Facts of the Case

The petitioner, Ashish Garg, being the legal heir of Late Sh. Pawan Kumar (proprietor of M/s Kirti Plastics), challenged the order dated 14.03.2023 cancelling GST registration retrospectively from 28.05.2018.

The business was engaged in plastic manufacturing and was duly registered under GST. The petitioner contended that returns were regularly filed and taxes were duly paid. A Show Cause Notice dated 15.01.2023 was issued alleging non-filing of returns under Section 39, though it lacked specific reasons.

The proprietor passed away on 15.08.2021, and business operations ceased thereafter. The impugned order cancelled the registration retrospectively despite no outstanding demand and without proper reasoning.

Issues Involved

  1. Whether GST registration can be cancelled retrospectively without proper reasoning.
  2. Whether a vague Show Cause Notice satisfies principles of natural justice.
  3. Whether retrospective cancellation is justified when the taxpayer was compliant during the relevant period.
  4. Whether cancellation impacts vested rights such as input tax credit and cash ledger balances.

Petitioner’s Arguments

  • The Show Cause Notice was vague and did not specify cogent reasons for cancellation.
  • The petitioner was not properly served, as the notice was uploaded online and not physically communicated.
  • The business had already ceased upon the death of the proprietor.
  • Retrospective cancellation unjustly blocked recovery of amounts lying in the electronic cash ledger.
  • No tax demand was raised, making retrospective cancellation arbitrary.

Respondent’s Arguments

  • The registration was liable to be cancelled due to non-filing of returns under Section 39.
  • The proper officer exercised powers under Section 29(2) of the CGST Act.
  • Retrospective cancellation may have consequences such as denial of input tax credit to customers.

Court’s Findings

  • The Show Cause Notice did not disclose proper reasons and failed to justify retrospective cancellation.
  • The cancellation order was contradictory, stating both that no reply was filed and simultaneously referring to a reply.
  • No objective satisfaction was recorded for retrospective cancellation as required under Section 29(2).
  • Retrospective cancellation cannot be applied mechanically and must be based on objective criteria.
  • Mere non-filing of returns does not justify cancellation for periods where the taxpayer was compliant.
  • The notice failed to inform the petitioner about retrospective cancellation, violating principles of natural justice.

Court Order / Decision

The Delhi High Court modified the impugned order and held that:

  • GST registration shall be treated as cancelled from 15.08.2021 (date of death of proprietor) instead of 28.05.2018.
  • The petitioner is allowed to apply for refund/claim of amounts in the electronic cash ledger.
  • The department retains the right to recover any lawful dues.
  • Issues relating to succession were left open for determination by competent authority.

Important Clarifications by Court

  • Retrospective cancellation must not be arbitrary and requires objective justification.
  • Authorities must consider consequences such as denial of input tax credit before cancelling registration retrospectively.
  • Proper notice with clear reasons is mandatory before taking adverse action.
  • Mechanical cancellation orders without reasoning are unsustainable in law.

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/62720022024CW24662024_103140.pdf

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