ITC on VAT cannot be Denied to Registered Purchasers for Seller’s Failure to Deposit Tax with Govt: Supreme Court [Read Judgement]

The Supreme Court has held that Input Tax Credit (ITC) under the Delhi Value Added Tax Act, 2004 (DVAT Act) cannot be denied to registered purchasing dealers merely because the registered selling dealer failed to deposit the VAT collected from them, with the government as the fault lies with the defaulting selling dealer in such a case and not against a bona fide purchaser who has paid tax in good faith.

The ruling was delivered by the apex court in a batch of appeals, with the leading case filed by the Commissioner of Trade and Tax, Delhi against M/s Shanti Kiran India (P) Ltd.

The matter arose when the Department denied ITC to purchaser-dealers on the ground that the selling dealers, though registered at the time of transaction, had defaulted in depositing the tax collected to the government. In the prior appeal, the Delhi High Court had allowed the benefit of ITC to the purchasers after verifying that they were bona fide dealers who had paid VAT against valid tax invoices issued by registered sellers.

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The department was represented by N. Venkataraman, Additional Solicitor General, Mukesh Kumar Maroria, Udai Khanna, V.C. Bharathi, B.K. Satija and Gaurang Bhushan while the respondent purchaser-dealer was represented by Varinder Kumar Sharma.

The Supreme Court examined the impugned decision of the Delhi High Court, also alluding the High Court’s earlier judgment in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017).

In On Quest (supra), the Delhi High Court had “read down” Clause (g) of Section 9(2) of the DVAT Act to hold that ITC could not be denied to purchasing dealers who entered into bona fide transactions with validly registered selling dealers, where tax invoices had been properly issued and there was no mismatch in the records.

The Delhi High Court further noted that if the provision were to be interpreted differently, Section 9(2)(g) would violate Article 14 of the Constitution. Accordingly, the Delhi High Court had clarified that in such an instance, the remedy available to the Department was to recover unpaid tax from the defaulting seller and not from the purchasing dealer, unless there existed material to establish that there was collusion between the two parties.

The Bench of Justice Manoj Misra and Justice Nongmeikapam Kotiswar Singh noted that there was no dispute about the sellers’ registration status on the date of transactions and no evidence questioning the genuineness of invoices. In such circumstances, the Supreme Court found no reason to interfere with the order of the Delhi High Court directing the grant of ITC to the purchasers after due verification.

Accordingly, the Supreme Court concluded that there was no merit in the appeals instituted by the Department and dismissed them in full, thereby reaffirming that bona fide purchasers cannot be penalised for a seller’s failure to deposit VAT with the government and proceeded to dismiss the appeal.

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