The Rajasthan High Court, in a significant ruling in M/s Bhilwara Trading Company v. Bank of Baroda (decided on 7 November 2025), held that the voluntary cancellation of a company’s GST registration cannot, by itself, justify the freezing of its bank account. The Court observed that such an action by banks, without any allegation of tax evasion or fraud, is arbitrary and violates the principles of natural justice. The Bench of Justice Nupur Bhati emphasised that a business entity’s decision to voluntarily cancel its registration—particularly when it deals in exempt goods—does not automatically render it a suspicious or high-risk account. The Court directed the bank to unfreeze the petitioner’s account and decide the company’s representation through a reasoned order within ten days.
This judgment provides much-needed clarity for genuine businesses whose GST registrations are cancelled voluntarily and reinforces that banks must not mechanically equate cancellation with illegality or risk.
📄 Facts of the case
- The petitioner company was trading in goods exempt from GST and therefore applied for voluntary cancellation of its GST registration.
- The appropriate tax-authority accepted the application and cancelled the company’s GST registration.
- After cancellation, the bank (Bank of Baroda) froze the company’s bank account, on the ground that “accounts with cancelled GST registrations” are treated as “high-risk”.
🏛️ What the Court held
- The Bench (Justice Nupur Bhati) directed that mere voluntary cancellation of GST registration is not, by itself, a valid ground to freeze a company’s bank account.
- The court ordered the bank to allow the account to be operational until the company’s representation is decided.
- The court directed the company to file a representation with the bank (detailing its exempt-status and voluntary cancellation) and directed the bank to decide that representation within 10 days by a speaking order.
✅ Significance / Practical take-aways
- If a company is exempt from GST (e.g., dealing only in exempt goods/services) and has voluntarily cancelled its registration, the bank cannot freeze its account solely on that ground.
- It emphasises that banks (and other financial institutions) must follow due process and cannot mechanically treat cancellation of GST registration as “high risk” without looking at underlying facts.
- For companies in this situation: prepare a representation to the bank (with relevant documents showing exempt status, voluntary cancellation, no continuing compliance issues) and press the bank to issue a reasoned (speaking) order.
- From a risk-management perspective, banks must ask for and assess the factual matrix (e.g., whether the business is genuine, exempt, has clean payments record) before freezing accounts on GST grounds.
⚠️ Caveats / Further considerations
- The ruling is from a High Court (Rajasthan). While persuasive, it is not binding on all courts or banks across India.
- The case did not consider situations where there are ongoing investigations, fraud, tax evasion, or other adverse facts. In such situations freezing might still be justified.
- The decision emphasises procedural fairness (representation, speaking order) rather than immunising all cases of cancellation from risk scrutiny.
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It does not create a blanket rule that freezing is prohibited in all GST cancellation cases, only where cancellation is voluntary and the facts show exempt trade and no adverse findings.