The Allahabad High Court stated that if the seller was a GST-registered dealer at the time of the transaction, no adverse inference could be drawn against the purchasing dealer due to the subsequent cancellation of the seller’s registration.
Justice Piyush Agrawal Ruled
“Once the seller was registered at the time of the transaction in question, no adverse inference can be drawn against the petitioner. Further, the record shows that the registration of the selling dealer was cancelled retrospectively i.e. w.e.f. 29.01.2020 and not from its inception which goes to show that the transaction between petitioner and seller was registered and having valid registration in his favour.”
Case Details
The applicant is a registered dealer who is in the business of purchasing and selling scraps. It is his case that a notice under section 74 of the UPGST Act was issued to him for the tax period December 2018-19, F.Y. 2018-19. The applicant pleaded that the order was passed in breach of Section 75(4) of the Act without acknowledging the response given by him.
Section 75 gives the process to be followed via assessing officers for proceedings under Sections 73 and 74. Section 75(4) furnishes that when asked in writing, the taxpayer is required to be provided a chance of personal hearing where the taxpayer is liable to tax/ penalty or where any adverse measure is contemplated against him.
The applicant’s counsel pleaded that the transaction from the selling dealer in question was more than a year before the registration of the seller was cancelled by the department. It was claimed that the applicant could not be liable if, at a forthcoming date, the seller was not discovered at the place of business and the registration was cancelled. It was claimed that the applicant had furnished its return revealing the transaction.
Per contra, the department’s counsel claimed that the applicant had not exhibited actual physical movement of goods.
Verdict of the High Court
The Court, perusing Sections 74 and Sections 16 of the GST Act and Rule 36 of the GST Rules, noted that once the requirements are completed and documents are given, then the taxpayer should be granted the benefit of an input tax credit. It noted that
“Section 74 of the GST Act, 2017 provides the power to the State-authorities to proceed against the registered dealer if I.T.C. has wrongly availed or utilized by reason of fraud or wilful misstatement of fact or by means of fraud, and upon the adjudication, can recover the same.”
The court found that despite the authorities having cancelled the registration of the selling dealer from the date of proceedings, they cancelled it wef 29.01.2020. The department does not plead that during the transaction the selling dealer was not enrolled.
The court discovered that the returns were submitted via the supplier and were available on the portal, and the authority did not regard them while charging the penalty on the applicant. It was noted that the seller’s registration was not cancelled from the transaction date.
The Allahabad High Court for its ruling in M/s Rajshi Processors Raebareli Thru. Its Partner Ashok Kumar Lakhotia vs. State of U.P. Thru. Prin. Secy. Deptt. Of State Tax, Lko, and 2 Others, Justice Agrawal ruled that in that case, the seller’s registration was cancelled from the beginning, whereas in the case at hand, the registration was cancelled from a later date after the transaction between the parties.
The court distinguished the ruling of the High Court in M/s Shiv Trading Vs. State of U.P. and 2 others, which followed the decision of the Supreme Court in State of Karnataka Vs. Ecom Gill Coffee Trading Private Limited, because in Shiv Trading, no finding concerning GSTR-3B was made, whereas in the present case, it had been filed by the applicant.
In M/S Rama Brick Field vs. Additional Commissioner Grade-2 and 2 others, reliance was placed on its former ruling where the court once held that the GSTR-2A had been auto-generated on the portal, the transaction was true, and the parties were enrolled during the transaction.
“However at the subsequent time if the seller i.e. Rohit Coal Trader was found non- existence, the proceeding can be initiated but the authorities has failed to consider the fact that GSTR returns as prescribed under the Act was filed by the seller to which not a single word has been whispered while passing the impugned order. On the contrary an observation has been made that the petitioner has failed to bring on record any cogent material to show that Rohit Coal Traders has deposited the tax and therefore proceedings were held to be justified”
The proceedings in the M/S Rama Brick Field have been set aside by the court, keeping in mind that the returns were available on the portal, which the authorities were unable to validate. The court has made the observations for the present case.
As per that, the impugned orders were quashed, and the case was remanded to the authority to pass fresh orders.
| Case Title | M/S Solvi Enterprises v. Additional Commissioner Grade 2 And Another |
| Case No. | WRIT TAX No. – 1287 of 2024 |
| Date | 24.03.2025 |
| Counsel For Appellant | Aditya Pandey |
| Counsel For Respondent | C.S.C |
| Allahabad High Court | Read Order |
