Supplier’s Failure to Pay GST Cannot Deny ITC to Bona Fide Buyer: Tripura HC says ‘Parliament fails to Distinguish Bona Fide Buyers’ [Read Order]

The Tripura High Court has held that the Input Tax Credit ( ITC ) cannot be denied to a bonafide buyer on failure of the Supplier to file GST ( Goods and Services Tax ) returns. The court noted that the parliament failed to distinguish the bonafide buyers in the Section 16(2)(c).

Chief Justice M.S. Ramchandra Rao and Justice S. Datta Purkayastha allowed the petition deciding that “Section 16(2) (c) of the Act is held not violative of Art.14, 19(1) (g) or 265 or 300-A of the Constitution of India but Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue.”

A petition was filed by M/s Sahil Enterprises, a registered dealer engaged in trading rubber products. The company purchased goods from a registered supplier, M/s Sentu Dey, during the period July 2017 to January 2019 after paying GST amounting to ₹1.11 crore.

The supplier reported the outward supplies in GSTR-1 but filed nil GSTR-3B returns and failed to remit the tax collected to the Government.

After investigation against the supplier, the GST authorities blocked the petitioner’s electronic credit ledger. The department issued a show cause notice under Section 73, proposing reversal of ITC with interest and penalty, solely on the ground that the supplier had not paid the tax.

The petitioner’s counsels Adv. Naveen Bindal, Adv. Mukul Singla and Adv.Prabal Kumar Ghosh submitted that denial of ITC in such circumstances was arbitrary, unreasonable, and violative of Articles 14, 19(1)(g), 265, and 300-A of the Constitution.

It was argued that the GST Act provides no mechanism for a purchaser to verify whether the supplier has actually paid tax through GSTR-3B.

The authorities, on the other hand, defended the provision, submitting that ITC is a conditional benefit and that courts should exercise restraint in interfering with fiscal legislation.

The High Court admitted that while Section 16(2)(c) is constitutionally valid, however its application imposes an impossible and disproportionate burden on bona fide purchasers.

The bench noted that “there is a failure by the Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.”

The purchasing dealer cannot be asked to do the impossible, that is, to identify a selling dealer who will not deposit with the Government the tax collected by him from purchasing dealers, and avoid transacting with such selling dealers, said the court.

The court citing numerous decisions of both Supreme court and high courts concluded that the transactions between the purchaser and the seller were genuine. Therefore the petitioner cannot be penalised by invoking Section 16(2) (c) of the Act and denied the ITC.

The order was set aside directing the department to allow the petitioner ITC to the extent of Rs.1,11,60,830/- denied to it.

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