ITC Cannot Be Denied Merely Because Supplier’s Registration Got Cancelled Subsequently: Allahabad HC Sets Aside GST ITC Reversal [Read Order]

The Allahabad High Court has set aside the reversal of Input Tax Credit (ITC) under the GST law, holding that a bona fide purchaser cannot be denied credit when the supplier was duly registered on the date of transaction, had filed GSTR-1 and GSTR-3B returns, and the tax stood deposited with the department.

The Court found that the authorities proceeded on assumptions of fictitious transactions despite the statutory data and payment trail being undisputed.

M/s Saniya Traders, a scrap trader engaged in the supply of waste and plastic scrap, had purchased old scrap batteries from a Bihar-based dealer in June 2021. The supplier issued a tax invoice and e-way bill, disclosing the transaction in its GSTR-1.

The Court noted that the supplier also filed GSTR-3B for the relevant period, resulting in auto-population of GSTR-2A for the purchaser, leading to confirmation of tax payment under Section 49 of the GST Act. The payment was carried out through banking channels.

A subsequent investigation by Bihar State Tax authorities led to proceedings under Section 74 of the CGST/UPGST Act against the purchaser. The authorities alleged that several entities in the supply chain were non-existent and had engaged in bogus invoicing. The assessing authority treated the transaction as non-genuine and reversed ITC of Rs. 4.17 lakh along with interest and equal penalty, which was later affirmed in appeal.

The Bench, comprising Justice Piyush Agrawal, observed that the authorities had ignored crucial statutory documents. The supplier’s returns and tax deposit were on record, yet the impugned orders did not find mention of GSTR-3B or the auto-populated GSTR-2A, which the Court treated as significant indicators of genuineness.

The High Court reiterated that once the supplier has deposited the tax and the purchaser has fulfilled all conditions under Section 16, ITC cannot be denied merely because the supplier’s registration was cancelled at a later date.

In order to conclude, the Court relied upon the Supreme Court’s decision in Shakti Kiran India (P.) Ltd., holding that a purchaser cannot be penalised for subsequent cancellation of a supplier’s GST registration when the transaction was valid at the time of supply.

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The Bench further relied upon Solvi Enterprises and Safecon Lifescience, which established that Section 74 proceedings are attracted only in cases of fraud, wilful misstatement, or suppression, none of which existed in the present case.

Finding that the authorities failed to take the evidence into account and did not dispute tax payment or the supplier’s contemporaneous registration, the High Court quashed the orders passed under Section 74 and allowed the writ petition.

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