The Tripura High Court has ruled that Input Tax Credit (ITC) cannot be denied to a bona fide purchaser solely due to the supplier’s failure to file GST returns.
The Court observed that Section 16(2)(c) of the CGST Act does not distinguish between compliant suppliers and bona fide buyers, and therefore penalising the buyer for the supplier’s default is unsustainable in law.
Chief Justice M.S. Ramchandra Rao and Justice S. Datta Purkayastha permitted the petition determining that “Section 16(2) (c) of the Act is held not violative of Art.14, 19(1) (g) or 265 or 300-A of the Constitution of India but Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue.”
The petition was filed by M/s Sahil Enterprises, a registered dealer involved in the trade of rubber products. Between July 2017 and January 2019, the firm purchased goods from a registered supplier, M/s Sentu Dey, and paid GST totalling ₹1.11 crore.
The supplier has reported their outward supplies in GSTR-1; however, they submitted nil returns for GSTR-3B and did not remit the tax collected to the Government. This situation may indicate potential compliance issues that need to be addressed.
The GST authorities post investigation against the supplier, blocked the electronic credit ledger of the applicant. An SCN was issued by the department u/s 73, asking for the ITC reversal with interest and penalty only based on the fact that the supplier has not filed the tax.
The counsels for the petitioner, Adv. Naveen Bindal, Adv. Mukul Singla, and Adv. Prabal Kumar Ghosh argued that the denial of Input Tax Credit (ITC) under the given circumstances was arbitrary and unreasonable. They contended that this action violates several provisions of the Constitution, specifically Articles 14 (right to equality), 19(1)(g) (right to practice any profession), 265 (taxation by law), and 300-A (protection of property rights).
It was mentioned that the GST Act furnishes no procedure for a purchaser to validate whether the supplier has actually filed the tax via GSTR-3B.
The authorities defended the provision, citing that ITC is a conditional advantage and that courts need to exercise restraint in interfering with fiscal legislation.
The High Court acknowledged that while Section 16(2)(c) is constitutionally valid, its application imposes an unreasonable and disproportionate burden on bona fide purchasers.
The bench mentioned that “there is a failure by the Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is a need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.”
Read Also: Gauhati HC: GST Tax Credit Cannot Be Denied to Bona Fide Buyers for Supplier Defaults
The court stated that the purchasing dealer cannot be expected to do the impossible, specifically, to identify a selling dealer who will not deposit the tax collected from purchasing dealers with the government. Therefore, it is unrealistic to require purchasing dealers to avoid doing business with such selling dealers.
Quoting numerous decisions of both the Supreme Court and the high courts, the court concluded that the transactions between the purchaser and the seller were genuine. Hence, the applicant could not be penalised by invoking Section 16(2) (c) of the Act and rejected the ITC.
The order was set aside by asking the department to permit the applicant ITC to the extent of Rs 1,11,60,830, which was denied.
| Case Title | M/S. Sahil Enterprises vs. Union of India |
| Case No. | WP(C) No.688 of 2022 |
| For the Petitioner | Mr Naveen Bindal, Mr Mukul Singla, and Mr Prabal Kumar Ghosh |
| For Respondent | Mr Bidyut Majumder, Mr Bibhal Nandi Majumder, Mr Biplabendu Roy, and Mr Elembrok Debbarma |
| Tripura High Court | Read Order |
