Court Rules that Retrospective Cancellation Does Not Bar Audit of Records for Period When Registration Was Active; Non-Disclosure of Audit Notice in Earlier Writ Petition Disentitles Petitioner from Relief
In a significant ruling impacting the Goods and Services Tax (GST) compliance landscape, the Delhi High Court (Division Bench) dismissed a writ petition filed by Oyster Steel and Iron Private Limited challenging an audit notice issued under Section 65 of the Central Goods and Services Tax Act, 2017 (CGST Act). The Court held that an audit can be conducted for a period during which the petitioner was registered, even if its GST registration was subsequently cancelled with retrospective effect.
The petitioner, registered under the CGST Act since July 2017, had applied for cancellation of its GST registration on January 11, 2020, seeking cancellation effective from December 31, 2019, citing business discontinuance. However, the application remained pending with the GST department due to procedural delays. Meanwhile, on September 15, 2022, the Assistant Commissioner issued an audit notice proposing an audit for the period from July 1, 2017, to March 31, 2021, which included a period after the retrospective cancellation date.
Oyster Steel and Iron contended that since its registration was cancelled retrospectively from December 31, 2019, it was no longer a "registered person" under the Act post that date, and thus the audit notice was without jurisdiction, especially for the period after cancellation. The petitioner also relied on a Madras High Court decision which had held that audit under Section 65 could not be invoked post cancellation.
The GST department, on the other hand, argued that audit under Section 65 is backward-looking and concerns examination of past records and returns filed during the period of registration. They emphasized that the retrospective cancellation does not erase the fact that the petitioner was registered during the audit period, nor does it place the statutory records beyond the scope of audit. The department further pointed out that the petitioner failed to disclose the pending audit notice in an earlier writ petition seeking cancellation, thereby losing the benefit of discretionary relief.
The Court, comprising Justice Anil Kshetarpal and Justice Bharat Parashar, undertook a detailed analysis of the statutory provisions, including Sections 2(13), 2(94), 29(3), and 65 of the CGST Act, as well as Rules 21A, 22, and 101 of the CGST Rules. The judgment underscored that:
- An audit under Section 65 is an examination of records, returns, and documents maintained or furnished by a person during the period when registration was valid.
- The term "registered person" in the context of audit cannot be restricted only to those whose registration subsists on the audit date but includes those who were registered at any time during the audit period.
- Retrospective cancellation affects the legal consequences of transactions but does not erase the historical fact of registration or the records maintained during that period.
- Returns filed after retrospective cancellation may be treated as void but this does not place the underlying books and records beyond audit scrutiny.
- The petitioner's non-disclosure of the audit notice in earlier writ proceedings disentitled it from seeking relief on that ground.
The Court rejected the petitioner's reliance on the Madras High Court's ruling, aligning instead with the Bombay and Rajasthan High Courts' decisions which recognized the permissibility of audit after cancellation for the relevant period.
Ultimately, the Court upheld the validity of the audit notice for the entire period proposed, including the portion after the retrospective cancellation date, clarifying that this does not imply any assumption that taxable supplies or liabilities existed post cancellation. The writ petition was dismissed, and the interim stay on the audit notice was vacated.
This ruling provides clarity on the scope of GST audits in cases of retrospective cancellation and reinforces the importance of full disclosure in writ proceedings.
Bottom Line:
Goods and Services Tax - Audit under Section 65 of the CGST Act can be undertaken in respect of a person who was registered during the period proposed for audit, even if the registration is subsequently cancelled with retrospective effect - Retrospective cancellation does not erase the historical fact of registration or place records, returns and statutory conduct referable to that registration beyond audit - Non-disclosure of pending audit notice in earlier writ proceedings also disentitles petitioner to discretionary relief.
Statutory provision(s):
Central Goods and Services Tax Act, 2017 Sections 2(13), 2(94), 25, 29(3), 65; Central Goods and Services Tax Rules, 2017 Rules 21A, 22, 101
