Introduction
The eligibility of Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime has been a subject of extensive litigation and judicial scrutiny. One recurring issue concerns the denial of ITC to a purchaser on the grounds that the registration of the supplier was cancelled retrospectively, despite the transaction being genuine and duly reflected in statutory returns.
A recent judgment by the Hon’ble Allahabad High Court in M/s. Sri Sai Traders vs. State of U.P. & Ors. has once again brought this issue into the spotlight, ruling in favour of the assessee and reinforcing the principle that bonafide purchasers cannot be penalised for the post-facto conduct or status of their suppliers.
This article analyses the key facts of the case, the applicable GST provisions, judicial precedents, and the evolving stance of courts on the protection of bona fide purchasers claiming ITC.
Background of the Case
In the case of Sri Sai Traders, the petitioner purchased goods from a registered supplier, and the transactions were duly recorded in the books of accounts. These purchases were also reflected in the petitioner’s GSTR-2A. Subsequently, the supplier’s registration was cancelled retrospectively.
The Revenue, invoking Section 16(2)(c) and Rule 36 of the CGST Rules, disallowed the ITC on the grounds that the tax charged by the supplier was not deposited with the Government due to cancellation of the supplier’s registration.
Relevant Legal Provisions
1. Section 16 of the CGST Act, 2017 – Conditions for Taking Input Tax Credit
Key conditions under Section 16(2) include:
- Possession of a tax invoice.
- Receipt of goods or services.
- Tax has been actually paid to the Government (Section 16(2)(c)).
- Filing of the return under Section 39.
2. Rule 36 of CGST Rules, 2017 – Documentary Requirements
This rule emphasizes invoice-based matching and reconciliation with GSTR-2A/2B for claiming ITC. However, GSTR-2A is only a dynamic, auto-populated record and not the conclusive evidence of ITC eligibility.
3. Section 74 of the CGST Act – Determination of Tax Not Paid or Short Paid
This provision is invoked in case of fraud, willful misstatement, or suppression of facts, and is often misused by authorities to initiate proceedings against buyers when a seller defaults.
Key Judicial Observations in Sri Sai Traders Case
The Hon’ble High Court made the following significant observations:
- No fault of the purchasing dealer: The petitioner had complied with all the requirements under Section 16, including the presence of the transaction in GSTR-2A.
- No requirement to verify seller’s conduct: A purchasing dealer cannot be expected to police the affairs of the selling dealer or ensure their continuous registration.
- Violation of natural justice: The order was passed without providing the petitioner an adequate opportunity of being heard, violating the principles of natural justice.
- Retrospective cancellation cannot affect vested rights: The court emphasized that retrospective cancellation of GSTIN cannot be used as a ground to deny ITC if the transactions were genuine and completed before the date of cancellation.
Other Key Judicial Precedents Supporting Assessee
- M/s. LGW Industries Ltd. vs. Union of India [Calcutta HC, 2021]
Held that a bona fide purchaser cannot be penalized for the seller’s default when purchases were genuine and supported by valid documents. - M/s. Tarapore and Co. vs. Union of India [Madras HC, 2022]
Emphasized that Section 16(2)(c) cannot be invoked arbitrarily to deny ITC where the tax has not been paid by the supplier, unless the buyer is complicit. - M/s. Arise India Ltd. vs. Commissioner of Trade & Taxes [SC, 2018 – Delhi VAT case]
Though under the VAT regime, the Supreme Court upheld that ITC cannot be denied if the transaction is genuine and supported by proper documentation.
Government Clarifications and Circulars
- CBIC Circular No. 59/33/2018-GST dated 04.09.2018
Clarified that ITC shall not be denied on the sole ground of mismatch unless there is conclusive evidence of fake or bogus transactions. - CBIC’s recent instruction on ITC verification (2022-23)
Emphasizes use of risk-based data analysis rather than blanket denial, and directs officers to avoid mechanical denial of credit.
Practical Implications for Businesses
A. For Bona Fide Purchasers
- Ensure that the supplier is registered at the time of supply.
- Retain all supporting documents – invoices, e-way bills, payment proofs.
- Cross-check supplier compliance to the extent reasonably possible.
- Download and preserve GSTR-2A and GSTR-2B as contemporaneous evidence.
B. For GST Officers and Assessing Authorities
- Cannot deny ITC without determining purchaser’s involvement in fraud.
- Must follow natural justice and provide an opportunity to be heard.
- Should not rely solely on retrospective cancellation of GSTIN.
Contrasting with Fake ITC Cases
It is important to distinguish between:
- Fraudulent ITC claims (e.g., no actual supply, circular trading) – where denial is justified, and,
- Genuine transactions with defaulting suppliers – where denial penalizes innocent purchasers.
The Hon’ble Supreme Court in Union of India vs. Bharti Airtel Ltd. (2021) also emphasized balancing revenue protection with ensuring smooth credit flow to legitimate taxpayers.
Latest Updates and Developments
- GST Council’s Recommendation (50th Council Meeting, 2023)
Suggested a mechanism to protect genuine buyers by introducing a due diligence rating or safe harbour norms. - Proposal to amend Section 16(2)(c)
Discussion paper floated to link ITC denial with proven collusion or knowledge of default, rather than automatic reversal. - AI and Data Analytics for Risk Profiling
GSTN is increasingly using AI tools to profile risky suppliers, which might reduce indiscriminate denial of credit to buyers.
Conclusion
The judgment in Sri Sai Traders is a welcome reiteration of the fundamental GST principle – “No unjust denial of credit for genuine taxpayers.” ITC is a vested right, and denial of the same merely due to the retrospective cancellation of a supplier’s registration, without evidence of collusion or fraud, is unjust and contrary to the spirit of GST.
It is imperative for authorities to distinguish between tax evasion and procedural lapses, and not impose disproportionate hardship on genuine businesses. This ruling also affirms that GST compliance should be driven by data, reasonableness, and justice — not rigidity or fear.
For further professional advice or case-specific consultation, do not hesitate to connect with your Chartered Accountant.
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