Allahabad HC Upholds ITC Denial and Tax Penalty if Supplier Fails to Pay GST Dues

The Allahabad High Court upheld the validity of Section 16(2)(c) of the GST Act in a case, ruling that input tax credit (ITC) claims were not permitted. The court imposed a penalty on the buyer (the applicant) who claimed the ITC, as it was determined that the tax had not been deposited by the supplier.

The applicant, Trendships Online Services Pvt Ltd., was unable to demonstrate to the tax authorities or the court that the tax had been deposited by the supplier according to the tax invoice issued.

Case Facts:

The Trendships Online Services Pvt Ltd. purchased what-man filter paper required for soil testing from one Shree Radhey International, Delhi, who was also a registered dealer at the time when the sale was made.

The petitioner, payment for the complete purchase was through the banking channel from March to April 2018. The goods purchased were against the tax invoices, and the petitioner notified it in its GSTR-3B return for the said period. Input tax credit on output tax liability was claimed, and for ITC, credit was availed.

The GST Assistant Commissioner has issued the SCN against which a response was furnished by the applicant. After that, an order u/s 74(9) was passed asking for the tax/interest, and the penalty was levied. The applicant appealed the order, though it was dismissed. Therefore, this writ petition.

Petitioner Arguments

At the execution of the transactions, the supplier was GST registered, and from the firm of the supplier, the goods were purchased, the applicant stated. RTGS payment mode has been used for all the payments, and the purchased goods were carried in car of the applicant and no outside assistance was taken.

On 11.09.2019, the supplier’s registration was cancelled, and between March and April 2018, the transactions were executed. Essential documents to claim ITC were given as per which the advantage was provided, and no occasion was there to reverse the GST ITC taken by the applicant. The supplier firm has not deposited the computed tax and is at fault and not the receiver firm.

On the following rulings, the applicant relied-

• Rimjhim Ispat Ltd. vs. Union of India and others, Writ Tax No. 1611 of 2022
• M/s Solvi Enterprises vs. Additional Commissioner Grade II and another, Writ Tax No. 1287 of 2024
• Suncraft Energy Private Limited and another vs. The Assistant Commissioner, State Tax, MAT 1218 of 2023

Section 16(2)(c) of the Central Act, 2017 furnishes that the tax levied for such supply should be paid to the Government either in cash or through input tax credit, then only ITC can be availed. The petitioner, as per the issuance of notice under section 74, could not place any proof before the authorities that the transaction was bona fide, and a tax invoice, along with transportation of goods and tax deposited by the supplier firm, was placed.

The Allahabad High Court’s Decision

Section 16(2) a non obstante clause: High Court disallows claim of ITC if tax not paid by Supplier

Sub-section (2) of Section 16 is a non-obstante clause, remarking that notwithstanding anything included in Section 16, no registered dealer will be qualified to claim credit of any input tax for any supply of goods or services or both to them unless the prerequisites in the section are met.

Once the tax mandated under sub-section (2)(c) of Section 16 has not been deposited by the supplier, the applicant purchasers cannot take the benefit.

Allahabad HC Affirms Tax Penalty on Buyer

On inquiry, the supplier’s registration was cancelled, and the supplier did not deposit any tax with the government as was needed under sub-section (2)(c) of Section 16 before ITC is claimed. The applicant does not prove that the tax was deposited via the supplier as per the issuance of the tax invoice before the authorities or this court.

As per that, the High Court affirmed the order of the Lower Authorities denying the ITC claim and charging a penalty.