Purchaser Cannot be Penalised for Supplier’s GST Default: Gauhati HC Quashes ITC Denial, allows Probe if Transactions Found Non-Genuine [Read Order]

The Gauhati High Court has again confirmed that a bona fide purchaser cannot be denied Input Tax Credit (ITC) merely because the supplier allegedly failed to deposit GST ( Goods and Services Tax ) with the Government.

The Court quashed GST demand, interest and penalty proceedings initiated against M/s Narayan Enterprise, the petitioner while allowing the authorities to proceed against the purchasing dealer if material exists to show that the transactions were not genuine or were entered into in collusion with the suppliers.

As per the facts, the proceedings were initiated against M/s Narayan Enterprise, a Silchar-based proprietorship concern engaged in the business of scrap and waste batteries.

The authorities alleged that the assessee had wrongly availed and utilized ITC amounting to ₹22.22 lakh during the period from May 2018 to March 2019 on the basis of invoices issued without actual supply of goods.

Based on these allegations, the department confirmed tax demand of ₹22.22 lakh along with interest and an equivalent penalty under Section 74 of the CGST Act. The appellate authority subsequently upheld the demand.

The petitioner contended that it had purchased goods from suppliers located in Kolkata, received the goods physically, and made payments including GST through proper banking channels. The purchases were supported by tax invoices and reflected in statutory GST returns

The petitioner contested the denial of Input Tax Credit (ITC), stating they had provided all necessary records and passed a 2019 premise search without issue. They argued that penalizing a bona fide purchaser who already paid the full invoice value and tax for a supplier's failure to discharge their GST liabilities is unjust, as buyers have no control over the supplier.

Furthermore, the petitioner also asserted that the department failed to provide opportunity of hearing and it also delayed service of notices.

The Division Bench's prior ruling in National Plasto Moulding v. State of Assam addressed the issue, the High Court observed during the hearing. The Delhi High Court's decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, which held that a valid purchasing dealer cannot be expected to make sure the selling dealer deposits the tax collected from him with the Government, was cited by the Court in that particular case.

The bench of Justice Kardak Ete observed that “where a purchasing dealer has entered into transactions bona fide with a registered supplier and has complied with the statutory requirements, denial of input tax credit solely on account of failure of the supplier to deposit tax would not be justified. The remedy of the Department, in such circumstances, lies against the defaulting supplier and not against a bona fide purchaser.”

Therefore, the Court quashed the appellate order and the Order-in-Original. However, if it becomes clear that the transactions were not legitimate or were carried out in conjunction with the suppliers, GST authorities were permitted to take necessary action.

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