ITC cannot Be Denied Merely Because Supplier’s Suppliers Defaulted: Allahabad HC [Read Order]

In a recent ruling, the Allahabad High Court held that the GST Department cannot deny Input Tax Credit (ITC) on genuine transactions supported by valid documents merely because the supplier’s suppliers failed to deposit tax.

Safecon Lifescience Pvt. Ltd., engaged in the trading and manufacturing of medicines, filed a writ petition challenging the orders dated 12 January 2022 passed by the Deputy Commissioner of the Commercial Tax and 20 December 2022 order passed by the Additional Commissioner (Appeal).

The petitioner had purchased medicines from Unimax Pharma Chem, a registered GST dealer and drug licence holder at the time of supply. The purchases were made against proper tax invoices, e-way bills, transport bills and payments through banking channels. The supplier also filed GSTR-1 and GSTR-3B returns reflecting the tax payment.

The petitioner’s counsel argued that ITC was correctly claimed since the transactions were genuine, duly documented, and taxes were paid through the banking system. They further argued that the authorities wrongly denied ITC on the ground that the supplier’s own suppliers had not deposited tax, even though there was no fraud, wilful misstatement, or suppression of facts by the petitioner.

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The counsel relied on the CBIC circular dated 13 December 2023 and the decision of the High Court in M/s Khurja Scrap Trading Company v. Additional Commissioner.

The department’s counsel argued that since Unimax Pharma Chem had made purchases from firms whose registration had been cancelled and who had not deposited tax, the petitioner could not claim ITC on purchases made from such a supplier.

The single-judge bench comprising Justice Piyush Agrawal observed that the petitioner had produced invoices, e-way bills, transport records, bank payments, and GST returns of both purchaser and supplier, which showed actual movement of goods and payment of tax.

The authorities did not rebut this evidence and passed orders only on the basis of an intelligence report from the Central Excise and Tax Department without verifying it or providing it to the petitioner. The court explained that Section 74 of the UPGST Act can be invoked only in cases of fraud, wilful misstatement, or suppression of facts with intent to evade tax, none of which were established in this case.

The court observed that denial of ITC in such circumstances was unjustified and contrary to law. It held that the proceedings under Section 74 were not sustainable.

The court quashed both the impugned orders of the Deputy Commissioner and the Appellate Authority. The writ petition was accordingly allowed.

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