2020 (4) TMI 306 - HC - VAT / Sales Tax

Ab initio cancellation of the registration certificate of the appellant - It is claimed that the basis of the allegations and grounds neither made out nor established in the original order - Gujarat VAT Act - CST Act - principles of natural justice - HELD THAT - Sub-section (5) of section 27 of the GVAT Act empowers the Commissioner to cancel the certificate of registration from such date as may be specified by him. On a plain reading of the sub-section, it appears that it is permissible for the Commissioner to cancel the registration even with retrospective effect - Thus under sub-section (5) of section 27 of the GVAT Act, the Commissioner is empowered to cancel the certificate of registration from such date as may be specified by him; under clause (1) of sub-se Since sub-section (5) of section 27 of the GVAT Act does not contain the words from a date not earlier than the date of the order , this is a clear indication of the legislative intent, not to curtail the date of cancellation of registration to the date of the order of cancellation of registration. In other words, sub-section (5) of section 27 of the GVAT Act permits the Commissioner to cancel the certificate of registration even with retrospective effect. This court is of the considered view that in case of non-payment of tax dues, the registration may be cancelled prospectively from the date of the order or at best from the date of violation; but not ab initio from the date of grant of registration or any date prior to the violation of the statutory provision. The registration of a dealer cannot be cancelled retrospectively to even include the period where the transactions were legal and valid and there was no violation in terms of any of the clauses contained in sub-section (5) of section 27 of the GVAT Act. While cancelling the registration of a dealer, the authority should consider the nature of the violation as well as the effect that the cancellation of the registration has, not only on the dealer but on all other dealers who have dealt with him. In case of mere non-payment of assessed tax dues, there is no illegality in the transactions entered into by the parties, and hence, the concerned authority should exercise discretion accordingly, and if it finds on facts that a case for cancellation is made out, it may cancel the registration prospectively. Thus, the Tribunal was not justified in confirming ab initio cancellation of the registration certificate of the appellant. Whether the Gujarat Value Added Tax Tribunal was justified in holding that the judgment of this court in the case of State of Gujarat v. Nageshi Enterprise, 2016 (12) TMI 886 - GUJARAT HIGH COURT , wherein the dealer had specifically admitted that he was not entitled to input tax credit, would be applicable to the facts of present case? - HELD THAT - The decision of this court in State of Gujarat v. Nageshi Enterprise has been rendered in the peculiar facts of the said case wherein the dealer had specifically admitted that he was not entitled to input tax credit, whereas in the facts of the present case, the appellant has challenged the tax, interest and penalty till the stage of second appeal, and there is no admission on its part that the transactions in question were invalid. Question No.2 is also, therefore, required to be answered in favour of the appellant and against the respondent, namely, that the Tribunal was not justified in holding that the decision of this court in the case of State of Gujarat v. Nageshi Enterprise would be applicable to the facts of the appellant. Whether the Gujarat Value Added Tax Tribunal was justified in confirming the order of the first appellate authority confirming the cancellation of registration certificate of the appellant on the basis of the allegations and grounds neither made out nor established in the original order cancelling the registration certificate? - HELD THAT - In the facts of the present case, no notice in Form 503 has been issued to the appellant prior to the first appellate authority taking into consideration the material which did not form part of the material before the Commercial Tax Officer. Moreover, this court is of the opinion that the provisions of sub-rule (1) of rule 57 of the GVAT Rules would be applicable to assessment proceedings wherein the appellate authority is of the opinion that the demand is required to be enhanced or the penalty is not proportionate to the default. In a case of cancellation of registration pursuant to a show cause notice, the appellate authority cannot travel beyond the grounds stated in the show cause notice and expand the scope of the proceedings by placing reliance upon additional material, which was not relevant to the grounds stated in the show cause notice. The Tribunal, in the impugned order, has failed to consider the scope of the proceedings before it and has upheld the order passed by the first appellate authority on the grounds which were extraneous to the show cause notice. Moreover, as discussed hereinabove, the Tribunal has thoroughly misunderstood the facts of the case while holding that appellant had accepted that the purchases were not genuine. The Tribunal was, therefore, not justified in upholding the order passed by the first appellate authority whereby it had confirmed the order of cancellation of the registration certificate of the appellant - Answered in favour of the appellant and against the revenue. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Justification of ab initio cancellation of the registration certificate.
2. Applicability of the judgment in the case of State of Gujarat v. Nageshi Enterprise.
3. Confirmation of the cancellation order based on unestablished allegations and grounds.

Detailed Analysis:

1. Justification of Ab Initio Cancellation of the Registration Certificate:
The appellant challenged the retrospective cancellation of its registration certificate by the Commercial Tax Officer (CTO) under section 27(5) of the GVAT Act. The CTO had cancelled the registration ab initio on grounds of non-payment of tax dues and suspicious transactions. The Tribunal upheld this decision. However, the court found that non-payment of tax dues, although a valid ground for cancellation, does not warrant retrospective cancellation unless the infraction goes to the root of the registration. The court emphasized that retrospective cancellation should be reserved for cases involving fraudulent registration or solely billing activities without genuine transactions. The court held that the Tribunal was not justified in confirming the ab initio cancellation of the registration certificate, as it invalidated genuine transactions and had severe consequences for the appellant and other dealers.

2. Applicability of the Judgment in the Case of State of Gujarat v. Nageshi Enterprise:
The Tribunal applied the judgment in State of Gujarat v. Nageshi Enterprise, concluding that by paying tax and interest, the appellant indirectly accepted that the purchases were not genuine. However, the court noted that the appellant had confined its challenge to the penalty component based on the normal practice of the Tribunal, which should not be construed as an admission of invalid transactions. The court distinguished the present case from Nageshi Enterprise, where the dealer had specifically admitted to wrongful claims. The court held that the Tribunal was not justified in applying the Nageshi Enterprise judgment to the appellant's case.

3. Confirmation of the Cancellation Order Based on Unestablished Allegations and Grounds:
The show cause notice issued to the appellant cited non-payment of tax dues and failure to produce books of accounts as grounds for cancellation. The order of cancellation, however, included an additional ground of suspicious transactions, which was not mentioned in the show cause notice. The court found this to be a breach of natural justice, as the appellant was not given an opportunity to respond to the new ground. The appellate authority and the Tribunal also relied on material not included in the original show cause notice, further violating the principles of natural justice. The court held that the Tribunal and the appellate authority were not justified in confirming the cancellation based on unestablished allegations and grounds beyond the show cause notice.

Conclusion:
The appeal was allowed, and the orders of the Tribunal, the first appellate authority, and the Commercial Tax Officer were quashed. The appellant's registration certificate was restored. The court emphasized the importance of adhering to the principles of natural justice and the proper scope of show cause notices in cancellation proceedings.