Delhi High Court rules that retrospective GST registration cancellation does not prevent departmental audit under Section 65 of the CGST Act, including examination of earlier records.
Introduction
The cancellation of GST registration with retrospective effect does not automatically deprive the GST Department of its statutory authority to conduct an audit of the taxpayer’s books of accounts and records for the relevant period. The Delhi High Court has reiterated that retrospective cancellation of GST registration cannot be used as a ground to challenge the jurisdiction of tax authorities to undertake an audit under Section 65 of the Central Goods and Services Tax Act, 2017 (CGST Act).
In the case of Oyster Steel and Iron Private Limited vs. Assistant Commissioner, the Court examined whether an audit notice issued under Section 65 of the CGST Act could survive when the taxpayer’s GST registration was subsequently cancelled with retrospective effect. The judgment clarifies the scope of the expression ‘registered person’ in the context of GST audits and reinforces the Department’s authority to examine past tax records.
Facts of the Case
The petitioner, Oyster Steel and Iron Private Limited, obtained GST registration in July 2017. Subsequently, due to the discontinuation and closure of its business, the company applied for cancellation of its GST registration on January 11, 2020, requesting that the cancellation take effect from December 31, 2019.
However, the GST Department did not process the cancellation application within a reasonable period.
Meanwhile, on September 15, 2022, the Department issued a notice in FORM GST ADT-01 under Section 65 of the CGST Act, proposing an audit of the company’s books of accounts and other records for the period from July 1, 2017, to March 31, 2021. The company was also directed to furnish the documents and information required for the proposed audit.
Aggrieved by the delay in processing its cancellation application, the company earlier approached the Delhi High Court by filing W.P.(C) No. 5805/2023, seeking retrospective cancellation of its GST registration from December 31, 2019.
By an order dated May 4, 2023, the High Court directed the Department to process the cancellation application and make the cancellation effective from the date requested by the petitioner. It also directed that the returns filed for the subsequent period be treated as void.
Following the retrospective cancellation, the company challenged the audit notice, contending that it could no longer be treated as a registered person under Section 65 of the CGST Act.
Contentions of the Petitioner
The petitioner argued that once its GST registration had been cancelled retrospectively with effect from December 31, 2019, the Department could not continue with the audit proceedings covering the period beyond that date.
According to the company, the cancellation of registration extinguished its status as a registered person for the relevant period. Consequently, the Department lacked jurisdiction to conduct an audit under Section 65, particularly concerning the period after the effective date of cancellation.
The petitioner therefore sought judicial intervention to set aside the audit notice issued in FORM GST ADT-01.
Delhi High Court’s Observations and Findings
The Delhi High Court rejected the petitioner’s contention and examined the statutory meaning and scope of an audit under the CGST Act.
The Court referred to Section 65 of the CGST Act, which empowers the proper officer to conduct an audit of a registered person’s business transactions, records and accounts to verify compliance with GST provisions.
The Court also considered the definition of audit under Section 2(13) of the CGST Act. An audit involves examination of records, returns and other documents maintained or furnished by a registered person, including verification of turnover, tax payments, input tax credit claimed and refunds availed.
The Court observed that the expression ‘registered person’ in the context of an audit cannot be interpreted narrowly to mean only a person whose GST registration continues to remain active on the date when the audit is initiated.
An audit is essentially an exercise to verify compliance with the GST law for the relevant period. Therefore, subsequent cancellation of registration, even with retrospective effect, does not automatically extinguish the Department’s authority to examine records relating to the period during which the taxpayer was registered.
The Court further clarified that permitting the audit would not mean that the Department could disregard the retrospective cancellation order or treat returns filed after December 31, 2019, as legally valid.
Thus, the validity of the retrospective cancellation and the Department’s authority to examine historical records are two distinct matters.
Final Decision of the Court
The Delhi High Court dismissed the writ petition and refused to interfere with the audit notice dated September 15, 2022.
The Court held that retrospective cancellation of GST registration with effect from December 31, 2019, did not make the audit notice without jurisdiction, either in its entirety or in relation to the subsequent period.
Accordingly, the interim stay granted on December 5, 2023, was vacated, allowing the Department to proceed with the audit in accordance with law.
Case Name: Oyster Steel and Iron Private Limited vs. Assistant Commissioner
Court: Delhi High Court
Case No.: W.P.(C) 15619/2023, CM APPL. 62577/2023
Relevant Provisions: Sections 2(13) and 65 of the CGST Act, 2017.
Legal Significance and Practical Implications
This ruling carries considerable significance for businesses that have discontinued operations or obtained cancellation of GST registration with retrospective effect.
The judgment establishes that cancellation of GST registration should not be viewed as an automatic shield against departmental scrutiny of past transactions. Tax authorities can continue examining historical books of accounts, returns, input tax credit claims, turnover and tax liabilities for the relevant period, subject to the statutory framework.
Businesses should therefore preserve their accounting records, invoices, GST returns, supporting documents and other relevant information even after cancellation of registration.
The ruling also highlights an important distinction between the effective date of cancellation and the Department’s statutory power to verify past compliance.
The key takeaway is that retrospective cancellation of GST registration does not automatically bring an end to the Department’s audit jurisdiction under Section 65 of the CGST Act. Taxpayers cannot rely solely on cancellation of registration to resist an otherwise valid audit of their historical records.