DGGI Gauhati | Bona Fide Buyer Can’t Be Penalised for Supplier’s Tax Default: High Court

The Gauhati High Court has set aside a GST demand of Rs. 78.70 lakh raised against a registered dealer, reiterating that a bona fide purchaser cannot be denied ITC merely because the supplier allegedly failed to discharge its tax liability. The bench of Justice Kardak Ete has observed that the law is now settled that where a purchaser has entered into transactions bona fide with a registered supplier and complied with statutory requirements, ITC cannot be denied solely because the supplier subsequently fails to deposit the tax with the government. The dispute arose from allegations that the taxpayer had wrongly availed and utilized Input Tax Credit amounting to ₹78.70 lakh during the period from July 2017 to March 2019. Based on these allegations, the GST department passed an Order-in-Original confirming tax demands comprising IGST, CGST and SGST along with interest and an equivalent penalty under Section 74 of the CGST Act, 2017. According to the taxpayer, goods had been purchased from suppliers located in Kolkata and payments, including GST, were made through proper banking channels against valid tax invoices. The taxpayer maintained that all statutory conditions prescribed under Section 16 of the CGST Act for availing ITC had been fulfilled. The matter originated from an investigation conducted by the Directorate General of GST Intelligence (DGGI), Guwahati Zonal Unit. The authorities alleged that the taxpayer had availed ITC on invoices without actual receipt of goods and without genuine supply transactions. Summons were issued and the taxpayer was directed to furnish records relating to GST returns and purchase invoices. Subsequently, a search operation was conducted at the business premises in July 2019. The taxpayer argued before the Court that no incriminating material was recovered during the search. During the investigation, the proprietor explained the procurement process, transportation arrangements, storage practices and payment mechanisms, asserting that goods covered under the invoices had actually been received and paid for through banking channels. Despite these explanations, a show cause notice was issued in July 2022 alleging wrongful availment of ITC and proposing recovery of tax, interest and penalty. Before the High Court, the taxpayer contended that the entire demand was founded on the alleged failure of suppliers to discharge GST liability, a circumstance beyond the purchaser’s control. It was argued that the purchaser had acted in good faith by obtaining valid invoices, receiving goods and making payments through banking channels, including GST amounts. The taxpayer further alleged violations of principles of natural justice, claiming that no effective opportunity of hearing was granted and that notices were not properly uploaded on the GST portal. It was also argued that the proceedings were time-barred and that the authorities had improperly invoked Section 74 of the CGST Act. Reliance on Earlier Precedent The case turned substantially on an earlier Division Bench judgment of the Gauhati High Court in National Plasto Moulding v. State of Assam, which had relied on the Delhi High Court's landmark decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi. In those decisions, the courts had held that a genuine purchasing dealer cannot be expected to ensure that a supplier deposits the tax collected from customers with the government. Denial of ITC in such circumstances would impose an impossible burden on honest taxpayers and could violate constitutional guarantees of equality. The GST department itself conceded before the Court that the issue was covered by the earlier Division Bench ruling. The Court emphasised that in such situations, the proper course for the department is to proceed against the defaulting supplier rather than penalise an innocent purchaser. However, the Court clarified that authorities remain free to take action where there is evidence of collusion, fraud or lack of bona fides in the transactions. The Gauhati High Court quashed both the Order-in-Original dated February 19, 2024 and the appellate order dated February 14, 2025. The Court disposed of the writ petition while preserving the department’s liberty to initiate fresh proceedings if material emerges indicating that the transactions were not genuine or were entered into in collusion with suppliers. Case Details Case Title: M/S Metal Syndicate And Other Versus The Union Of India Citation: JURISHOUR-1536-HC-2026(GAU) Case No.: WP(C)/2960/2026 Date: 05.06.2026 Counsel For Petitioner: A R Das Counsel For Respondent: DY.S.G.I. Click Here To Read Order Read More: Rs. 20 Crore GST ITC Demand Quashed Based on GSTR-2A Mismatch: Karnataka High Court

DGGI Gauhati | Bona Fide Buyer Can’t Be Penalised for Supplier’s Tax Default: High Court

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