2025 (4) TMI 1143 - HC - GST

Cancellation of registration as a taxpayer due to non-filing of returns for six months continuously - returns are filed for a few months subsequent to the issuance of SCN - HELD THAT - A perusal of Rule 21 (h) and Section 29 (2) (c) of the CGST Act makes it explicit that when there is a failure to file returns for a continuous period of six months it gives a cause of action for the proper officer to cancel the registration after issuing a show cause notice. However once the show cause notice is issued the taxpayer is given the liberty to avoid cancellation of registration by filing the returns for all six months along with the tax interest and late fee. A piecemeal filing of returns is not contemplated by the Rules as is evident from the proviso to Rule 22 (4) of CGST Rules. Unless the returns for all six months; along with tax interest and late fee are submitted the cause of action that arose due to non filing of returns for six months will not be wiped-off. In order to avoid the serious repercussion of cancellation of registration it is an obligation for the taxpayer to file all the returns and pay the tax interest and late fee after the show cause notice was issued. In the instant case show cause notice was issued on 12.03.2024 while the petitioner filed Ext.P2 return on 13.03.2024 i.e. after the issuance of show cause notice. Two weeks later she filed returns for yet another month. Still the requirement of the proviso to Rule 22 (4) was not satisfied. The taxpayer had the liberty to avoid cancellation by filing returns for all the six months. Once the cause of action arose by issuance of show cause notice the end result can be avoided only by filing returns for all six months along with the tax interest and late fee. In the instant case since petitioner had filed Ext.P2 return on 13.03.2024 after the issuance of the show cause notice that too initially for one month and two weeks later for yet another month the requirement of the proviso to Rule 22 (4) has not been satisfied - The default of non filing of returns for a continuous period of six months remained as on the date of show cause notice and petitioner failed to rectify the mistake by filing all the returns along with the tax interest and late fee. Thus the order cancelling the registration is legally justified and the same warrants no interference. Conclusion - The default of non filing of returns for a continuous period of six months remained as on the date of show cause notice and petitioner failed to rectify the mistake by filing all the returns along with the tax interest and late fee. Thus the order cancelling the registration is legally justified and the same warrants no interference. Petition dismissed.

Summary

The core legal question considered is whether an order cancelling a taxpayer's registration due to non-filing of returns for six continuous months can be set aside if the taxpayer subsequently files returns for some, but not all, of the months after issuance of the show cause notice.

The Court examined the provisions under the Central Goods and Services Tax Act, 2017 (CGST Act) and the corresponding Rules, focusing primarily on Section 29(2)(c) of the CGST Act and Rules 21(h) and 22 of the CGST Rules, 2017.

Section 29(2)(c) authorizes the proper officer to cancel registration if the taxpayer fails to furnish returns for a continuous period as prescribed. While the original statutory language referred to six continuous months, the Act was amended to substitute the phrase with "as may be prescribed." The Rules, however, specifically maintain the six-month continuous non-filing period as the threshold for cancellation under Rule 21(h).

Rule 22 prescribes the procedure for cancellation, including the issuance of a show cause notice and the opportunity for the taxpayer to respond. The proviso to Rule 22(4) is particularly significant, stipulating that if, instead of merely replying to the notice, the taxpayer furnishes all pending returns and pays the full tax dues along with interest and late fees, the proceedings for cancellation must be dropped.

In interpreting these provisions, the Court emphasized that the cause of action for cancellation arises upon continuous non-filing of returns for six months. Once the show cause notice is issued, the taxpayer can avoid cancellation only by complying fully with the requirements-filing all pending returns for the entire six-month period and paying all dues including interest and late fees. Partial or piecemeal filing of returns for some months does not interrupt the continuous default or extinguish the cause of action.

The petitioner had failed to file returns for six continuous months from August 2023 to January 2024, prompting the issuance of the show cause notice on 12.03.2024. After the notice, the petitioner filed returns for only two months (August and September 2023) but did not file for the remaining months nor paid the applicable interest and late fees. The proper officer proceeded to cancel the registration with effect from 17.04.2024.

The petitioner contended that filing returns for two months after the show cause notice broke the continuity of default and thus cancellation was unjustified. The Court rejected this argument, holding that the statutory scheme does not contemplate piecemeal compliance after the notice. The proviso to Rule 22(4) clearly requires filing of all pending returns and payment of dues to avoid cancellation.

The Court also addressed the petitioner's reliance on a prior judgment where it was held that continuous default must exist at the time of cancellation order, and that filing returns in the interim interrupts the continuity. However, the Court distinguished that decision on the ground that the proviso to Rule 22(4) was not considered in that case. Therefore, the earlier judgment was held to be per incuriam and not binding.

Applying the law to the facts, the Court found that the petitioner's failure to file returns for all six months and pay dues after issuance of the show cause notice meant the cause of action persisted. Consequently, the cancellation order was legally justified.

The Court did not find any merit in the writ petition and dismissed it.

Significant holdings include the following:

"If a person fails to file the return for a continuous period of six months, it gives a cause of action to the proper officer to cancel the registration after issuing a show cause notice."

"Once the show cause notice is issued, the taxpayer is given the liberty to avoid cancellation of registration by filing the returns for all six months along with the tax interest and late fee. A piecemeal filing of returns is not contemplated by the Rules."

"Unless the returns for all six months; along with tax interest and late fee, are submitted, the cause of action that arose due to non filing of returns for six months will not be wiped-off."

"The default of non filing of returns for a continuous period of six months remained as on the date of show cause notice, and petitioner failed to rectify the mistake by filing all the returns along with the tax interest and late fee. Thus, the order cancelling the registration is legally justified and the same warrants no interference."

Core principles established are that the statutory framework mandates strict compliance with filing all pending returns and payment of dues to avoid cancellation once a show cause notice is issued for continuous non-filing. Partial compliance is insufficient to break the continuity of default or to nullify the cause of action for cancellation.