GST ITC Cannot Be Denied for Supplier's Tax Default: HC:

The Gauhati High Court reiterated that Input Tax Credit (ITC) cannot be denied to a bona fide purchaser merely because the supplier failed to deposit the tax collected from the purchaser with the Government. Following its earlier decision in National Plasto Moulding, the Court quashed GST demand, interest and penalty proceedings initiated against M/s Narayan Enterprise and held that recovery action, if any, must be directed against the defaulting supplier rather than a genuine purchasing dealer. Justice Kardak Ete allowed the writ petition and set aside both the adjudication and appellate orders.

The petitioner, M/s Narayan Enterprise, had purchased goods from registered suppliers during FY 2018-19 and claimed ITC after making payments through banking channels and obtaining proper tax invoices. The Department, however, alleged that the petitioner had wrongly availed ITC of Rs.22.22 lakh on invoices issued without actual receipt of goods and issued a show cause notice proposing recovery of tax, interest and penalty under the CGST Act.

Subsequently, the adjudicating authority confirmed a demand of ₹22.22 lakh along with interest and an equivalent penalty under Section 74 of the CGST Act. The first appellate authority also upheld the demand, prompting the assessee to approach the High Court.

Before the Court, the petitioner contended that it had complied with all conditions prescribed under Section 16 of the CGST Act and that the denial of ITC was founded solely on the alleged default of the suppliers in discharging their tax liability. It was argued that the petitioner had acted in good faith, received the goods, verified tax invoices and made payments including GST through proper banking channels.

“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 Revenue fairly conceded that the controversy was squarely covered by the decision in National Plasto Moulding, which had adopted the principles laid down by the Delhi High Court in On Quest Merchandising India Pvt. Ltd. The precedent recognizes that a bona fide purchaser cannot be expected to monitor or ensure subsequent tax compliance by the supplier.

The Court observed that the earlier Division Bench had categorically held that where a purchaser has entered into genuine transactions with a registered supplier and fulfilled statutory requirements, denial of ITC solely because the supplier failed to deposit tax would be unjustified. In such situations, the Department’s remedy lies against the supplier who defaulted and not against the purchaser who has acted bona fide.

“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.”

However, the Court clarified that the tax authorities would remain at liberty to proceed in accordance with law if material is discovered indicating that the transactions were not bona fide or were entered into in collusion with the suppliers. Subject to this liberty, the writ petition was disposed of in favour of the assessee.

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