Delhi High Court Upholds GST Audit Despite Retrospective Registration Cancellation, Rules Section 65 Permits Scrutiny of Earlier Records Including The Disputed Post Cancellation Period
Delhi High Court Rejects Oyster Steel Challenge To GST Audit Extending Beyond Retrospective Cancellation Date, Says Such Cancellation Cannot Erase Historical Records Or Statutory Scrutiny
Facts
Oyster Steel and Iron Private Limited registered under the CGST Act in July 2017 and applied on 11 January 2020 to cancel its registration retrospectively from 31 December 2019 following closure of business. While the application remained undecided, the Department issued an audit notice in Form GST ADT-01 on 15 September 2022 under Section 65, covering 1 July 2017 to 31 March 2021. In W.P.(C) 5805/2023 the Delhi High Court directed processing of cancellation with effect from 31 December 2019 and treated later-filed returns as void and non-est. Oyster Steel had not disclosed the pending audit notice in those proceedings, although it replied to the notice on 3 May 2023, one day before the order. Its second writ petition challenged the audit; the notice was stayed on 5 December 2023.
Issues
Whether subsequent retrospective cancellation of GST registration renders an earlier Section 65 audit notice jurisdictionally invalid, wholly or for the period after the effective cancellation date; how “registered person” is interpreted in the audit framework; and whether nondisclosure of the existing audit notice in an earlier writ petition independently disentitles the taxpayer to discretionary relief.
Petitioner’s Arguments
The company argued that Section 65 authorises audit only of a “registered person” and that retrospective cancellation from 31 December 2019 excluded subsequent periods, making the notice covering up to 31 March 2021 ultra vires. It relied on Tvl. Raja Stores v. Assistant Commissioner (ST), a Madras High Court ruling restricting audit after cancellation, and paragraph 7.1.2 of the Model All India GST Audit Manual, 2023. The petitioner criticised the Department’s failure to decide its cancellation application within the prescribed timeframe and denied, without specifically answering, the allegation that the earlier writ petition had omitted the audit notice.
Respondent’s Arguments
The Department submitted that cancellation does not extinguish antecedent statutory liabilities, citing Section 29(3) CGST Act. The company’s registration remained uncancelled when the audit notice issued, and Section 65 permits scrutiny of transactions under a registration notwithstanding later cancellation. It invoked L.J. Victoria Properties Pvt. Ltd. v. Union of India (Bombay High Court) and Ashoka Fabricast Pvt. Ltd. v. Union of India (Rajasthan High Court), and argued that withholding the audit notice from the earlier writ proceedings barred equitable relief.
Analysis of the Law
Sections 2(13), 2(94) and 65 CGST Act, read with Rule 101 CGST Rules, contemplate a backward-looking audit of books, returns, input-tax credits, refunds and compliance under an existing registration. Under Rule 21A(1), Oyster Steel’s registration was deemed suspended from 11 January 2020, the later of its application date and the requested effective cancellation date; suspension did not terminate registration. Section 29(3) preserves earlier liabilities but does not, by itself, resolve the audit period after retrospective cancellation. Crucially, jurisdiction to scrutinise historical records differs from a finding of taxable activity or tax liability. The prior direction treating returns as void and non-est was not displaced by permitting the audit.
Precedent Analysis
L.J. Victoria Properties Pvt. Ltd. v. Union of India, 2024:BHC-OS:18689-DB, adopted a contextual reading of “registered person” permitting audit after cancellation, but did not address cancellation retrospectively affecting part of the proposed audit period. Ashoka Fabricast Pvt. Ltd. v. Union of India, 2024:RJ-JP:20409-DB, rejected an absolute prohibition on audit after cancellation, without deciding that precise temporal issue. The Delhi High Court expressly declined to follow Tvl. Raja Stores v. Assistant Commissioner (ST), Madras High Court (11 August 2023), finding its narrower construction inconsistent with Sections 2(13) and 65 and Rule 101. Departmental audit guidance could not limit statutory jurisdiction.
Court’s Reasoning
The Division Bench held that Section 65 examines conduct and records referable to a registration, not merely current portal status. A cancellation order retrospectively changes the legal effectiveness of registration but cannot erase the historical fact that registration existed and records or dealings arose under it. Thus the notice could cover 1 July 2017 to 31 March 2021, even though cancellation took effect from 31 December 2019. The Court stressed that audit cannot validate non-est returns, presume post-cancellation supplies or automatically impose tax; any consequential demand must independently satisfy statutory conditions. Nor was the Department’s phrasing in its affidavit an unequivocal concession limiting the audit. Separately, the company’s material nondisclosure in the first writ petition justified refusal of discretionary relief.
Conclusion
The Delhi High Court dismissed W.P.(C) 15619/2023 and declined to quash the 15 September 2022 Section 65 audit notice or curtail its period. The interim stay dated 5 December 2023 was vacated. The ruling preserves GST audit jurisdiction despite subsequent retrospective cancellation, while expressly leaving substantive liability, the validity of later returns and all other audit requirements to be decided under law. The Department was left free, if advised, to seek modification of the earlier order dated 4 May 2023.
Case: Oyster Steel and Iron Private Limited v. Assistant Commissioner, Circle VII Group 61, CGST Audit I
Court: High Court of Delhi, New Delhi
Case Number: W.P.(C) 15619/2023; CM APPL. 62577/2023; CNR DLHC010718112023
Judge: Justice Anil Kshetarpal and Justice Bharat Parashar (authored by Kshetarpal, J.)
Date: 30 October 2026 (reserved 5 October 2026)
Result: Writ petition dismissed; Section 65 audit notice sustained for its stated period; interim stay vacated.
