The Gauhati High Court has quashed a GST order confirming a demand of ₹69.57 lakh and imposing an equivalent penalty after holding that input tax credit cannot be denied to a bona fide purchasing dealer merely because the supplier failed to deposit the tax collected from the purchaser with the government.

The bench of Justice Kardak Ete observed that when a purchaser has entered into genuine transactions with registered suppliers and complied with the statutory requirements, the GST Department’s remedy lies against the defaulting suppliers. The purchaser cannot be punished for a failure attributable to the sellers.

BUY NOW: Input Tax Credit of the Purchasing Dealer: When It Can Be Claimed and When It Cannot

The petitioner/assessee challenged an Order passed by the Assistant Commissioner, Central Goods and Services Tax and Central Excise Division, Silchar. The impugned order confirmed a tax demand of ₹69,56,794 for the period from July 2017 to March 2019. The amount comprised integrated goods and services tax of ₹50,19,230, central goods and services tax of ₹9,68,782 and state goods and services tax of ₹9,68,782.

In addition to the tax demand, the adjudicating authority directed recovery of applicable interest under Section 50 of the Central Goods and Services Tax Act, 2017, along with the corresponding provisions of the State GST and Integrated GST laws. A penalty equal to the tax demand, amounting to ₹69,56,794, was also imposed under Section 74(1), read with Section 122 of the CGST Act and Section 20 of the IGST Act.

The petitioner submitted that several businesses had encountered practical difficulties during the initial phase of GST implementation, particularly while filing GSTR-1 and GSTR-3B returns. These difficulties allegedly resulted in data-entry discrepancies concerning output tax liabilities, ITC claims and invoice matching.

According to the petitioner, goods were purchased from suppliers located in Kolkata during the financial years 2017-18 and 2018-19. The value of the goods, together with the applicable GST, was paid to the suppliers through proper banking channels, and the transactions were supported by valid tax invoices.

The Directorate General of GST Intelligence’s Guwahati Zonal Unit initiated proceedings on the allegation that the petitioner had availed ineligible ITC based on invoices issued without an actual supply or receipt of goods. Pursuant to summons, the petitioner appeared before the authorities on April 5, 2019, and produced documents including GSTR-1 and GSTR-3B returns and purchase invoices for the disputed period.

A search was subsequently conducted at the petitioner’s business premises on July 9, 2019. The petitioner claimed that no incriminating material was recovered or seized during the search.

In his statement, the petitioner explained the nature of the scrap and waste battery business, the sources of purchases, transportation arrangements, storage practices and the manner in which payments were made. He maintained that the goods covered by the invoices had actually been received and that the entire consideration, including GST, had been paid to the suppliers through banking channels.

The Department later issued a show cause notice dated August 26, 2022, alleging that ITC of ₹69,56,794 had been wrongly availed and utilised in violation of Sections 16(2)(a) and 16(2)(b) of the CGST Act. The allegation was that the credit had been taken without actual receipt of the underlying goods.

The petitioner contended that, despite producing the relevant documents and repeatedly seeking an opportunity to explain the transactions, no effective personal hearing was granted. It was further alleged that the notices were not uploaded on the GST portal and were manually served only after the scheduled hearing dates.

The adjudication order was therefore alleged to have been passed without affording a meaningful opportunity of hearing and without issuing Form GST DRC-07.

The petitioner further argued that the denial of ITC was ultimately based on the suppliers’ alleged failure to discharge their corresponding tax liability. Such a failure, it was contended, was beyond the purchaser’s control, particularly when the purchaser had verified the invoices, received the goods and paid the entire consideration, including GST, through traceable banking channels.

Reliance was placed on the Gauhati High Court’s Division Bench ruling in National Plasto Moulding v. State of Assam, in which the Court had held that a purchasing dealer cannot be penalised merely because the selling dealer failed to deposit the tax collected from the purchaser.

The GST Department also fairly accepted that the controversy was covered by the decision in National Plasto Moulding.

The High Court noted that the Division Bench, while deciding National Plasto Moulding, had followed the Delhi High Court’s judgment in On Quest Merchandising India Private Limited v. Government of NCT of Delhi. That decision distinguished bona fide purchasers from dealers involved in collusive or non-genuine transactions.

The Delhi High Court had held that a bona fide purchasing dealer cannot reasonably be expected to ensure that the selling dealer subsequently deposits the tax collected from it with the government. Where a registered supplier issues a valid tax invoice and the purchase transaction is genuine, the Department must proceed against the defaulting supplier instead of denying ITC to the purchaser.

The Gauhati High Court reiterated that denial of ITC solely because of the supplier’s failure to deposit tax would not be justified when the purchaser had entered into the transaction bona fide and fulfilled the statutory requirements.

“The remedy of the Department, in such circumstances, lies against the defaulting supplier and not against a bona fide purchaser,” the Court observed.

At the same time, the Court clarified that the protection would not extend to transactions involving collusion or lacking bona fides. If the Department possesses material showing that the purchaser and supplier acted in concert or that the transactions were not genuine, it remains free to initiate appropriate proceedings in accordance with law.

Since both parties agreed that the dispute was covered by the Division Bench ruling in National Plasto Moulding, the High Court held that no further adjudication was required in the writ proceedings.

The Court set aside and quashed the Order-in-Original dated March 28, 2024, including the ₹69.57 lakh tax demand, interest direction and equivalent penalty. However, liberty was granted to the GST authorities to proceed afresh in accordance with law if material exists indicating that the disputed purchase transactions were collusive or not bona fide.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Wrong Sanction U/s 151 Invalidates Reassessment: ITAT