The Himachal Pradesh High Court, in M/s A.M. Enterprises vs State of Himachal Pradesh & Ors. (CWP No.1517/2024, decided on 20.09.2024), considered the legality and proportionality of cancelling GST registration for alleged violation of Rule 86B of the CGST/HPGST Rules.
The department had cancelled the taxpayer’s registration under Rule 21(b), 21(e) and 21(g) on the ground that the taxpayer used ITC to discharge more than 99% of its output tax liability. While the violation was recorded, the Court noted that the taxpayer had fully discharged its tax dues and no loss to revenue was demonstrated.
Holding cancellation to be a drastic and disproportionate measure, the Court observed that registration cancellation amounts to the economic death of the business and cannot be imposed merely for procedural or percentage-based violations. The Court further held that cancellation based solely on a prima facie investigation under Rule 21(b)/(e) is arbitrary and violates Article 14.
Interestingly, the Court also noted that Rule 86B appears to lack statutory backing, raising a potential ultra vires concern — although this issue was left open for future adjudication.
The registration was accordingly restored.
Why this matters:
• Reinforces the proportionality doctrine in GST enforcement
• Clarifies that Rule 86B violations ≠ automatic cancellation
• Establishes that drastic measures require completed adjudication and proof of prejudice to revenue
• Opens the door for future constitutional challenges to Rule 86B
For detailed judgment text, citations, and ratio decidendi, refer to the case law entry:
[View Full Case Law]