GST registration cancellation restricted to SCN date as retrospective cancellation was held arbitrary and mechanically exercised

M/s Chehak Fashions v. Commissioner, Delhi GST & Anr.

Delhi High Court
W.P.(C) 4383/2024
Section involved: Section 29(2) of the CGST Act, 2017
Category: Cancellation of GST Registration – Retrospective Effect
Date of Judgment: 22 March 2024

Facts

The petitioner, a proprietary concern engaged in trading of woven fabric, was holding a valid GST registration. A Show Cause Notice dated 20.09.2021 was issued proposing cancellation of registration on the ground that returns were not filed for a continuous period of six months. The notice, however, neither disclosed any cogent factual basis nor specified the date and time of personal hearing, and crucially did not indicate that cancellation was proposed with retrospective effect. Subsequently, an order dated 26.10.2021 cancelled the registration retrospectively with effect from 26.07.2017. The petitioner’s statutory appeal was dismissed solely on limitation, prompting invocation of writ jurisdiction. These facts emerge from paras 1 to 5 of the judgment

Questions before the Court

The Court was required to examine whether the Show Cause Notice and cancellation order satisfied the statutory requirements under Section 29(2) of the CGST Act, and whether retrospective cancellation of registration from 26.07.2017 could be sustained in absence of reasons, opportunity of hearing, and objective satisfaction. This issue is reflected across paras 4, 8 and 9 of the judgment

Observations of the Court

The Court noted that the Show Cause Notice was vague, cryptic, and devoid of particulars. It neither mentioned the date and time of personal hearing nor put the petitioner to notice that retrospective cancellation was contemplated, thereby violating principles of natural justice. The cancellation order itself was found to be internally contradictory, simultaneously referring to a reply and stating that no reply was filed, while also showing nil tax dues. Importantly, the Court held that retrospective cancellation under Section 29(2) cannot be exercised mechanically and must be based on objective criteria. Mere non-filing of returns for a period does not justify cancellation covering earlier compliant periods. The Court further observed that retrospective cancellation has severe downstream consequences, including denial of input tax credit to recipients, and therefore warrants careful consideration. These findings are elaborated in paras 5 to 10 of the judgment

Judgment / Verdict

Considering that the petitioner had closed business and did not intend to continue registration, the Court modified the cancellation order to the limited extent that the GST registration would be treated as cancelled prospectively from 20.09.2021, i.e., the date of issuance of the Show Cause Notice. The Court expressly held that retrospective cancellation from 26.07.2017 was unsustainable. At the same time, liberty was reserved to the department to initiate recovery proceedings in accordance with law, including retrospective cancellation if justified on proper grounds. The writ petition was disposed of accordingly, as recorded in paras 11 to 14 of the judgment

Between the Fine Lines – Trade & Industry Takeaway

This judgment reinforces that retrospective cancellation of GST registration is not a routine administrative consequence of non-filing of returns. Tax authorities must record objective reasons, issue a clear and reasoned show cause notice, and consciously assess the commercial and ITC implications before invoking retrospective effect. For businesses, the ruling offers strong protection against arbitrary cancellation impacting past transactions and recipient ITC, while still preserving departmental recovery rights where legally justified.

Cases referred – Summary Table