GST registration cancellation cannot be sustained without adequate hearing and opportunity to produce supporting documents.

The petitioners, a partnership firm engaged in the sale of brass, copper and other metal scrap, challenged the cancellation of their GST registration.

A show-cause notice dated 10 November 2022, issued in Form GST REG-17/31, alleged that the registration had been obtained by fraud, wilful misstatement or suppression of facts and required the petitioners to appear on 18 November 2022.

The petitioners sought 15–20 days’ time to produce purchase and sales bills, e-way bills, transportation records, FASTag evidence and documents supporting their availment of input tax credit (“ITC”).

Without deciding that request, the authority cancelled the registration retrospectively from 24 June 2020 by order dated 22 November 2022.

The petitioners filed an appeal and an application for revocation of cancellation. The revocation application was rejected on the ground that the petitioners had purchased goods from three dealers whose registrations had subsequently been cancelled suo motu, and the petitioners were asked to pay tax, interest and penalty through Form GST DRC-03.

The appellate authority thereafter rejected the appeal on 4 May 2024, relying, inter alia, on a report containing grounds allegedly not set out in the original show-cause notice.

1. Whether the cancellation of the petitioners’ GST registration was legally sustainable when the authority failed to consider the petitioners’ request for time to produce supporting documents and proceeded without affording a meaningful opportunity of hearing?

2. Whether the revocation proceedings could be rejected on the basis of purchases from dealers whose registrations had been cancelled, when that allegation had not been specifically raised in the original show-cause notice?

3. Whether the authorities could require payment of tax, interest and penalty through Form GST DRC-03 in proceedings concerning cancellation or revocation of registration, without initiating separate proceedings for alleged wrongful availment of ITC under Sections 73 or 74 of the GST Act?

4. Whether the appellate authority could introduce new grounds and thereby cure defects in the original cancellation proceedings?

The Court applied the statutory scheme governing cancellation and revocation of GST registration and appeals under the Central/Gujarat Goods and Services Tax Act, 2017, including Section 107 concerning appellate proceedings.

It applied the principles of natural justice, requiring the affected taxpayer to receive notice of the precise allegations, a reasonable opportunity to produce evidence, and a meaningful hearing before cancellation of registration.

The Court further held that proceedings for cancellation or revocation of registration cannot be conflated with proceedings for determination and recovery of tax, interest, penalty or wrongful ITC under Sections 73 and 74; such liabilities require appropriate statutory proceedings and notice.

The Court also relied on the principle that an appellate authority cannot improve upon or supplement a fundamentally defective original order by introducing new grounds at the appellate stage, referring to Arshil Enterprise v. State of Gujarat, Tax Appeal No. 952 of 2017, decided on 11 December 2019.

The Court found that the cancellation order itself recorded the petitioners’ request for 15–20 days to produce documentary evidence, but did not state whether the request was accepted or rejected and was passed only twelve days after issuance of the show-cause notice.

The authority therefore denied the petitioners a reasonable opportunity to substantiate their transactions and ITC claims.

The subsequent reliance on purchases from three dealers whose registrations had been cancelled also violated natural justice because that allegation was not contained in the original notice, and the authority did not examine when those dealers’ registrations had been cancelled or whether that fact had any connection with the petitioners’ original registration.

The Court further held that requiring the petitioners to deposit tax, interest and penalty through DRC-03 during revocation proceedings improperly merged registration proceedings with separate proceedings concerning alleged fraudulent ITC availment under Sections 73 and 74.

Since DRC-03 payment is voluntary and no appropriate notice had been issued for disallowance of the petitioners’ ITC, the demand was legally unsustainable.

The appellate authority’s reliance on additional grounds and the jurisdictional officer’s report could not cure the original denial of opportunity or the defects in the cancellation order.

The respondents were granted liberty to initiate fresh proceedings by issuing an appropriate and legally compliant show-cause notice.

The petitioners were directed to cooperate fully, and the respondents were directed to complete the fresh proceedings within three months after providing a proper opportunity of hearing and complying with the principles of natural justice.

All contentions on merits were left open.