Court’s decision
The Rajasthan high court issued a structured and protective set of directions ensuring that the Petitioner’s banking operations remain unhindered pending the Bank’s reconsideration of its freezing action. The Court held that the Bank failed to justify the freezing of the Petitioner’s account merely because the Petitioner’s GST registration stood voluntarily cancelled. The Court emphasized that if the Petitioner’s goods fall within Chapter 10 of the Harmonized System of Nomenclature—goods that are exempt from the Goods and Services Tax—then the cancellation of GST registration does not trigger any automatic classification into a high-risk banking category. The Court directed the Petitioner to file a detailed representation within ten days and mandated the Bank to pass a speaking order within one month thereafter.
Critically, the Court ordered that until the Bank decides the representation, the Petitioner must be allowed to freely operate the account. The Court clarified that freezing a bank account without prior notice or without complying with principles of natural justice violates Articles 14 and 19(1)(g) of the Constitution. The judgment reinforces the doctrine that administrative actions affecting trade and livelihood must be reasoned, proportionate, and legally sustainable. This decision further strengthens judicial oversight over bank-initiated account freezing based on automated GST-risk triggers and underscores that classification as a high-risk entity is not permissible without proper factual foundation and statutory backing.
Facts
The Petitioner operated a trading business dealing in goods listed under Chapter 10 of the Harmonized System of Nomenclature, which are exempt from Goods and Services Tax. Since these goods do not attract GST, the Petitioner voluntarily applied for cancellation of GST registration. Upon examining the application, the GST Department cancelled the registration with effect from 31 January 2025. After this cancellation, the Respondent Bank informed the Petitioner that accounts associated with cancelled GST registrations fall under a high-risk category under certain GST-related compliance directions and therefore froze the Petitioner’s current account without prior notice. The freezing paralysed the Petitioner’s business operations, prompting the present writ petition.
Issues
The principal issues before the Court were whether the Bank could freeze the Petitioner’s current account solely due to voluntary cancellation of GST registration, whether such freezing violated Articles 14 and 19(1)(g), and whether the Bank was obligated to issue prior notice or conduct an independent assessment before categorizing the Petitioner as high-risk. The Court also had to determine whether the Petitioner was entitled to interim relief permitting full transactional access.
Petitioner’s arguments
The Petitioner argued that the freezing of the bank account without notice was arbitrary, unconstitutional, and disproportionate. It was submitted that since the Petitioner’s goods are exempt from GST, the voluntary cancellation of GST registration was lawful and appropriate. The Petitioner contended that the Bank misapplied directions under the GST framework and the Reserve Bank’s risk-classification norms by assuming that cancellation automatically creates a high-risk status. The Petitioner further asserted that freezing of accounts without any alleged tax evasion or investigation violates the right to livelihood and the constitutional guarantee to carry on trade. On these grounds, the Petitioner sought immediate de-freezing of the account and compensation for resultant business losses.
Respondent’s arguments
The Respondent Bank argued that the account was frozen due to system-based alerts generated after GST cancellation, which, according to regulatory instructions, placed customers with cancelled GST registrations in a high-risk bracket requiring caution. The Bank contended that its action was precautionary and taken in adherence to compliance protocols rather than punitive intent. The Respondent asserted that as the cancellation appeared abrupt, the Bank acted to mitigate risk until the Petitioner produced proof of exemption and lawful cancellation. The Bank maintained that the freezing was temporary and could be reviewed upon submission of appropriate documents and representation.
Analysis of the law
The Court examined the intersection between GST law, banking regulatory norms, and constitutional protections. Since goods under Chapter 10 of the Harmonized System of Nomenclature are exempt from GST, the law allows voluntary cancellation of GST registration when a business deals exclusively in exempted goods. The Court noted that the GST Department had already accepted and processed this cancellation. Therefore, treating such cancellation as a risk category, without independent evaluation, is incompatible with banking principles and constitutional safeguards.
The Court held that freezing a bank account constitutes a severe interference with the right to trade under Article 19(1)(g), and such interference requires strict justification, adherence to principles of natural justice, and a clear statutory mandate. The impugned freezing did not satisfy any of these requirements. The Court emphasized that the Bank, as a public sector institution, cannot rely on automated GST-related triggers without ensuring that the underlying circumstances actually warrant coercive action. Thus, the action lacked legality and proportionality.
Precedent analysis
Although the judgment does not cite external authorities in detail, the reasoning aligns with established jurisprudence on administrative fairness and economic rights. Courts have consistently held that unilateral freezing of bank accounts without notice or statutory backing amounts to arbitrary action. The principles invoked by the Court resonate with earlier judicial formulations requiring speaking orders, proportionality, and fair procedure in cases affecting financial access. The judgment strengthens this line of reasoning by applying it to the emerging interface between GST compliance systems and banking risk-assessment mechanisms.
Court’s reasoning
The Court reasoned that once the GST Department had itself cancelled the registration upon the Petitioner’s application, there was no lawful basis for the Bank to presume wrongdoing. The Court found no allegation of tax evasion, fraud, or pending investigation. Consequently, the Bank’s freezing of the account lacked any factual nexus with risk and amounted to a mechanical application of internal policy, which cannot override the constitutional obligation to ensure fairness. The Court directed the Petitioner to file a detailed representation so that the Bank could reassess the position, but simultaneously ensured that access to the account would not be restricted during this period. The mandate of a speaking order underscored the requirement of transparency and accountability.
Conclusion
The Court concluded that the freezing of the Petitioner’s account was unjustified, disproportionate, and contrary to fundamental rights. To correct this, the Court ordered the Petitioner to file a representation within ten days and directed the Bank to pass a reasoned decision within one month thereafter. Importantly, the Court ordered that until such decision is made, the Petitioner must be permitted unrestricted access to the bank account. This represents a balanced approach that provides immediate relief while allowing the Bank an opportunity to reassess the situation in accordance with law.
Implications
This decision has significant implications for businesses dealing in exempt goods under GST. It clarifies that voluntary cancellation of GST registration cannot, by itself, justify restrictive banking measures. The judgment curbs the increasing trend of banks automatically freezing accounts based on GST-related system alerts that lack human evaluation. It strengthens the jurisprudence that freezing of bank accounts directly impacts economic freedom and must be exercised only with clear legal basis. Banks will now be compelled to examine individual circumstances rather than applying risk classifications mechanically, and taxpayers dealing in exempt goods gain greater protection against unwarranted financial restrictions.