Court’s Decision
The Bombay High Court dismissed the writ petition challenging the GST audit initiated under Section 65 of the Maharashtra Goods and Services Tax Act, 2017 (SGST Act). The Court held that an audit could be conducted for periods when an entity was registered, even if the entity subsequently deregistered. It reasoned that the legal framework under the SGST Act contemplates a retrospective application of audit provisions to ensure compliance and recovery of dues. The Court remarked, “Provisions of Section 65 of the SGST Act would be applicable for conducting the audit of a financial year when a person was registered, although, on the date of ordering the audit, such a person ceases to be registered voluntarily or otherwise.”
Facts
- The petitioner was engaged in leasing and renting commercial properties.
- It registered under the Central GST Act in 2019 but applied for deregistration in March 2023 after ceasing operations.
- The GST authorities accepted the deregistration request and formally canceled the petitioner’s registration in May 2023.
- Despite deregistration, GST authorities issued an audit notice in August 2024 for the financial year 2020–2021, alleging discrepancies in the petitioner’s tax filings.
- Preliminary audit findings reported excess input tax credit (ITC) claims amounting to ₹3.60 crore and other discrepancies, leading to a tax and interest liability of ₹7.01 crore.
- The petitioner challenged the audit notice and preliminary findings, arguing that Section 65 does not apply to deregistered entities.
Issues
- Whether Section 65 of the SGST Act applies to deregistered entities.
- Whether audit proceedings initiated post-deregistration for a period during registration are valid.
- Whether the petitioner can be compelled to comply with audit requirements despite deregistration.
Petitioner’s Arguments
- Applicability of Section 65: The petitioner argued that audits could only be conducted for “registered persons,” as defined under Section 2(94) of the SGST Act. It contended that deregistered entities do not fall within this definition.
- Lack of Liability: The petitioner emphasized that its deregistration order explicitly recorded no outstanding tax liabilities, making the audit unwarranted.
- Reliance on Precedent: The petitioner relied on Tvl. Raja Stores v. Assistant Commissioner (ST) (Madras High Court), where it was held that audit provisions do not apply to deregistered entities.
Respondent’s Arguments
- Retrospective Application: The respondents argued that Section 65 permits audits for periods when an entity was registered, regardless of its deregistered status at the time of the audit.
- Continuing Obligations: They referred to Section 29(3) of the SGST Act, which states that deregistration does not absolve entities of liabilities or obligations for the period of registration.
- Support from Precedent: The respondents relied on Ashoka Fabricast (P.) Ltd. v. Union of India (Rajasthan High Court), which upheld the validity of audits for deregistered entities.
Analysis of the Law
The Court conducted a detailed analysis of the relevant legal provisions:
- Definition of ‘Registered Person’: Section 2(94) defines a registered person as one registered under the GST Act. The Court clarified that this includes entities registered during a relevant period, even if they are deregistered at the time of the audit.
- Section 65 (Audit Provisions): The audit provisions apply retrospectively to ensure compliance for the period of registration. The Court emphasized that audits are post-event reviews, focusing on past filings and compliance.
- Section 29(3): The provision explicitly states that deregistration does not absolve entities of their tax liabilities or obligations for periods before deregistration.
- Harmonious Construction: The Court highlighted the importance of interpreting the SGST Act holistically. Excluding deregistered entities from audits would render Section 65 ineffective and create enforcement loopholes.
Precedent Analysis
- Tvl. Raja Stores v. Assistant Commissioner (ST): The Court respectfully disagreed with this Madras High Court judgment, noting that it failed to consider key provisions like Section 29(3) and Rule 101 of the GST Rules.
- Ashoka Fabricast (P.) Ltd. v. Union of India: The Court aligned with the Rajasthan High Court’s interpretation, which supported retrospective application of audit provisions to deregistered entities.
Court’s Reasoning
- Nature of Audits: Audits are retrospective and aim to verify past compliance. Entities cannot avoid scrutiny for their period of registration by merely deregistering.
- Avoidance of Redundancy: Excluding deregistered entities from audits would undermine the statutory framework, particularly the provisions of Sections 29(3) and 65.
- Legislative Intent: The Court observed that the legislature intended to include deregistered entities in the audit framework to ensure accountability for their registered period.
Conclusion
The Court dismissed the petition and upheld the validity of the audit notice and preliminary findings. It concluded that audits under Section 65 of the SGST Act are applicable to entities for periods during which they were registered, even if they subsequently deregistered. The petitioner was directed to comply with the audit process.
Implications
- Broader Enforcement Powers: The ruling strengthens GST authorities’ ability to enforce compliance for registered periods, even after deregistration.
- Deterrent for Non-Compliance: It discourages entities from using deregistration as a shield against accountability for past non-compliance.
- Clarification on Audit Scope: The judgment provides clarity on the scope and applicability of audit provisions under the SGST Act.
