High Court Quashes GST ITC Denial Despite Supplier Cancellation

Facts of the case

Petitioner is engaged in the trading and manufacturing business, mainly of all kinds of medicines/ pharma products on a wholesale basis. He purchased medicines/ pharma products from M/s Unimax Pharma Chem, Purana Taluka Bhiwandi, Thane and at the time of supply it was in existence and duly registered with the GST department as well as Drug License Holder.

The transaction of purchases made by the petitioner from the Maharashtra Party for the tax period April, 2021 which was against the Tax Invoice dated 30.4.2021 and E-way bill and transport bilty of M/s Vinay Road Lines Pvt. Ltd. The whole payments of purchases were made through banking channel, and the supplier also submitted his GSTR-1 and GSTR-3B within the time on GST Portal after paying due tax on the turnover made by the supplier.

GST Department issued a show cause notice under section 74 of on the ground that the petitioner has claimed ITC through GSTR-3B for the tax period April 2021 on the purchase made from M/s Unimax Pharma Chem, which has itself got its registration cancelled; as such the petitioner has incorrectly claimed ITC. He submitted that a detailed reply was submitted to the show cause notice which has been rejected by the GST Department on the ground that the recipient purchaser can claim the ITC only when the supplier has deposited the collected tax with the department as per Section 16(2)(c) of the Act.

Petitioner was aggrieved by the order passed by GST Department against which it preferred an appeal which has also been dismissed on 20.11.2022 on the ground that the supplier M/s Unimax Pharma Chem in the month of March 2021 made purchases from different firms who did not deposit the tax, therefore, it claimed forged ITC.
He further submits that the appellate authority has erred in holding that the purchases made by the supplier from the different firms that did not deposit tax on sales made by them to M/s Unimax Pharma Chem, as such, the petitioner cannot claim ITC on the supply made by M/s Unimax Pharma Chem.

He further submits that the petitioner has made the payment of Tax as per tax invoices to the supplier, and the supplier has deposited the tax as reflected in GSTR-3B, therefore, no adverse inference can be drawn by making RITC to the ITC claimed by the petitioner.

Petitioner made no Fraud U/S 74

Petitioner submitted that a circular has been issued on 13.12.2023, which specifically provides that under section 74 of the CGST Act, proceedings can only be initiated if there is a case of fraud or willful misstatement or suppression of fact to evade payment of tax, and in the absence thereof, proceedings under section 74 of the Act cannot be initiated.

In support of his arguments, he has relied upon a Judgment of this Court in Writ Tax No. 743 of 2023, M/s Khurja Scrap Trading Company vs. Additional Commissioner Grade 2 (Appeal) and another (2025: AHC 151783).

GST Department: The  benefit of ITC cannot be passed once the supplying dealer’s purchase is doubted

Department submitted that the supplying dealer of the petitioner, M/s Unimax Pharma Chem, has shown purchases from the firm whose registration has been cancelled long before; therefore, once the supplying dealer’s purchase is doubted and it cannot be proved on record, the benefit of ITC cannot be accorded to the petitioner. Hence, the proceedings have rightly been initiated against the petitioner.

Observations of High Court

Petitioner submitted its specific reply on all points, bringing on record the material of actual movement of goods, payment of tax through banking channel, as well as filing of return, which was reflected in GSTR-3B of both the petitioner and supplier, but no weightage was given on the order under section 74 of the Act, which was passed on 13.10.2021.

Once actual movement of goods as well as payment of tax by the respondent authorities have been proved by the petitioner, to which no rebuttal has been brought on record at any stage, proceedings under section 74 of the Act cannot be justified.

The order of the first appellate authority has been passed only on the basis of the information sent by the office of the Pr. Chief Commissioner, Central Intelligence Unit, Central Excise & Central Tax Vadodara Zone, with closed eyes. The information sent by the Central Intelligence Unit must be verified by the authority before using the same against the registered dealer.

No finding has been recorded that M/s Unimax Pharma Chem, which sold the goods in question to the petitioner, was involved in any irregularity. The total quantity purchased by M/s Unimax Pharma Chem was sold to the petitioner, and no finding has been recorded that the alleged parties that supplied goods to M/s Unimax were the only sale made to it.

The record does not confirm that M/s Unimax Pharma Chem made sales only to the petitioner. It is the duty of the officers to verify facts from all angles before being used against the registered dealer. The record further shows that the report used against the petitioner has neither been provided to the petitioner, nor has the material used against the petitioner ever been provided, which ought to be provided to the petitioner.

Revenue officers are bent upon to act against the very theme/intent of ease of business

The GST regime has been brought in by the Central Government for ease of business in the country, but the revenue officers are bent on acting against the very theme/intent of it.
When it was noticed by the Government that, under the garb of Section 74 of the Act, various dealers are being harassed, it issued a circular dated 13.12.2023, where it has specifically been stated that proceedings under Section 74 of the Act can be initiated if there is a fraud or willful misstatement or suppression of fact to evade payment of tax and not otherwise.

The record shows that no finding has been recorded at any stage that there is a fraud or willful misstatement or suppression of fact to evade payment of tax.
The record further shows that at the time when the transaction took place, the selling dealer, i.e., M/s Unique Trading Company, was duly registered.

HC quashes proceedings u/s 74

The Apex Court has clearly stated that an incorrect statement, unless made with the knowledge that it was not correct, will not be a ground of wilful misstatement or suppression, and no inference can be drawn if full information has been disclosed without intent to evade payment of tax. [Apex Court in the case of Continental Foundation Joint Venture Holding, Nathpa, H.P. vs. Commissioner of Central Excise, Chandigarh-I [(2007) 10 SCC 337].

In the case in hand, the authorities have neither recorded any findings of fraud nor wilful misstatement nor suppression of fact to evade payment of tax; therefore, the proceedings under section 74 of the Act ought not to have been initiated against the petitioner.