Bona Fide Purchaser Can’t Be Denied ITC Merely For Seller’s Deposit Tax Failure: Gauhati High Court

The Gauhati High Court has held that a bona fide purchasing dealer cannot be denied Input Tax Credit (ITC) merely because the selling dealer failed to deposit tax with the government. The bench of Justice Kardak Ete has quashed both the adjudication order and the appellate order, while granting liberty to the GST Department to proceed only if there is material indicating collusion or lack of bona fides in the transactions. The case arose from a writ petition filed by M/s Narayan Enterprise and its proprietor, Moloy Banik, challenging an Order-in-Original dated February 19, 2024, passed by the Assistant Commissioner of Central GST and Central Excise, Silchar. Through the impugned order, the department had confirmed a tax demand of ₹22,22,695 comprising IGST, CGST, and SGST for the period May 2018 to March 2019. The authorities had also directed recovery of interest under Section 50 of the CGST Act and imposed an equivalent penalty under Section 74(1) read with Section 122 of the CGST Act. The taxpayer's appeal was subsequently rejected by the Joint Commissioner (Appeals) on January 7, 2025. According to the petitioner, the dispute stemmed from allegations that it had wrongly availed ITC on the basis of invoices issued by suppliers without actual receipt of goods. The firm contended that it had purchased goods from Kolkata-based suppliers during FY 2018-19, received the goods physically, and made all payments, including GST, through proper banking channels supported by valid tax invoices. The petitioner further asserted that all statutory conditions under Section 16(2) of the CGST Act had been fulfilled before claiming ITC. The petitioner pointed out that officials of the Directorate General of GST Intelligence (DGGI) had issued summons in 2019 and examined all relevant records, including GSTR-1, GSTR-3B returns, and purchase invoices. Subsequently, a search was conducted at the business premises on July 9, 2019. However, according to the petitioner, no incriminating material was recovered during the search. The proprietor's statement was also recorded, wherein he explained the nature of the business, procurement process, transportation arrangements, storage practices, and payment mechanisms, maintaining that the goods covered by the invoices had actually been received. The controversy intensified after a Show Cause Notice dated July 30, 2022 alleged wrongful availment and utilization of ITC amounting to ₹22.22 lakh on the ground that the goods were not actually received. The petitioner argued that despite submitting all relevant documents, no meaningful opportunity of hearing was granted and notices were manually served beyond the scheduled hearing dates. It was also contended that the denial of ITC was based solely on the alleged failure of suppliers to discharge their tax liability, a factor entirely beyond the purchaser's control. Before the High Court, the petitioner relied heavily on the Division Bench judgment in National Plasto Moulding v. State of Assam, which had held that a purchasing dealer cannot be penalized for the selling dealer's failure to deposit tax collected from the purchaser. Significantly, the GST Department also conceded that the controversy was squarely covered by the said precedent. Justice Kardak Ete noted that the Division Bench in National Plasto Moulding had relied upon the landmark Delhi High Court decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi. Those judgments recognized that a bona fide purchaser cannot be expected to ensure that a supplier deposits the tax collected from it and that such an obligation would impose an impossible burden on genuine taxpayers. The proper remedy for the tax authorities, the Court observed, lies in proceeding against the defaulting supplier rather than denying ITC to an honest purchaser. The Court emphasized that where a purchaser has entered into transactions with registered suppliers, possesses valid tax invoices, has received the goods, and has made payments through legitimate channels, denial of ITC solely because the supplier defaulted in depositing tax would be unjustified. However, the Court clarified that the Department remains free to initiate proceedings where evidence suggests collusion, fraud, or absence of bona fide transactions. Finding the matter fully covered by the binding precedent, the High Court set aside and quashed both the Order-in-Original dated February 19, 2024 and the appellate order dated January 7, 2025. At the same time, it preserved the Department's liberty to proceed in accordance with law if material emerges showing that the disputed transactions were not genuine or were entered into in collusion with suppliers. Case Details Case Title: M/S Narayan Enterprise And Anr Versus The Union Of India Citation: JURISHOUR-1565-HC-2026(GAU) Case No.: WP(C)/2933/2026 Date: 04.06.2026 Counsel For Petitioner: P ALAM Counsel For Respondent: DY.S.G.I., SC, CGST Click Here To Read Order Read More: Yaba Seizure | Can Circumstantial Evidence Without Recovery Defeat Bail in NDPS Cases? Tripura HC Says Yes

Bona Fide Purchaser Can’t Be Denied ITC Merely For Seller’s Deposit Tax Failure: Gauhati High Court

Membership Required

Latest articles

Income Tax Dept Can’t Revive Time-Barred Assessments After Settlement Proceedings: Madras HC

ICAI Announces CA September–November 2026 Examination Schedule; Applications Open from July 6

Got an Income Tax Notice? CBDT Says These 6 Types of Taxpayers Are Most Likely to Be Scrutinised

Can ED Invoke Emergency Attachment Powers Without Demonstrating Urgency? Karnataka High Court Answers

More like this

Income Tax Dept Can’t Revive Time-Barred Assessments After Settlement Proceedings: Madras HC

ICAI Announces CA September–November 2026 Examination Schedule; Applications Open from July 6

Got an Income Tax Notice? CBDT Says These 6 Types of Taxpayers Are Most Likely to Be Scrutinised

About us

Company

Categories