The Madras High Court has held that the mere cancellation of a supplier’s GST registration at a later point of time cannot, by itself, justify the denial of Input Tax Credit (ITC) to a purchasing dealer without examining the documentary evidence produced by the taxpayer. 

Setting aside an assessment order passed under Section 74 of the CGST/TNGST Act, the bench of Justice Senthilkumar Ramamoorthy ruled that tax authorities must consider all relevant documents establishing the genuineness of transactions and provide an opportunity to furnish additional evidence before confirming any tax demand. 

The writ petition was filed challenging an assessment order dated September 2, 2025, together with the summary order in Form DRC-07, whereby the GST authorities proposed reversal of ITC claimed by the petitioner for purchases made during the assessment year 2022-23. The dispute arose over ITC availed on supplies received from a supplier, Jay Steels, whose GST registration was subsequently cancelled after the department categorized it as a non-existent entity. 

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The petitioner contended that the assessment order had been passed arbitrarily and in violation of the principles of natural justice. According to the petitioner, it had responded to the departmental proceedings by producing extensive documentary evidence, including proof of payment through banking channels, tax invoices, e-way bills, ledger extracts, and screenshots of GSTR-2A and GSTR-2B reflecting the transactions. 

The tax department issued a show cause notice proposing reversal of ITC on the ground that the supplier had subsequently been found to be non-existent and its GST registration had been cancelled. During the hearing, the Government contended that instances of bill trading are often conducted through banking transactions and that mere proof of payment would not establish the actual movement of goods. It argued that, in the absence of satisfactory evidence regarding physical movement of goods, no interference with the assessment order was warranted. 

The court observed that the show cause notice had required the petitioner to produce original tax invoices, e-way bills, purchase registers, lorry receipts and proof of payment. The records showed that the petitioner had indeed submitted several supporting documents, including bank statements, invoices, e-way bills, ledger accounts and GSTR-2A and GSTR-2B returns in response to the departmental proceedings. 

The Court acknowledged that under the GST law, the burden of proving entitlement to Input Tax Credit rests upon the claimant. Consequently, it found nothing improper in the department calling for documentary evidence to establish the genuineness of the underlying transactions. However, once such documents had been furnished, the assessing authority was required to evaluate them on their merits. 

A significant aspect of the judgment was the Court’s finding that the assessment authority had confirmed the tax proposal solely because the supplier’s registration had been cancelled with effect from March 27, 2024, after being classified as a non-existent dealer.

The Court held that this approach was legally unsustainable, particularly when the taxpayer had already submitted substantial documentary evidence supporting the transactions. If the authority found deficiencies in the material produced, it ought to have granted the taxpayer an opportunity to furnish additional documents instead of mechanically confirming the demand based solely on the supplier’s subsequent status. 

The High Court also took note of an important procedural irregularity. It observed that although the show cause notice repeatedly stated that proceedings had been initiated under Section 73 of the GST statutes, the final assessment order had ultimately been passed under Section 74, which deals with cases involving fraud, wilful misstatement or suppression of facts.

The Court considered this inconsistency as another factor warranting interference with the impugned order. 

The High Court set aside the assessment order and remanded the matter to the jurisdictional GST authority for fresh consideration.

The Court directed the assessing authority to provide the petitioner with a reasonable opportunity of hearing and thereafter pass a fresh order in accordance with law within three months from the date of receipt of the High Court’s order. 

The writ petition was accordingly disposed of, while the connected miscellaneous petitions were also closed without any order as to costs.

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