GST registration cancellation restricted to application date as retrospective cancellation without reasons was held arbitrary

Chima Ram Harnand Rai v. Principal Commissioner, Department of Trade and Taxes, GNCTD

Delhi High Court – W.P.(C) 5671/2024
Category: GST Registration – Retrospective Cancellation
Date of Judgment: 24 April 2024
Relevant Provisions: Section 29(2), Central Goods and Services Tax Act, 2017

Facts

The petitioner was engaged in the business of plastic raw material and was duly registered under the Central Goods and Services Tax Act, 2017. Owing to serious health issues, the petitioner closed business operations and consequently filed an application dated 02.07.2022 seeking voluntary cancellation of GST registration. The application was rejected vide order dated 03.10.2022 without disclosing any reasons, merely stating that the reply was not satisfactory, leaving the reasoning column completely blank (paras 3–6).

Subsequently, a Show Cause Notice dated 02.03.2023 was issued proposing cancellation of registration on the vague ground of non-filing of returns. The notice neither specified concrete reasons nor disclosed the identity of the issuing authority, and did not propose retrospective cancellation. Despite this, an order dated 20.04.2023 was passed cancelling the registration retrospectively with effect from 07.07.2017, without assigning any justification for such retrospective operation (paras 7–11). The petitioner claimed lack of knowledge of the proceedings and orders (para 12).

Questions for Determination

Whether GST registration can be cancelled retrospectively without specific reasons and without putting the taxpayer to notice of such retrospective cancellation, particularly when the taxpayer had earlier sought voluntary cancellation due to closure of business (paras 14–16).

Observations

The Court observed that both the Show Cause Notice and the cancellation order were bereft of material particulars and reasons. The Show Cause Notice failed to indicate any cogent ground or the intent to cancel registration retrospectively, thereby denying the petitioner an opportunity to object to such drastic consequences (paras 14–15).

Interpreting Section 29(2) of the CGST Act, the Court held that although the statute empowers retrospective cancellation, such power cannot be exercised mechanically. The satisfaction of the proper officer must be founded on objective criteria. Mere non-filing of returns does not automatically justify retrospective cancellation, especially for periods where the taxpayer was otherwise compliant (para 15).

The Court also noted the serious cascading impact of retrospective cancellation, including denial of input tax credit to recipients, and held that such consequences must be consciously intended and legally warranted before exercising retrospective powers (para 16).

Judgment

Considering that the petitioner had voluntarily applied for cancellation due to closure of business and did not intend to continue registration, the Court modified the impugned cancellation order. The GST registration was directed to be treated as cancelled with effect from 02.07.2022, being the date of the petitioner’s application for cancellation, instead of the arbitrary retrospective date of 07.07.2017 (paras 17–18).

The petitioner was directed to complete statutory compliances under Section 29 of the CGST Act. Liberty was reserved for the department to initiate recovery or fresh proceedings in accordance with law after issuing a proper show cause notice and granting an opportunity of hearing (paras 19–21).

Between Fine Lines – Practical Takeaway for Trade

Retrospective cancellation of GST registration is not automatic and cannot be imposed without clear reasons and prior notice. Even where returns are not filed, authorities must justify why cancellation is required from an earlier date. Businesses that have genuinely closed operations and applied for cancellation are protected from arbitrary retrospective action, particularly where such action may adversely affect past compliances and third-party input tax credit.

Cases Referred – Summary Table

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