ITC Cannot Be Denied to Bona Fide Purchaser Solely Because Seller Fails to Remit Tax: Kerala HC [Read Order]
The Kerala HC held that input tax credit cannot be denied to a bona fide purchaser solely because the seller failed to remit tax to the government.
![ITC Cannot Be Denied to Bona Fide Purchaser Solely Because Seller Fails to Remit Tax: Kerala HC [Read Order]](https://images.taxscan.in/h-upload/2025/07/29/2070304-kerala-hc-itc-cannot-bona-fide-purchaser-taxscan.webp "ITC Cannot Be Denied to Bona Fide Purchaser Solely Because Seller Fails to Remit Tax: Kerala HC [Read Order]")
In a recent ruling, the Full Bench of the Kerala High Court held that input tax credit (ITC) cannot be denied to a bona fide purchasing dealer solely because the selling dealer failed to remit the tax to the government. The petitioner, S.P. Faizal, was a registered dealer under the Kerala Value Added Tax Act, 2003. He purchased goods from registered sellers and claimed ITC based on...
In a recent ruling, the Full Bench of the Kerala High Court held that input tax credit (ITC) cannot be denied to a bona fide purchasing dealer solely because the selling dealer failed to remit the tax to the government.
The petitioner, S.P. Faizal, was a registered dealer under the Kerala Value Added Tax Act, 2003. He purchased goods from registered sellers and claimed ITC based on valid tax invoices. The department denied the credit because the sellers did not deposit the tax collected on those transactions.
Aggrieved by the denial, the petitioner challenged the assessment, and the matter was referred to a Full Bench in view of conflicting decisions from different High Courts. The petitioner’s counsel argued that he had complied with all statutory conditions under the KVAT Act for claiming ITC, including purchasing from registered dealers and possessing valid tax invoices.
How to Audit Public Charitable Trusts under the Income Tax Act Click Here
They pointed out that the definition of input tax under Section 2(xxiii) of the Act covers tax “paid or payable,” and nowhere does the law require the purchaser to ensure that the seller actually remits the tax.
The State’s counsel argued that ITC is a concession and not an absolute right. They argued that if tax is not actually credited to the government’s account, allowing ITC would create a revenue loss. The counsel further argued that buyers must ensure compliance by sellers and that returns must match for ITC to be granted.
The Full bench comprising Justices Devan Ramachandran, Gopinath P., and Mohammed Nias C.P. observed that the purchasing dealer had fulfilled all legal requirements. The court found no provision in the KVAT Act that imposes a duty on the purchaser to verify the seller’s tax payment.
Complete Guide to Reassessment: Comprehensive Topic-wise Analysis, Circulars, Case Laws & Practical Insights, Click Here
The court observed that punishing a bona fide buyer for the seller’s default would be unjust and contrary to the object of the VAT regime, which is to allow seamless credit and avoid tax cascading.
The court held that input tax credit cannot be denied when the purchaser has complied with all legal obligations, including maintaining valid tax invoices and dealing with registered dealers.
The court ruled that the department must proceed against the defaulting sellers instead of penalising the buyers. The earlier judgment in C.P. Rasheed was overruled, and the writ petition was allowed.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
