Bank cannot freeze business account solely on ground of GST registration cancellation

Rajas, a Trading Company, a proprietorship firm dealing in goods under Chapter 10 of the Harmonized System of Nomenclature (HSN), which are exempt from Goods and Services Tax (GST), had voluntarily applied for cancellation of its GST registration. The GST Department accepted the request and cancelled the registration with effect from 31 January 2025. However, following the cancellation, Bank of Baroda froze the firm’s current account, citing internal and RBI guidelines treating accounts with cancelled GST registrations as “high risk.”

Aggrieved, the petitioner approached the Rajasthan High Court under Article 226, arguing that the bank’s action was arbitrary, violated Articles 14 and 19(1)(g) of the Constitution, and crippled its business operations. The firm requested directions to unfreeze its account and resume regular transactions, as well as compensation for losses caused by the bank’s unilateral action.

Issue before Court: Whether a bank can freeze a business account solely on the ground of GST registration cancellation when the trader’s goods are tax-exempt under Chapter 10 of the HSN.

HC’s Order: The Hon’ble Court directed the petitioner to produce a detailed representation to Bank of Baroda within ten days, enclosing all relevant documents to prove exemption from GST and the voluntary nature of cancellation. The Court observed that since the GST Department had itself approved the cancellation, the bank’s action required reconsideration in light of the trader’s exemption.

The Court ordered that till the bank decides on the representation, the petitioner must be permitted to operate the account and carry on normal business transactions. The bank was directed to pass a reasoned (speaking) order within one month of receiving the representation. With this, the writ petition and all pending applications were disposed of.

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