2025 (4) TMI 1574 - HC - GST

Cancellation of the petitioner s GST registration license on the ground of discrepancies noticed during physical verification - HELD THAT - Since the show cause notice has been adjudicated partially in favour of the petitioner hence only issue regarding the cancellation of the GST license of the petitioner is being considered in this writ petition. The entire process for cancellation of the license was initiated after the visit note prepared by Shri Avinash Joshi Superintendent CGST and C.X.Range-2 Division IV Indore - the officer did not record the statements of the nearby shop owners. This visit note is only signed by Shri Avinash Joshi not by any other witness. Shri Joshi ought to have recorded the statement of the nearby shop owner and obtained their signature in the visit notes as a witness. It appears that no one was accompanied with him from the GST department on 15.05.2023 at the time of the search. Had any person visited with him he would have countersigned this visit note therefore such a visit note cannot be relied on for taking such a drastic action of cancellation of license. In the case of Roxy Enterprises 2023 (12) TMI 1098 - DELHI HIGH COURT the Division Bench of the High Court of Delhi has considered Rule 25 of GST Rules 2017 which deals with the physical verification of business premises in certain cases. According to Rule 25 the physical verification of the business premises should be done in the presence of the person and it should be uploaded in the form GST REG-30 on the common portal within 15 working days following the date of such verification. The entire impugned action of the respondents is based on the presumption that the firm is bogus because the office/place of business was found locked. The order dated 29.05.2023 passed by the Superintendent Officer (respondent No.5) the order dated 03.08.2023 passed by Deputy Commissioner (respondent No.4) and the order dated 25.04.2024 passed by Joint Commissioner (respondent No.3) are unsustainable and liable to be quashed and are hereby quashed - petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

(a) Whether the cancellation of the petitioner's GST registration license on the ground of discrepancies noticed during physical verification, particularly the place of business being found locked, was justified under the Central Goods and Services Tax Act, 2017 (hereinafter "Act of 2017") and relevant GST Rules;

(b) Whether the procedural requirements under Rule 25 of the GST Rules, 2017 regarding physical verification of business premises were complied with by the authorities;

(c) Whether the petitioner's shifting of business operations to a residential address without prior verification or intimation invalidates the registration or justifies cancellation;

(d) Whether the petitioner's claim of genuine business operations and payment of input tax credit (ITC) without misuse or fraud was adequately considered;

(e) Whether the impugned orders of cancellation, rejection of revocation application, and related show cause notices were sustainable in light of evidence and statutory provisions;

(f) The extent to which the petitioner's rights to be heard and procedural fairness were observed during the cancellation and penalty proceedings;

(g) The validity of the departmental reliance on visit notes and other documentary evidence in absence of corroborative witness statements or due process;

(h) The effect of subsequent orders passed by the Joint Commissioner partially in favor of the petitioner, particularly the dropping of penalty proceedings, on the writ petition challenging cancellation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Justification for Cancellation of GST Registration Based on Physical Verification

Relevant Legal Framework and Precedents: Section 29 of the Act of 2017 governs cancellation or suspension of GST registration. Rule 25 of the GST Rules, 2017, prescribes the procedure for physical verification of business premises, requiring presence of the person and uploading of verification report (GST REG-30) within 15 working days. Precedents cited include Roxy Enterprises (Delhi High Court) and M/s Shyam Sundar Sita Ram Traders (Allahabad High Court), emphasizing adherence to procedural safeguards and the necessity of genuine grounds for cancellation.

Court's Interpretation and Reasoning: The Court scrutinized the visit note prepared by the Superintendent Officer which formed the basis for cancellation. The note recorded the principal place of business as locked and the display board showing a different firm's name. However, the officer did not record statements of nearby shop owners or have any witnesses countersign the visit note. The Court held that such a unilateral visit note without corroboration cannot justify the drastic step of cancellation.

Key Evidence and Findings: The visit note lacked witnesses and did not comply with Rule 25 requirements. The petitioner's business was found locked at the registered address, but the petitioner claimed shifting business to a residential address due to health and financial reasons. The petitioner produced a Gumasta license for the residential address.

Application of Law to Facts: The Court found that the cancellation on the ground of "discrepancies noticed during physical verification" was not supported by proper procedure or evidence. The absence of verification at the residential address and failure to follow Rule 25 protocols rendered the cancellation arbitrary.

Treatment of Competing Arguments: The respondents argued that the place of business was non-existent/non-operational and that the petitioner had availed ITC fraudulently. The petitioner rebutted by showing payment of ITC in cash and genuine business transactions. The Court noted that the penalty proceedings based on these allegations were dropped by the Joint Commissioner, weakening the respondents' case.

Conclusions: The cancellation order dated 29.05.2023 was unsustainable as it was based on incomplete and procedurally flawed physical verification.

Issue (b): Compliance with Rule 25 of GST Rules, 2017 Regarding Physical Verification

Relevant Legal Framework and Precedents: Rule 25 mandates that physical verification must be conducted in the presence of the person and the verification report must be uploaded on the GST portal within 15 working days. The Delhi High Court in Roxy Enterprises emphasized strict compliance with these procedural safeguards.

Court's Interpretation and Reasoning: The Court observed that the physical verification was conducted without presence of the petitioner or authorized representative. The visit note was not countersigned by any witness, and no GST REG-30 form was produced or uploaded as required.

Key Evidence and Findings: The visit note was signed only by the officer conducting the verification. No evidence of presence of the petitioner or any witness was found. The respondents failed to demonstrate compliance with Rule 25.

Application of Law to Facts: The Court held that non-compliance with Rule 25 vitiates the cancellation process as it deprives the petitioner of the opportunity to be heard and to rebut the findings on the spot.

Treatment of Competing Arguments: Respondents contended that the place was locked and hence presence was not possible. The Court noted that even if the place is locked, the procedure requires the officer to record statements of neighbors or witnesses and upload the verification report, which was not done.

Conclusions: The physical verification was procedurally defective and did not satisfy the requirements of Rule 25, invalidating the cancellation.

Issue (c): Effect of Shifting Business Operations to Residential Address

Relevant Legal Framework: The GST registration is linked to the principal place of business as declared. Change of address requires intimation and verification. However, business operations from a residential address are permissible if properly declared and verified.

Court's Interpretation and Reasoning: The petitioner shifted business operations to her residential address due to health and financial constraints. She possessed a Gumasta license for the residential premises issued on 16.07.2023. The respondents did not verify or inspect this new address.

Key Evidence and Findings: The petitioner submitted documents and explanations for shifting. The respondents did not conduct physical verification of the residential address or consider the documents submitted for revocation of cancellation.

Application of Law to Facts: The Court held that the failure of the authorities to verify the residential address or consider the petitioner's explanation before cancellation was arbitrary and unfair.

Treatment of Competing Arguments: Respondents argued that the petitioner's business was non-existent at both addresses. The Court found that the petitioner's presence and explanation were credible and that no investigation was conducted to verify genuineness of transactions.

Conclusions: The shifting of business to residential address was not a ground for cancellation without due verification, and the authorities' failure to consider this rendered the cancellation invalid.

Issue (d): Consideration of Genuine Business Transactions and Payment of Input Tax Credit

Relevant Legal Framework: Sections 16, 20, 122, and 155 of the Act of 2017 relate to input tax credit, penalties, and investigations. Genuine availing of ITC is a key factor in assessing the validity of registration.

Court's Interpretation and Reasoning: The Joint Commissioner examined GSTR 2A returns from 2017 to 2023 and found that the suppliers of the petitioner were active and genuine. The petitioner had paid ITC in cash and had not availed it fraudulently.

Key Evidence and Findings: The GSTR 2A data and supporting documents showed genuine inward supplies. The penalty proceedings based on presumed fake ITC were dropped.

Application of Law to Facts: The Court noted that the entire cancellation was based on a presumption of bogus firm due to locked premises, ignoring genuine business evidence.

Treatment of Competing Arguments: Respondents relied on the locked premises and presumed bogus transactions. The Court gave primacy to documentary evidence and findings of the Joint Commissioner.

Conclusions: The petitioner's business transactions and ITC claims were genuine, negating the basis for cancellation.

Issue (e): Validity of Impugned Orders and Procedural Fairness

Relevant Legal Framework: Principles of natural justice and statutory procedural requirements under the Act of 2017 and GST Rules.

Court's Interpretation and Reasoning: The Court found that the petitioner was not given adequate opportunity to be heard during physical verification and cancellation. The show cause notices and revocation application were not duly considered. The visit note lacked corroboration. The petitioner appeared and participated in personal hearings after cancellation.

Key Evidence and Findings: The petitioner filed revocation application with supporting documents; however, the Deputy Commissioner rejected it citing non-genuineness without proper investigation. The Joint Commissioner later found no penalty was warranted and recognized the petitioner's existence.

Application of Law to Facts: The procedural lapses and failure to consider petitioner's submissions violated principles of fairness and statutory mandates.

Treatment of Competing Arguments: Respondents contended that the petitioner was non-existent and non-cooperative. The Court relied on petitioner's submissions and findings of the higher authority.

Conclusions: The impugned orders were unsustainable due to procedural irregularities and lack of proper investigation.

Issue (f): Effect of Subsequent Orders Partially in Favor of Petitioner

Relevant Legal Framework: Principles of finality and effect of administrative orders.

Court's Interpretation and Reasoning: The show cause notice dated 25.07.2024 for penalty was adjudicated by the Joint Commissioner on 31.12.2024, dropping the penalty. The Court noted this partial relief to the petitioner and considered it relevant to the writ petition.

Key Evidence and Findings: The Joint Commissioner's order acknowledged the petitioner's existence and rejected penalty, undermining the basis for cancellation.

Application of Law to Facts: The Court treated the subsequent order as reinforcing the petitioner's case and weighed it in quashing the cancellation orders.

Treatment of Competing Arguments: Respondents indicated intention to appeal the order but no stay or suspension was in place.

Conclusions: The subsequent order was a material factor in setting aside the cancellation and restoring registration.

3. SIGNIFICANT HOLDINGS

The Court held:

"The visit note is only signed by Shri Avinash Joshi not by any other witness. Shri Joshi ought to have recorded the statement of the nearby shop owner and obtained their signature in the visit notes as a witness. It appears that no one was accompanied with him from the GST department on 15.05.2023 at the time of the search. Had any person visited with him, he would have countersigned this visit note, therefore, such a visit note cannot be relied on for taking such a drastic action of cancellation of license."

"The entire impugned action of the respondents is based on the presumption that the firm is bogus because the office/place of business was found locked."

"Though the business of the Noticee was non-operational at the registered Principal Place of Business, but the Noticee i.e. Smt. Akriti Mishra (Proprietor) is in existence."

"No investigation was conducted to verify the genuineness of the transaction i.e. inward and outward supply of the noticee before issuance of the show cause notice."

"The registration license of the petitioner is hereby restored from its date of issuance."

Core principles established include:

- Physical verification under Rule 25 must be conducted with procedural safeguards including presence of the person and witnesses, and proper documentation uploaded on the portal;

- Cancellation of GST registration cannot be based solely on the premises being locked without corroborative evidence or investigation;

- Genuine business operations and payment of ITC must be considered before cancellation;

- Procedural fairness and opportunity to be heard are mandatory before cancellation;

- Subsequent administrative orders partially in favor of the petitioner are relevant in adjudicating writ petitions challenging cancellation.

Final determinations:

The Court quashed the cancellation order dated 29.05.2023, the Deputy Commissioner's rejection order dated 03.08.2023, and the Joint Commissioner's order dated 25.04.2024. The petitioner's GST registration license was restored retrospectively from the date of issuance. The writ petition was allowed with costs.