Retrospective Cancellation of GST Registration Should be based on Objective Criteria, Not merely Non-Filing of Returns as it Affects ITC for Customers: Delhi HC [Read Order]

The High Court of Delhi has set a precedent bringing clarity and justification in cases of retrospective cancellation of GST registrations. The High Court emphasised the need for objective criteria rather than solely relying on the non-filing of returns, highlighting the significant impact such cancellations can have on Input Tax Credit (ITC) for customers.

The judgment came in response to a petition filed by Mukesh Kumar Singh, challenging the retrospective cancellation of his GST registration by the Commissioner of Delhi GST and others.

The petitioner, engaged in the business of TMT Bars, found his registration cancelled retrospectively with effect from July 1, 2017, through an order dated May 4, 2023, issued on the grounds of non-submission of a reply to the Show Cause Notice (SCN) dated August 18, 2021.

The petitioner, represented by Mr. Vedant Chandel, Mr. Vikram Saini and Mr. Surinder Kaul Aberdar contested the cancellation, arguing that he was not aware of the notice and orders issued by the authorities. Further, the petitioner contended that he had ceased business operations and had filed all returns until August 2021, thus complying with his tax obligations.

The respondent revenue, Commissioner of Delhi GST and Others, represented by Mr. Rajeev Aggarwal and Mr. Manohar Mittal argued that retrospective cancellation of GST registration is warranted when taxpayers fail to file returns, as it affects ITC for customers. They contended that cancellation with retrospective effect is justified to uphold tax compliance and protect revenue interests.

The court scrutinised the SCN and the subsequent order for cancellation. It noted several discrepancies, including the lack of detailed reasons provided for the retrospective cancellation and the absence of a specific date and time for the petitioner to appear for a personal hearing. Moreover, the order failed to clarify why the cancellation was deemed necessary from a retrospective standpoint.

The bench emphasised the importance of objective criteria in determining the validity of retrospective cancellation. The court highlighted that cancellation cannot be mechanical and must be based on clear and justifiable grounds. Additionally, the bench stressed the adverse consequences of retrospective cancellations on customers’ ability to claim ITC, thereby affecting their financial interests.

The bench pointed out that while both the petitioner and the respondents sought cancellation of the GST registration, their reasons differed significantly. It stressed the need for authorities to consider the ramifications of such cancellations, particularly regarding ITC for customers, before making any retrospective decisions.

In result, the division bench comprising Justice Sanjeev Sachdeva and Justice Ravinder Dudeja modified the retrospective cancellation of the petitioner’s GST registration, setting the effective date as August 18, 2021, the date of the SCN. However, the court clarified that the respondents were not precluded from taking further steps for recovery of any outstanding tax, penalty, or interest owed by the petitioner, provided proper procedures were followed.

The judgment emphasised the need for clear reasons and the importance of objective criteria in administrative decisions involving retrospective cancellations of GST registrations. It highlighted the impact on ITC for customers and stated that cancellation should be justified and warranted, not merely for non-filing of returns.

To Read the full text of the Order CLICK HERE

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