INTRODUCTION
The Goods and Services Tax (hereinafter referred to as “GST”) cancellation of registration has been noted to be one of the most contested matters in the GST regime. Businesses often dispute cancellation orders on the basis of flawed Show Cause Notices (hereinafter referred to as “SCN”), absence of factual specifics, mechanical argument and breach of the principles of natural justice. Indian courts have always stressed the need to exercise the power of cancellation of registration with caution, transparency and with regard to procedural protection. It is on this background that the new decision by the Delhi High Court in the case of M/s S.M. Trading Co. v. Assistant Commissioner of CGST 2024 SCC ONLINE DEL 6220, dated 03.09.2024, supports the judiciary in its view that GST authorities need to provide clear, reasoned, and factual SCNs prior to commencing the cancellation proceedings.
BACKGROUND AND CONTEXT OF THE CASE
The Delhi High Court considered the validity of an order de-registering the taxpayer as of July 3, 2017. This cancellation was based on an SCN made on the basis of Section (2) (e) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), which was a mere reproduction of a statutory provision in relation to fraud, willful misstatement, or suppression of facts. Most importantly, the SCN did not reveal any material particulars or factual allegations. The Court held that a notice, like the one that provided no substantive reasons, could not lead to the cancellation of registration, particularly retrospectively.
DEFECTIVE SHOW CAUSE NOTICE - LACK OF REASONS AND PARTICULARS
The SCN sent to the taxpayer referred to registration acquired by fraud, wilful misstatement, or omission of material facts, but did not specify what the purported fraud or misstatement was. The lack of information prevented the taxpayer from providing a serious answer. The Court believed that an SCN should have definite factual underpinnings because the very intention of giving a notice is that the noticee should be aware of the allegations made and be able to respond appropriately. A generic or templated notice does not meet this requirement and makes the whole proceedings invalid.
VIOLATION OF NATURAL JUSTICE AND DENIAL OF FAIR OPPORTUNITY
The Court ruled that the protocol followed by the authority was against the principles of natural justice. The SCN did not involve any specifics, meaning that the taxpayer did not have a fair chance to defend itself. The Principle of natural justice requires that victims of unfavorable administrative action be provided with an opportunity to argue their case reasonably and with awareness. Such an indeterminate SCN, in its turn, deprives this right. The Court restated that a lack of reasons in an SCN is a case that leads to invalidation of the consequential order.
The cancellation order overturned the GST registration, effective from the date of its inception. Nevertheless, the SCN did not suggest retrospective cancellation and provided no reason for such a drastic measure. The Court pointed out that the cancellation in retrospect affects the preceding transactions, input tax credit (hereinafter referred to as the “ITC”), and tax compliance, and thus, needs to be suggested specially and well-grounded. Without this kind of reasoning, the retrospective cancellation became arbitrary and unsound in the law.
The respondent stated that the SCN and cancellation had been made at the instruction of the Anti-Evasion Branch. The Court made it clear that the proper officer is required to exercise their independent judgment when issuing an SCN or cancellation order. Taking only external directives and not feeling satisfied contravenes the statute’s requirements and undermines the quasi-judicial aspect of the role. Such orders that are issued in a mechanistic fashion, as the Court determined, could not be maintained.
JUDICIAL PRECEDENTS SUPPORTING PROCEDURAL FAIRNESS
This decision conforms to previous court decisions that have emphasized the importance of reasonable SCNs and procedural fairness.
- In Aggarwal Dyeing and Printing Works vs. State of Gujarat, Special Civil Application Numbers 18860 of 2021 dated 24.2.2022, the Gujarat High Court determined that GST registration could not be cancelled due to vague or templated SCNs, which do not reveal a factual basis, as these notices would deny taxpayers the opportunity to provide an informed response.
- Equally, in Mahadev Trading Company vs. Union of India, Civil Application Numbers 11262 of 2020, dated 28.09.2020, the Gujarat High Court overturn a cancellation order based on an unreasoned and cryptic SCN. The court emphasized that any such notice must be backed by clear allegations and material evidence. Such rulings support the view that the GST system requires transparency, clarity and procedural rigor by authorities.
AMLEGALS REMARKS
The decision by the Delhi High Court underscores the importance of the GST authorities following basic procedural safeguards before revoking a taxpayer’s registration. The ruling upholds the fact that SCNs should be well-reasoned, factual, and elicit an informed response. The cancellation must not be done casually in retrospect, and the authorities cannot afford to be guided by outside instructions without applying their own mind to them. In the case of businesses, this decision serves as a reminder to confirm the challenge of vague or templated SCNs that fail to clearly reveal the basis for cancellation. To the authorities, the case serves as an indication that there must be a mechanism for scrutinizing procedural adherence, transparency, and fairness to ensure the validity of administrative conduct in the GST regime.
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