The Gauhati High Court held that a bona fide purchaser cannot be denied Input Tax Credit (ITC) merely because the supplier failed to deposit the tax collected from the purchaser with the Government. Relying on its earlier decision in National Plasto Moulding, the Court quashed GST demand, interest and penalty proceedings initiated against M/s Metal Syndicate and reiterated that the Department’s remedy lies against the defaulting supplier and not against a genuine purchasing dealer. Justice Kardak Ete allowed the writ petition and set aside both the adjudication and appellate orders.

The dispute arose after the Department alleged that the petitioner had wrongly availed and utilized ITC amounting to Rs.78.70 lakh during the period from May 2018 to March 2019 on invoices purportedly issued without actual supply of goods. A show cause notice was issued proposing recovery of tax, interest and penalty under the CGST Act. Subsequently, the adjudicating authority confirmed the demand of Rs.78.70 lakh along with interest and an equivalent penalty, which was later upheld by the appellate authority.

Before the High Court, the petitioner relied upon the earlier Division Bench judgment in National Plasto Moulding, wherein it was held that a purchasing dealer cannot be penalized for the default committed by a selling dealer in depositing tax collected from the purchaser.

“The remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC.”

The Court noted that the issue was squarely covered by the Division Bench ruling, which had in turn relied upon the Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd. The principle emerging from those decisions is that a bona fide purchaser, who has transacted with a registered supplier, received goods, obtained valid tax invoices and complied with statutory requirements, cannot be expected to ensure that the supplier ultimately deposits the tax with the Government.

The Court observed that denial of ITC in such circumstances would effectively require a purchaser to perform an impossible task—monitoring and guaranteeing tax compliance by the supplier. It emphasized that where transactions are genuine and supported by proper documentation, the purchasing dealer cannot be punished for the supplier’s default.

“A purchasing dealer cannot be punished for the act of the selling dealer in case the selling dealer had failed to deposit the tax collected by it.”

Since both parties agreed that the controversy was fully covered by the earlier judgment of the Gauhati High Court, the Court found no necessity for further adjudication. Thus, it quashed the Order-in-Original dated 19.02.2024 and the Order-in-Appeal dated 14.02.2025.

However, the Court clarified that the Department would remain free to initiate proceedings in accordance with law if it discovers material indicating that the transactions were not bona fide or were entered into in collusion with the suppliers. Subject to that liberty, the writ petition was allowed and the impugned GST demand, interest and penalty orders were set aside.