul the assessment”; the power to enhance the assessment must be appropriately read as relatable to an appeal or cross-objections filed by the Department. The normal rule that a party not appealing from a decision must be deemed to be satisfied with the decision, must be taken to have acquiesced therein and be bound by it, and, therefore, cannot seek relief against a rival party in an appeal preferred by the latter, has not been deviated from in sub-section (4) (a)(i) above. In other words, in the absence of an appeal or cross- objections by the Department against the Appellate Assistant Commissioner’s order the Appellate Tribunal will have no jurisdiction or power to enhance the assessment. Further, to accept the construction placed by the counsel for the appellant on sub-section (4) (a)(i) would be really rendering sub-section (2) of section 39 otiose, for if in an appeal preferred by the assessee against the Appellate Assistant Commissioner’s order the tribunal would have the power to enhance the assessment, a provision for cross- objections by the Department was really unnecessary. Having regard to the entire scheme of section 39, therefore, it is clear that on a true and proper construction of sub-section (4) (a) (i) of section 39 the Tribunal has no jurisdiction or power to enhance the assessment in the absence of an appeal or cross- objections by the Department.”

36. Section 73 of the GVAT Act provides for appeal. Sub- section (6) thereof provides that subject to such rules or procedure as may be prescribed, an appellate authority may pass such order on appeal as it deems just and proper. In the present case, the show cause notice was issued on only one ground, and hence, in view of the settled legal position, the cancelling authority could not have gone beyond the show cause notice. Therefore, in an appeal preferred against the order of the cancelling authority, the first appellate authority could not have gone beyond the scope of the show cause notice and taken into consideration totally new facts for the purpose of upholding the cancellation of registration.

37. Sub-rule (1) of rule 57 of the GVAT Rules provides that before an appellate or revising authority passes an order in appeal or revision which is likely to affect the appellant or applicant or any other person adversely, it shall serve notice in Form 503 and shall give him a reasonable opportunity of being heard.

38. Form 503 is the format prescribed for notice under section 73 or section 75 of the GVAT Act informing the party that the appellate/revising authority proposes to pass an order to the effect mentioned below the same and calling upon it to prefer any objection against such order. The gist of the order proposed to be passed is required to be stated in the notice.

39.In the facts of the present case, no notice in Form 503 has been issued to the appellant prior to the first appellate authority taking into consideration the material which did not form part of the material before the Commercial Tax Officer. Moreover, this court is of the opinion that the provisions of sub- rule (1) of rule 57 of the GVAT Rules would be applicable to assessment proceedings wherein the appellate authority is of the opinion that the demand is required to be enhanced or the penalty is not proportionate to the default. In a case of cancellation of registration pursuant to a show cause notice, the appellate authority cannot travel beyond the grounds stated in the show cause notice and expand the scope of the proceedings by placing reliance upon additional material, which was not relevant to the grounds stated in the show cause notice.

40. The Tribunal, in the impugned order, has failed to consider the scope of the proceedings before it and has upheld the order passed by the first appellate authority on the grounds which were extraneous to the show cause notice. Moreover, as discussed hereinabove, the Tribunal has thoroughly misunderstood the facts of the case while holding that appellant had accepted that the purchases were not genuine. The Tribunal was, therefore, not justified in upholding the order passed by the first appellate authority whereby it had confirmed the order of cancellation of the registration certificate of the appellant.

41. Question No.3 stands answered accordingly, that is, in favour of the appellant and against the revenue.

42.For the foregoing reasons, the appeal succeeds and is, accordingly, allowed. The impugned order dated 16.8.2017 passed by the Tribunal in Second Appeal No.13 of 2017, as well as the order dated 3.8.2016 passed by the first appellate authority and the order dated 12.1.2016 passed by the Commercial Tax Officer are hereby quashed and set aside and the certificate of registration of the appellant is hereby restored. No order as to costs.