Source: Delhi High Court

Why in News?

The Delhi High Court recently quashed a Show Cause Notice (SCN) and the subsequent cancellation of a taxpayer's GST registration due to the SCN lacking specific details. The court ruled that the SCN was too vague and did not provide intelligible reasons for the cancellation, thus violating procedural fairness requirements. This decision emphasizes the need for clear and specific reasons in legal notices for GST registration issues.

What was the Background of M/S Chauhan Construction Co. versus Commissioner of DGST and Anr.?

• The petitioner's Goods and Services Tax (GST) registration was cancelled by an order dated 05^th April 2021.
• This cancellation order was issued pursuant to a Show Cause Notice (SCN) dated 26^th March 2021.
• The SCN alleged that the petitioner had issued invoices without supplying goods or services, violating GST provisions and leading to wrongful input tax credit availment or tax refund.
• The SCN required the petitioner to respond within seven working days and mentioned the possibility of an ex parte decision if the petitioner failed to appear for a personal hearing.
• However, the SCN did not specify any date, time, or venue for the personal hearing.
• The petitioner's GST registration was suspended effective 26^th March 2021 as per the SCN.
• Following the cancellation, the petitioner filed an application dated 19^th Arpil 2021 seeking revocation of the cancellation order.
• This revocation application was met with another Show Cause Notice dated 29^th December 2021, proposing to reject the application.
• The petitioner's revocation application was subsequently rejected by an order dated 10^th January 2022.
• The petitioner then appealed against the cancellation order under Section 107 of the Central GST Act and Delhi GST Act.
• This appeal was rejected on the grounds that the petitioner did not appear in response to a notice served through the GST portal.
• The petitioner contends that they did not access the portal as their GST registration was already suspended.
• A second revocation application filed by the petitioner was also met with a Show Cause Notice dated 19^th July 2023 and subsequently rejected.
• Having exhausted these remedies, the petitioner approached the High Court challenging the cancellation of their GST registration.

What were the Court’s Observations?

• The Court held that the impugned cancellation order was void ab initio, having been passed in violation of the principles of natural justice, as the petitioner was neither provided intelligible reasons for the proposed cancellation nor afforded an opportunity for personal hearing.
• The Bench noted that the Show Cause Notice (SCN) was deficient in that it failed to specify a venue, date, or time for the petitioner's personal hearing, thereby contravening procedural fairness.
• The Court observed that the cancellation order improperly effected a retrospective cancellation of the petitioner's GST registration from its initial grant date, despite the absence of any such proposal in the SCN, thus exceeding the scope of the notice.
• The High Court found that the subsequent rejections of the petitioner's revocation applications were similarly tainted by violations of natural justice principles, compounding the procedural impropriety.
• While quashing the cancellation order and directing the restoration of the petitioner's GST registration, the Court explicitly preserved the respondents' right to initiate fresh action against the petitioner for any statutory violations or recovery of dues, in accordance with law.

What is Section 29 and Section 107 of Central Goods and Services Tax Act, 2017?

Section 29

• Grounds for Cancellation:
  • The proper officer may cancel registration on their own motion or on application by the registered person or their legal heirs.
  • Cancellation can be done if the business is discontinued, transferred, amalgamated, demerged, or disposed of.
  • It can also be done if there's a change in the business constitution or if the taxable person is no longer liable for registration or opts out voluntarily.
• Suspension of Registration:
  • During the pendency of cancellation proceedings, the registration may be suspended for a prescribed period and manner.
  • This suspension provision applies to both voluntary cancellation requests and cases where the proper officer initiates cancellation.
• Retrospective Cancellation:
  • The proper officer has the authority to cancel registration from any date, including retrospectively, under specific circumstances.
  • These circumstances include contravention of prescribed provisions, failure to file returns, non-commencement of business after voluntary registration, or obtaining registration through fraud or misrepresentation.
• Procedural Safeguards:
  • The proper officer must give the person an opportunity of being heard before cancelling the registration.
  • This provision ensures adherence to the principles of natural justice.
• Effect of Cancellation:
  • Cancellation does not affect the person's liability to pay tax and other dues for any period prior to the cancellation date.
  • This liability persists whether the dues are determined before or after the cancellation date.
• Cross-Applicability:
  • Cancellation under State GST or Union Territory GST Acts is deemed to be a cancellation under the Central GST Act as well.
• Financial Implications:
  • Upon cancellation, the registered person must pay an amount equivalent to the input tax credit on stock or the output tax payable on such goods, whichever is higher.
  • For capital goods, the person must pay an amount equal to the input tax credit taken, reduced by prescribed percentage points, or the tax on the transaction value, whichever is higher.
• Calculation Method:
  • The amount payable upon cancellation shall be calculated in the manner prescribed by the rules.

Section 107

• Section 107 of the Central Goods and Services Tax (CGST) Act, 2017 deals with Appeals to the Appellate Authority
• Right to Appeal:
  • Any person aggrieved by a decision or order passed under the CGST Act, State GST Act, or Union Territory GST Act by an adjudicating authority may appeal to the prescribed Appellate Authority.
• Time Limit:
  • The appeal must be filed within three months from the date of communication of the decision or order.
• Commissioner's Power:
  • The Commissioner may, on his own motion or upon request from State/UT tax Commissioners, examine any proceedings and direct a subordinate officer to appeal to the Appellate Authority within six months.
• Extension of Time:
  • The Appellate Authority may allow an appeal to be presented within a further period of one month if satisfied that the appellant was prevented by sufficient cause from filing within the original time limit.
• Powers of Appellate Authority:
  • The Authority may confirm, modify, or annul the decision or order appealed against, but cannot refer the case back to the adjudicating authority.
• Time Limit for Decision:
  • The Appellate Authority shall, where possible, hear and decide every appeal within one year from the date of filing.

What are the Principles of Natural Justice?

• Natural justice is a fundamental concept in common law systems, encompassing principles of fairness, reasonableness, equity, and equality in administrative and judicial proceedings.
• The two primary principles of natural justice are
  • "Nemo judex in causa sua" (no one should be a judge in their own cause)
  • "Audi alteram partem" (hear the other side), which together ensure impartiality and the right to a fair hearing.
• In India, the principles of natural justice are constitutionally protected under Articles 14 and 21 of Indian Constitution 1950, which guarantee equality before the law and the right to life and personal liberty, respectively.
• A third principle, often included in modern interpretations of natural justice, is the requirement for speaking orders or reasoned decisions, which helps prevent arbitrariness and ensures transparency in decision-making processes.
• The application of natural justice principles is essential in administrative law, serving as a safeguard against arbitrary state action and ensuring fair treatment of individuals in their interactions with government agencies and tribunals