Cancellation of GST Retrospectively Affected ITC Availment of Taxpayer’s Customers: Delhi HC suspends Retrospective Effect of Order

The Delhi High Court suspended the retrospective effect of the order Cancellation of Goods and Service Tax ( GST )registration retrospectively affected the (ITC) availment of taxpayer’s customers. MS Sumit Enterprises, the Petitioner submitted an application for cancellation of registration with effect from 22. 02.

2021 on the ground that Petitioner had closed its business during the COVID period. Respondent No. 2 issued a notice stating that the value of raw material stock, and stock value of capital goods appears to be incorrect and there were excess sales and purchases and accordingly particulars about stock were sought from the petitioner.

Since no reply was received from the petitioner, the application seeking cancellation of registration was rejected by the order dated 04. 03. 2021.

A show cause notice was issued to the petitioner on 02. 09. 2021 for having failed to file a return for a continuous period of six months.

The petitioner did not submit any reply to the show cause notice, leading to the order dated 27. 04. 2022 (also impugned herein) being passed, cancelling the registration of the petitioner with effect from 02.

07. 2017. The application seeking cancellation of the registration of the petitioner was rejected on the ground that the petitioner had failed to furnish stock position, value of raw material as well as the value of capital goods.

In terms of Section 29 sub-section 5 of the Central Goods Services Tax Act, 2017 (every person whose registration is cancelled is liable to pay an amount equivalent to the credit of input tax in respect of inputs held in stocks and inputs contained in semi-finished or finished goods held in stock or capital goods of plant and machinery on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher. Since the petitioner has failed to furnish the value of the raw material stock, capital goods and the stock position, the proper office in our view has rightly rejected the application on account of lack of information. It was found that the cancellation of registration had on retrospective effect.

In terms of Section 29(2) of the Act, the proper officer may cancel the 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. The 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. According to the respondent, one of the consequences for cancelling a taxpayer’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 taxpayer 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. A division bench comprising Justice and Justice Ravinder Dudeja held that the order is erroneous to the extent that the same could not have been passed retrospectively. The Court modified the order to the extent that cancellation shall take effect from 02.

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