The Delhi High Court has held that retrospective cancellation of GST registration does not, by itself, invalidate an audit notice under Section 65 of the Central Goods and Services Tax Act, 2017, even where the proposed audit covers a period after the effective cancellation date.
The Bench of Justice Anil Kshetarpal and Justice Bharat Parashar distinguished the legal consequences of cancellation from the department’s authority to examine records and conduct relating to a registration that had actually been granted. However, it clarified that permitting an audit does not establish that the taxpayer carried on business, made taxable supplies or incurred tax liability after the cancellation date.
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The taxpayer obtained GST registration in July 2017. On January 11, 2020, it applied for cancellation with effect from December 31, 2019, citing discontinuance or closure of business.
While the cancellation application remained pending, the department issued a notice dated September 15, 2022 under Section 65, proposing an audit of its books and records for July 1, 2017 to March 31, 2021. The taxpayer was also asked to furnish documents specified in the notice’s annexure.
The taxpayer subsequently approached the High Court in separate proceedings over the delay in processing its cancellation application.
During those proceedings, the department stated that the pending application was not visible on the portal, apparently because of a technical glitch. However, the screenshot showing submission of the application was not disputed.
By an order dated May 4, 2023, the Court directed the department to process the application within four weeks and directed that cancellation would take effect from December 31, 2019. Upon acceptance of the application, returns filed for the subsequent period were to be treated as void and non-est.
The registration was thereafter cancelled retrospectively. In November 2023, the taxpayer filed the present petition challenging the audit notice and consequential proceedings. Operation of the notice was stayed on December 5, 2023.
The taxpayer argued that Section 65 authorises an audit only of a “registered person”. Since its registration stood cancelled retrospectively from December 31, 2019, it contended that the audit notice lacked jurisdiction.
Alternatively, it submitted that the proposed audit could not extend beyond the effective cancellation date.
The taxpayer relied on the Madras High Court’s decision in Tvl. Raja Stores v. Assistant Commissioner (ST) and paragraph 7.1.2 of the Model All India GST Audit Manual, 2023.
The department maintained that cancellation does not extinguish liabilities and statutory obligations relating to the period during which registration subsisted. It relied on Section 29(3) and the decisions in L.J. Victoria Properties Private Limited v. Union of India and Ashoka Fabricast Private Limited v. Union of India.
The Bench examined the definition of audit under Section 2(13), the definition of a registered person under Section 2(94), Section 65 and Rule 101 of the CGST Rules.
It explained that an audit examines records, returns and documents to verify turnover, taxes paid, refunds claimed, input tax credit availed and compliance with statutory requirements.
Accordingly, the inquiry concerns past conduct under a registration, rather than merely the taxpayer’s present status on the GST portal.
In that context, the expression “registered person” cannot be restricted to someone whose registration continues to be effective when the examination takes place.
The Court also clarified that filing a cancellation application does not itself terminate registration. Under Rule 21A(1), the taxpayer’s registration was deemed suspended from January 11, 2020—the later of the application date and the date from which cancellation was sought.
Its continued display as active on the portal did not alter that statutory consequence. Suspension, however, did not bring the registration to an end.
The Court distinguished between a period during which no registration existed and a period covered by a registration that was subsequently cancelled retrospectively.
In the latter situation, cancellation determines the legal effectiveness of registration from the specified date. It does not erase the historical fact that registration had been granted or that acts may have been undertaken under it.
The Bench held that where registration had been granted and had not yet been cancelled during the proposed audit period, that factual connection satisfies Section 65, even if cancellation is subsequently given retrospective effect.
Applying this reasoning, the Court held that cancellation from December 31, 2019 did not place records and statutory conduct referable to the registration for the period specified in the notice beyond the reach of audit.
The Bench nevertheless clarified that Section 29(3), which preserves liabilities and obligations for periods before cancellation, does not itself answer whether an audit may cover a period after the effective date of retrospective cancellation. The authority for such examination must arise from Sections 2(13) and 65 read with Rule 101.
The Court rejected the contention that the earlier direction treating subsequent returns as void and non-est prevented examination of the underlying books and records.
It explained that a return is one means of furnishing statutory information. An audit has a wider scope and extends to books of account, records and documents concerning turnover, tax payments, input tax credit, refunds and compliance.
Treating a return as void does not, without more, erase the transactions or records underlying it.
At the same time, the Court expressly stated that its judgment did not authorise the department to treat post-December 31, 2019 returns as legally valid or disregard the retrospective cancellation.
The Bench declined to adopt the construction in Tvl. Raja Stores, where a Single Judge of the Madras High Court had held that Section 65 could not be invoked after cancellation, while permitting authorities to initiate proceedings under Sections 73 and 74.
The Delhi High Court agreed with the contextual approach adopted by the Bombay High Court in L.J. Victoria Properties. It held that the contrary construction overlooked the scheme of Sections 2(13) and 65 read with Rule 101.
However, the Bench noted that the Bombay High Court’s decision did not directly decide the precise question of cancellation subsequently given retrospective effect from a date falling within the audit period. It therefore determined that additional issue independently.
The Rajasthan High Court’s decision in Ashoka Fabricast was relied upon for its rejection of an absolute prohibition on audit after cancellation.
The Court also considered paragraph 7.1.2 of the Model All India GST Audit Manual, 2023.
The provision contemplates retrospective cancellation preceding initiation of audit and advises that, if considered appropriate, an audit need not be undertaken, with taxpayer details instead shared with jurisdictional and enforcement officers.
The Bench held that the manual provides departmental guidance and cannot determine the scope of statutory power.
It consequently declined to accept an interpretation under which retrospective cancellation necessarily excludes examination under Section 65 of records and conduct relating to the registration.
The Court separately found that the taxpayer had not disclosed the audit notice in its earlier cancellation proceedings.
Its awareness of the notice was evident from a reply submitted on May 3, 2023, one day before the earlier cancellation order.
Although the taxpayer generally denied the department’s allegation, it did not specifically assert that the notice had been disclosed in the earlier petition.
The Bench held that the pending audit was material to the relief sought in those proceedings. The department’s delay in processing cancellation did not relieve the taxpayer of its obligation to disclose the notice.
Having failed to disclose it, the taxpayer subsequently relied on directions obtained in those proceedings to seek quashing of that very notice. The Court treated this conduct as an additional ground for declining discretionary relief.
Dismissing the petition, the High Court refused to curtail the audit period merely because registration had subsequently been cancelled retrospectively. It also vacated the interim stay dated December 5, 2023.
The Bench emphasised that an audit does not itself determine tax liability. If matters contemplated by Section 65(7) are detected, any consequential action must independently satisfy the requirements of the applicable statutory provision.
The judgment does not permit the department to assume that taxable supplies were made, tax liability arose or other statutory consequences followed after December 31, 2019.
The Court confined its decision to the effect of retrospective cancellation and left other statutory requirements governing the conduct or completion of audit undetermined.
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