The Madras High Court has established that the cancellation of GST registration for non-filing of returns due to genuine financial hardship cannot be treated as an automatic or irreversible penalty. The Court emphasized that administrative action under the GST regime must balance regulatory compliance with equitable relief, particularly when the taxpayer demonstrates willingness to rectify defaults.
Background & Facts
The Dispute
The petitioner, Oasis Inn International Pvt Ltd, a small hospitality business in Kanniyakumari, faced severe financial strain that rendered it unable to file GST returns for six consecutive months. As a consequence, the Respondent, the Assistant Commissioner (ST), Kuzhithurai Assessment Circle, cancelled the petitioner’s GST registration under Section 29(5) of the Central Goods and Services Tax Act, 2017, vide order dated 12.09.2024. The cancellation effectively barred the petitioner from making taxable supplies, claiming Input Tax Credit, or participating in the formal economy.
Procedural History
- The petitioner did not challenge the cancellation before the appellate authority under Section 107 of the CGST Act.
- Instead, it directly approached the Madras High Court under Article 226 of the Constitution, seeking quashing of the cancellation order and restoration of GSTIN.
- The matter was taken up for disposal at the admission stage by mutual consent of parties.
Relief Sought
The petitioner sought restoration of its GST registration, along with an opportunity to file pending returns and discharge tax liabilities, interest, and penalties. It emphasized its intent to comply fully and requested that the GST Network portal be enabled to facilitate such compliance.
The Legal Issue
The central question was whether the cancellation of GST registration under Section 29(5) of the CGST Act, triggered solely by non-filing of returns for six months, amounts to a disproportionate and irreversible penalty when the taxpayer demonstrates genuine hardship and willingness to rectify.
Arguments Presented
For the Petitioner
The petitioner’s counsel argued that Section 29(5) was never intended to impose a death penalty on small businesses for temporary non-compliance. He cited M/s. R.K. Industries v. Union of India to underscore that administrative action must be proportionate and that financial distress, if substantiated, warrants remedial rather than punitive outcomes. He further contended that the GST portal’s rigid architecture denied the taxpayer any avenue to cure the default, violating principles of natural justice.
For the Respondent
The Additional Government Pleader conceded the cancellation was procedurally valid under the statute but did not oppose relief, acknowledging the petitioner’s bona fides. He submitted that the Court’s discretion under Article 226 could be exercised to restore registration subject to conditions ensuring future compliance.
The Court's Analysis
The Court examined the nature of Section 29(5) and found that while the provision permits cancellation for non-filing, it does not mandate automatic or irreversible cancellation. The Court observed that the legislative intent behind the provision is to ensure compliance, not to extinguish the taxpayer’s right to operate. The Court noted that the petitioner’s default was not due to fraud, evasion, or willful neglect, but financial distress - a factor courts have consistently treated as mitigating in tax jurisprudence.
"The cancellation of registration, while statutorily permissible, cannot be permitted to operate as a permanent extinguishment of rights where the taxpayer is willing and able to comply, and where the default is attributable to genuine hardship."
The Court further held that the GST Network portal’s inability to permit belated filing of returns and payment of dues rendered the statutory remedy illusory. It emphasized that technology must serve compliance, not obstruct it. The Court rejected the notion that Input Tax Credit (ITC) could be automatically forfeited or utilized without scrutiny, affirming that ITC remains subject to verification under Section 43 and Rule 36 of the CGST Rules.
The Verdict
The petitioner succeeded. The Court revoked the cancellation order and restored the GST registration, subject to strict conditions requiring the petitioner to file pending returns, pay all dues without using unverified ITC, and comply with ITC scrutiny protocols. Non-compliance would result in automatic revocation of the relief.
What This Means For Similar Cases
Cancellation Is Not Automatic
- Practitioners must now argue that Section 29(5) cancellation requires proportionality assessment before being upheld.
- Financial hardship, if documented, must be treated as a mitigating factor - not a disqualifier.
- Taxpayers should be given a reasonable opportunity to cure defaults before registration is cancelled.
ITC Cannot Be Automatically Forfeited
- Unutilized ITC remains subject to verification under Section 43 and Rule 36.
- Tax authorities cannot deny ITC merely because registration was cancelled; each claim must be independently scrutinized.
- Practitioners should file separate applications for ITC verification if denied post-restoration.
Portal Architecture Must Enable Compliance
- The GST Network’s technical limitations cannot be used to justify administrative rigidity.
- Courts may direct authorities to modify portal functionality to allow belated filings where justice demands it.
- This creates a new ground for writ petitions challenging technical barriers to compliance.
