Cancellation of registration without providing the reason in the SCN/Order is cryptic in nature

The Hon'ble Gujarat High Court in Neha Enterprise v. State of Gujarat [R/Special Civil Application No. 20505 of 2022 dated January 19, 2023] has quashed and set aside the Show Cause Notice ("SCN") and the consequential order passed by the Revenue Department solely on the ground of violation of the principles of natural justice as no reasonable opportunity of hearing was given to the assessee. Further, directed the Revenue Department to issue a fresh SCN and provide reasonable opportunity of hearing. Further that, the Goods and Service Tax ("GST") Registration of the assessee to be restored. 

Facts

This petition has been filed by Neha Enterprises ("the Petitioner") challenging the SCN dated May 10, 2022 in the Form GST REG-17/31("the Impugned SCN") issued by the Revenue Department ("the Respondent") under Section 29 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") read with Rule 22(1) of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules") on the grounds that it was not sent to the Petitioner physically and that no reasons for the allegation was mentioned in it.

The Impugned SCN uploaded on the GST Portal consisted of a single page and there was no other explanation for the Petitioner to respond to the charges. Further, the Petitioner was instructed to appear in person, failing which the matter was to be decided ex-parte. However, no time for personal hearing was granted and that the Impugned SCN did not specify the name and designation of the person issuing it. The Petitioner replied to the Impugned SCN stating that the Impugned SCN was unintelligible for any prudent person to reply. 

The GST Registration of the Petitioner was cancelled by the Respondent vide order dated May 25, 2022 ("the Impugned Order"), but no reason for such cancellation was mentioned. The Petitioner preferred an application dated June 15, 2022 seeking revocation of cancellation of GST Registration but the same was rejected.

The Respondent contended that the GST Registration of the Petitioner was obtained by fraud on the basis of the spot verification conducted and therefore, the Impugned SCN had been issued and due to a technical glitch, the same could not be uploaded on the GST Portal. 

Issue

Whether the SCN not being sent to the Petitioner physically and not mentioning the reasons for which allegations were made is violative of principles of natural justice?

Held

The Hon'ble Gujarat High Court in R/Special Civil Application No. 20505 Of 2022 held as under:

• Noted that, the very basis of the Impugned SCN is quite hollow and shaky; and it is a cryptic ‘one-line' SCN.
• Further noted that, the Impugned SCN under Section 29 of the CGST Act and Rule 22(1) of the CGST Rules is needed to be uploaded on the GST Portal.    
• Observed that, there is no acknowledgement of the receipt of the registered post of the Impugned SCN, which was posted on May 12, 2022. 
• Opined that, the credibility of the Petitioner cannot be questioned, when the Respondent has not followed the required procedure while conducting spot verification.
• Relied on the judgement in the earlier matter of Aggarwal Dyeing and Printing Works v. State of Gujarat & Others [R/Special Civil Application Nos. 18860 Of 2021 And 1169, 2263, 3140 Of 2022], wherein, it was stated that the action of the Respondent in issuing cryptic notice that are either just a ‘single line' or ‘half a line' is a weak foundation for cancellation of the GST Registration of the Petitioner.
• Quashed and set aside the Impugned Order solely on the ground of violation of Principles of Natural Justice.
• Permitted the Respondent to issue a fresh SCN by providing reasonable opportunity of hearing.
• Restored the GST Registration of the Petitioner. 

Relevant Provisions

Section 29 of the CGST Act

"29. Cancellation or suspension of registration-

(1) The proper officer may, either on his own motion or on an application filed by the registered person or by his legal heirs, in case of death of such person, cancel the registration, in such manner and within such period as may be prescribed, having regard to the circumstances where, 

(a) the business has been discontinued, transferred fully for any reason including death of the proprietor, amalgamated with other legal entity, demerged or otherwise disposed of; or
(b) there is any change in the constitution of the business; or
(c) the taxable person is no longer liable to be registered under section 22 or section 24 or intends to optout of the registration voluntarily made under sub-section (3) of section 25

Provided that during the pendency of the proceedings relating to cancellation of registration filed by the registered person, the registration may be suspended for such period and in such manner as may be prescribed.

(2) The proper officer may cancel the registration of a person from such date, including any retrospective date, as he may deem fit, where, ––

(a) a registered person has contravened such provisions of the Act or the rules made thereunder as may be prescribed; or
(b) a person paying tax under section 10 has not furnished the return for a financial year beyond three months from the due date of furnishing the said return; or
(c) any registered person, other than a person specified in clause (b), has not furnished returns for such continuous tax period as may be prescribed; or
(d) any person who has taken voluntary registration under sub-section (3) of section 25 has not commenced business within six months from the date of registration; or
(e) registration has been obtained by means of fraud, wilful misstatement or suppression of facts:

Provided that the proper officer shall not cancel the registration without giving the person an opportunity of being heard.

Provided further that during the pendency of the proceedings relating to cancellation of registration, the proper officer may suspend the registration for such period and in such manner as may be prescribed.

(3) The cancellation of registration under this section shall not affect the liability of the person to pay tax and other dues under this Act or to discharge any obligation under this Act or the rules made thereunder for any period prior to the date of cancellation whether or not such tax and other dues are determined before or after the date of cancellation.

(4) The cancellation of registration under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act, as the case may be, shall be deemed to be a cancellation of registration under this Act.

(5) Every registered person whose registration is cancelled shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher, calculated in such manner as may be prescribed:

Provided that in case of capital goods or plant and machinery, the taxable person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery, reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery under section 15, whichever is higher.

(6) The amount payable under sub-section (5) shall be calculated in such manner as may be prescribed."

Rule 22(1) of the CGST Rules

"Where the proper officer has reasons to believe that the registration of a person is liable to be cancelled under section 29, he shall issue a notice to such person in FORM GST REG-17, requiring him to show cause, within a period of seven working days from the date of the service of such notice, as to why his registration shall not be cancelled."