ITC Cannot Be Denied for Seller’s Default: Supreme Court

Commissioner of Trade and Tax, Delhi, Versus Shanti Kiran India (P) Ltd.

In a welcome decision that brings much-needed clarity and fairness to the ITC regime, the Supreme Court has once again held that a genuine buyer cannot be denied input tax credit merely because the seller failed to deposit tax or later had their registration cancelled. The Court emphasised that when a purchaser buys goods from a dealer who is validly registered at the time of the transaction and pays tax in good faith, the law does not permit the department to shift the burden onto the buyer for lapses committed by the seller. This ruling, although delivered in a VAT case, carries strong persuasive value in today’s GST landscape, where similar disputes have become increasingly common.

Core Issue

The Supreme Court examined whether a bona fide purchasing dealer can be denied Input Tax Credit (ITC) under the Delhi VAT Act when the selling dealer was duly registered on the date of the transaction, the purchaser paid tax as per the invoice, but the seller later failed to deposit the tax or had its registration cancelled.

Key Facts

• The purchasing dealers (respondents) bought goods from registered selling dealers and paid them VAT as per invoices.

• At the time of each transaction, sellers were fully registered.

• After the transactions, the sellers’ registration was cancelled, and they defaulted in depositing the VAT collected.

• The department attempted to deny ITC to the buyers due to this seller-side default.

High Court’s Findings (Upheld by SC)

The Delhi High Court held that:

• Buyers acted bona fide,

• Sellers were registered at the time of purchase, and

• Invoices were genuine and undisputed.

Therefore, ITC cannot be denied merely because the seller subsequently:

• Failed to deposit VAT,

• Became non-traceable,

• Or had its registration cancelled.

The High Court also held that the amendment to Section 9(2)(g) (effective 1-4-2010) was not clarificatory and could not apply retrospectively.

Supreme Court’s Ruling

The Supreme Court affirmed the High Court’s decision and dismissed the appeals.

Important observations:

• The selling dealer was registered on the date of the transaction — that is the decisive factor.

• The department did not dispute the authenticity of invoices or the validity of purchases.

• If the seller defaults in paying tax, the proper remedy is for the department to proceed against the seller, not the buyer.

• The Court relied on its earlier principles and the Delhi HC’s landmark judgment in On Quest Merchandising India Pvt. Ltd.

• Since no evidence of collusion was found between buyer and seller, ITC must be granted.

Cases Relied Upon / Referred

• On Quest Merchandising Pvt. Ltd. v. Govt. of NCT of Delhi (Delhi HC): Read down Section 9(2)(g); held that bona fide buyers cannot be penalised for the seller’s default.

• Commissioner of Trade & Taxes v. Arise India Ltd. (SC 2022): Reiterated similar principles in the context of VAT.

Final Holding

The Supreme Court held that ITC cannot be denied to purchasing dealers when:

• The seller was registered at the time of sale,

• Purchaser paid tax in good faith,

• Invoices are genuine,

• No collusion is established.

Appeals dismissed — decision in favour of the assessee.

How This Judgment Helps Taxpayers Today (Especially Under GST)

Although the case arises under VAT law, it has significant persuasive value in the GST era, where the department frequently issues notices denying ITC due to:

• Supplier not filing GSTR-3B,

• Supplier being cancelled retrospectively,

• Supplier not paying tax,

• Supplier marked as fake/non-existent,

• Supplier absconding,

• ITC mismatch under Sections 16(2)(c), 42, 43A, or Rule 36(4).

Why is this judgment relevant for GST:

Constitutional principle reaffirmed:

A bona fide taxpayer cannot be penalised for someone else’s default unless collusion is proved. This is rooted in Article 14 (non-arbitrariness) and was recognised both in VAT and GST contexts (Arise India, On Quest Merchandising, and now Shanti Kiran).

Departments must proceed against the seller, not the buyer

The Supreme Court has again emphasised:

If the seller collected tax and did not deposit it, the department’s remedy lies against the seller — not the innocent buyer.

Under GST, this strengthens the argument that:

• Non-payment by supplier (Section 16(2)(c)) cannot be enforced against a buyer without proving active collusion.

Retrospective cancellation of registration should not harm a bona fide buyer

If the supplier was registered on the date of supply, ITC must not be denied simply because:

• Registration was cancelled later,

• Or cancellation was made retrospective without the buyer's fault.

This aligns with many High Court judgments (Madras, Delhi, Gujarat, Punjab & Haryana).

The Burden of proof is on the department

The department must show:

• The invoices are fake,

• Goods were not received,

• Or the buyer was involved in fraud.

Mere supplier non-compliance is not sufficient.

Helps counter Section 16(2)(c) notices under GST

Most GST show cause notices rely on:

“Supplier has not deposited the tax.”

Citing Shanti Kiran India (P) Ltd. helps assert that:

• The buyer cannot be denied ITC due to the acts of the supplier,

• Especially when the seller was registered on the date of the transaction,

• And the buyer has a tax invoice, payment proof, e-way bill, goods receipt, etc.

Reinforces principles of natural justice

The buyer must not suffer disproportionate consequences for reasons outside their control. Thus, relying on the principles of Lex non cogit ad impossibilia.