Bona Fide Purchaser Can’t Be Denied ITC for Seller’s Default: Tripura High Court

The Tripura High Court has held that a bona fide purchaser cannot be denied Input Tax Credit (ITC) merely because the selling dealer failed to deposit the tax collected from the purchaser. The bench of Chief Justice M.S. Ramachandra Rao and Justice Biswajit Palit set aside the order of the tax authorities denying ITC of Rs. 22,09,964 to the petitioner. The petitioner, M/s Malaya Rub-Tech Industries, is a partnership firm engaged in the rubber business across India, including in Tripura. It was duly registered under both the Central Goods and Services Tax (CGST) Act, 2017 and the State GST (SGST) Act, 2017. Between March 8, 2018 and November 30, 2018, the firm purchased input materials from a supplier (arrayed as Respondent No. 7) for manufacturing finished rubber products. The petitioner claimed that it had paid the applicable taxes on the purchases and utilized the materials in its manufacturing process, thereby becoming eligible for ITC. However, a show cause notice dated January 14, 2021 was issued under Section 73(1) of the CGST Act by the Assistant Commissioner, alleging that during the period August 2017 to July 2019, tax had either not been paid, paid short, or ITC had been wrongly availed or utilized. The notice proposed recovery of ₹22,09,964.04 from the petitioner. BUY NOW : E-MAGAZINE | Case Compilation On Input Tax Credit Of The Purchasing Dealer: When It Can Be Claimed And When It Cannot After considering the reply submitted by the petitioner, the department passed an order on February 17, 2022, holding that the ITC had been wrongly claimed and directing recovery of the said amount. Aggrieved, the petitioner approached the High Court. The petitioner challenged the show cause notice and the consequential order on multiple grounds. It argued that the show cause notice was vague and contained mutually contradictory allegations. Section 16(2)(c) of the CGST Act was wrongly invoked. The transaction with the supplier was bona fide. There was no statutory mechanism enabling a purchaser to compel the supplier to deposit tax with the government. A purchasing dealer cannot be penalized for the seller’s failure to remit tax collected. The Court extensively referred to its earlier decision in Sahil Enterprises, where it had considered precedents of the Supreme Court, Delhi High Court, and Gauhati High Court. In that judgment, the Court had observed that Parliament, while enacting Section 16(2)(c), failed to distinguish between bona fide purchasing dealers who transact after taking all statutory precautions; and dealers involved in collusive or fraudulent transactions. The Court in Sahil Enterprises had held that denying ITC to a bona fide purchaser for the seller’s failure to deposit tax would impose an “onerous burden” and could render the provision vulnerable under Article 14 of the Constitution. To avoid unconstitutionality, the provision was read down so that ITC can be denied only in cases involving fraud, collusion, or lack of bona fides. Applying this reasoning to the present case, the Bench noted that neither the show cause notice nor the adjudication order recorded any finding that the transactions between the petitioner and the supplier were fraudulent, collusive, or lacking in bona fides. Importantly, the authorities had invoked Section 73 of the CGST Act, which applies to cases not involving fraud, wilful misstatement, or suppression of facts. Had there been allegations of fraud, the department would have invoked Section 74, the Court observed. This absence of any finding of fraud or collusion was crucial in the Court’s decision. The High Court held that the transaction between the petitioner and the supplier must be treated as bona fide. Consequently, the petitioner could not be denied ITC merely because the supplier failed to deposit the tax collected. Allowing the writ petition, the Court set aside the order dated February 17, 2022 passed by the Assistant Commissioner; and directed the respondents to forthwith allow ITC to the petitioner to the extent of Rs. 22,09,964. Case Details Case Title: M/S Malaya Rub-Tech Industries Versus UOI Case No.: WP(C) No.849 of 2022 Date: 10.02.2026 Counsel For Petitioner: Somik Deb, Sr. Advocate Counsel For Respondent: Bibhal Nandi Majumder, Sr. Advocate Click Here To Read Order

Bona Fide Purchaser Can’t Be Denied ITC for Seller’s Default: Tripura High Court Reads Down S. 16(2)(c)

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