M/S A.M. Enterprises vs. State Of Hp And Others

Held

The Court found merit in the petitioner's contention that Rule 86B of the HPGST Rules, 2017, lacks statutory backing and appears to be ultra vires the HPGST Act, 2017. However, the Court did not base its decision solely on this issue. The Court held that the cancellation of GST registration for violating Rule 86B was a disproportionate punishment, especially since the petitioner's tax liability was discharged and no loss was caused to the department. The Court also found the cancellation based on a "prima facie" investigation under Rule 21(b) and Rule 21(e) to be arbitrary, unreasonable, and a violation of Article 14 of the Constitution, as it shocks the conscience of the Court to impose such a drastic penalty without completed investigation. The Court set aside the impugned order and directed the restoration of the petitioner's GST registration. Other issues raised by the petitioner were left open for consideration in an appropriate case.

Facts

The petitioner, M/s A.M. Enterprises, challenged an order dated 09.02.2024 by respondent no. 4, which cancelled its GST registration. The cancellation was based on alleged violations of Rule 21(g) for contravening Rule 86B (using excess input tax credit from the electronic credit ledger for output tax liability), and also Rule 21(b) and Rule 21(e). The petitioner argued that Rule 86B lacked statutory backing and that the cancellation was arbitrary and violated fundamental rights. The respondents contended that an alternative remedy of appeal under Section 107 of the HPGST Act was available and that Rule 86B was framed under the rule-making power of Section 164 of the Act. The impugned order was issued after a show cause notice dated 17.01.2024, concerning periods from October 2021 to January 2024.

Key Issues

1. Whether Rule 86B of the HPGST Rules, 2017, which restricts the use of input tax credit to 99% of output tax liability for certain registered persons, is ultra vires the HPGST Act, 2017, due to lack of statutory backing? (Question of law, concerning Sections 16, 49, 49A, 49B, and 164 of the Act). The petitioner argued that Sections 16, 49, 49A, and 49B do not provide for such a restriction, rendering Rule 86B invalid. The respondents contended that Rule 86B is framed under the rule-making power of Section 164 of the Act. 2. Whether the cancellation of GST registration based on a "prima facie" investigation under Rule 21(b) and Rule 21(e) is arbitrary and violates Article 14 of the Constitution? (Question of mixed law and fact). The petitioner argued that cancellation on a preliminary finding is unreasonable. The respondents did not explicitly counter this point in the judgment.