The Himachal Pradesh High Court has held that the GST department should wait for investigation to be completed before imposing a drastic penalty of GST registration cancellation.
The bench of Chief Justice M.S. Ramachandra Rao stated, “it shocks the conscience of the Court to find an extreme penalty of the nature of cancellation of GST Registration being imposed on a business on the basis of a “prima facie” investigation conducted by the department.”
Background
The petitioner/assessee has challenged the order cancelling the GST Registration. The order passed by the respondent-department recorded that a Show Cause Notice was issued to the petitioner. A reply to the Show Cause Notice was submitted by the petitioner.
After considering the reply of the assessee, the department was of the view that the GST Registration of the petitioner was liable to be cancelled in view of Rule 21(g), which deals with a person “who violates the provisions of Rule 86B for paying short tax in cash” and also Rule 21(b) & Rule 21(e) of the Rules framed under the GST Act.
The amount available in the Electronic Credit Ledger of the petitioner is the petitioner’s own money and it has been used to discharge the petitioner’s tax liability, though in excess of 99% of such tax liability.
It is not as if there has been any default in discharge of tax liability as such by the petitioner, causing any loss to the Department, since the Show Cause Notice itself was issued by the Department for almost two years from the date of violation.
Relevant Provisions
Rule 86B GST Rules stated that a registered person shall not use the amount available in the Electronic Credit Ledger to discharge his liability towards output tax in excess of 99% of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply in a month exceeds rupees fifty lakh.
Certain data is mentioned therein which indicates that the petitioner has indeed violated the said provision and had used the amount available in Electronic Credit Ledger to discharge his liability towards output tax in excess of 99% from October 2021 to March, 2022, April 2022 to March 2023 & April 2023 to January 2024.
No doubt, Rule 21(g) enables cancellation of GST Registration if there is a violation by a registered person of Rule 86B, but one has to see whether the violation is serious enough to warrant cancellation of the GST Registration, which would practically mean death of the business of the petitioner.
Section 49(1) of the GST Act provides that any deposit made by a person in cash towards tax, interest, penalty and fee or any other amount, will be credited to the Electronic Cash Ledger maintained by the GST Portal.
Section 49(2) of the Act provides for the self- assessment of input tax credit in the Return to be credited to the Electronic Credit Ledger.
Arguments
The assessee contended that Rule 86B lacks statutory backing since there is no provision in the statute supporting it, that Sections 16 & 49 do not provide for the same, and Sections 49A & 49B also do not provide any restriction of the nature indicated in Rule 86B.
The assessee submitted that the cancellation is arbitrary and violates its fundamental rights enshrined in Article 14 of the Constitution and has crippled his business, that Article 19(1)(g) of the Constitution is also violated apart from Article 300A of the Constitution of India.
The department argued that the petitioner has a remedy of appeal under Section 107 of the HPGST Act, 2017 to an Appellate Authority constituted under the statute and it is stated that there is an appeal which would lie against the impugned order before the Additional Commissioner (Appeals).
The department contended that the violation of Rule 86B is borne out by record. Rule 21(g) gives a linkage to the violation of Rule 86B and that Rule 86B is framed under the rule making power under Section 164 of the GST Act.
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Conclusion
The court remarked that how a “prima facie” investigation could be the basis of an order of cancellation of GST Registration without the investigation being completed, is not explained by the department.
The court while allowing the petition held that the cancellation of GST Registration on the pretext of violation of Rule 86B is a disproportionate punishment imposed on petitioner and is liable to be interfered in exercise of the power conferred on this Court under Article 226 of the Constitution of India.
Case Title: M/s A.M. Enterprises V/S State of Himachal Pradesh & Ors.
Citation: CWP No.1517 of 2024
Counsel for the Petitioner: Vishal Mohan, Sr. Advocate
Counsel for the Respondent: Anup Rattan, Advocate General
Date of Decision: 120.09.2024