Retrospective GST Cancellation Must Be Reasoned And
Pre-Disclosed: Delhi HC Protects Taxpayer Against Arbitrary Backdated Action
Case Overview
In this judgment, the
Delhi High Court quashed the retrospective cancellation of Goods and
Services Tax (GST) registration of M/s Compact Enterprises, holding
that the tax authorities failed to assign any justification for canceling the
registration from a backdated effective date. The cancellation was made
effective from 16 May 2024, but the Show Cause Notice (SCN)
issued to the petitioner on 06 February 2025 did not mention any intent
to backdate the cancellation.
Emphasizing the need for reasoned
orders and adherence to procedural fairness, the Court held that
retrospective cancellation cannot be mechanical or automatic, and must
be supported by cogent reasons disclosed to the taxpayer in advance. The order
was modified to provide that cancellation would be effective only from the
date of the SCN, not earlier.
Parties to
the Case
- Petitioner:
M/s Compact Enterprises
- Respondent:
Principal Commissioner of Goods and Services Tax, East Delhi
- W.P.(C):
2867/2025
- Date of Judgment:
06 March 2025
Facts of the
Case
1. GST
Registration Cancelled Retrospectively: The petitioner’s GST
registration was cancelled by order dated 02 March 2025 with retrospective
effect from 16 May 2024, meaning the cancellation applied from an earlier
date — well before the SCN was issued.
2. SCN
Issued on 06 February 2025: The department issued a Show
Cause Notice (SCN) initiating cancellation proceedings but did not
mention any proposed retrospective date of cancellation.
3. Challenge
Before Delhi High Court: Aggrieved by the retrospective
cancellation, the petitioner approached the High Court under Article 226 of
the Constitution, challenging the legality of the cancellation order.
Legal
Grounds Raised by the Petitioner
1. Violation
of Principles of Natural Justice: The petitioner argued
that the SCN gave no indication that retrospective cancellation was
being contemplated. As such, the petitioner was denied an opportunity to respond
specifically to this aspect.
2. No
Reasons Given for Backdating: The final cancellation
order also did not provide any justification for selecting 16 May 2024
as the effective date. This constituted non-application of mind.
3. Reference
to Past Judgments: The petitioner cited two judgments:
o Riddhi
Siddhi Enterprises v. Commissioner of CGST (W.P.(C) 8061/2024)
o Ramesh
Chander v. Assistant Commissioner of GST
In both cases, the Delhi
High Court had held that retrospective cancellation requires clear reasoning,
and the same must be evident in the SCN and final order.
Response of
the Department
The respondent
authorities defended their action on the following grounds:
1. Statutory
Power under Section 29(2): The GST officer has the power under
Section 29(2) of the CGST Act to cancel registration with retrospective
effect, and this discretion includes determining the effective date.
2. Failure
to File Returns: Though not explicitly detailed in the
SCN, the department argued that the taxpayer had allegedly failed to comply
with filing obligations, and retrospective cancellation was warranted.
However, the department did
not demonstrate any reasons recorded in the order justifying the backdated
cancellation nor could they point to any notice issued to the taxpayer
alerting them to this consequence.
Key Legal
Provisions Involved
- Section 29(2), CGST Act, 2017:
Grants power to the proper officer to cancel a registration from such
date, including any retrospective date, as deemed fit — but only if
specific conditions are met.
- Principles of Natural Justice:
The affected party must be informed of the case against them and given a
chance to respond. Retroactive legal consequences require prior notice
and justification.
Court’s
Analysis and Findings
1. Retrospective
Cancellation Not Supported by SCN
The Bench noted that the Show
Cause Notice dated 06 February 2025 did not indicate any intent to cancel
registration with retrospective effect. This deprived the petitioner of a
chance to respond meaningfully.
“The absence of reasons
in the original SCN in support of a proposed retrospective cancellation…
clearly invalidates the impugned action.”
2. No Reason Assigned in
the Final Order
Even the cancellation
order dated 02 March 2025 failed to explain why the cancellation was
backdated to 16 May 2024. Citing its earlier ruling in Riddhi Siddhi
Enterprises, the Court reiterated that:
“The mere existence or
conferral of that power would not justify a revocation of registration with
retrospective effect… it must be demonstrative of due application of mind.”
3. Retrospective Effect
Not Routine
The Court held that the
power to cancel registration retrospectively is not to be applied
mechanically, but only in cases where circumstances truly warrant it,
and where such intention is clearly articulated in the notice and order.
4. Precedents Reinforce
the Position
The Court referred to
earlier cases where:
- Retrospective cancellation was
quashed because taxpayers were compliant during the disputed
period.
- Cancellation would unfairly deny
input tax credit (ITC) to customers of the taxpayer.
Final
Judgment
The Delhi High Court
allowed the writ petition and passed the following orders:
1. Cancellation
Order Modified: The order dated 02 March 2025
cancelling the petitioner’s registration with effect from 16 May 2024
was modified.
2. New
Effective Date of Cancellation: The registration shall
now be treated as cancelled only from the date of the SCN, i.e., 06
February 2025.
3. Backdated
Cancellation Quashed: The stipulation that cancellation takes
effect from 16 May 2024 was quashed as legally unsustainable.
Conclusion
This case reaffirms the
judicial commitment to procedural fairness under GST, especially in
cases of registration cancellation. The judgment clarifies that:
- Retrospective cancellation is a serious
action that alters legal rights, and hence, must be backed by transparent
and reasoned justification.
- The High Court has once again held
that administrative convenience cannot override statutory rights,
especially when taxpayers are not given a fair chance to respond.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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