ITC Cannot be Denied Solely on Seller’s Default: Landmark Allahabad HC Ruling

In a significant decision involving Section 16(2)©, the Allahabad High Court in R.T. Infotech vs. Additional Commissioner Grade-2 & Others (Writ Tax No. 1330 of 2022) quashed an Input Tax Credit (ITC) denial order solely on the grounds that the selling dealer had failed to deposit tax. This judgment has come in the context of section 16(2)© which has been a bone of contention between the tax payer and the department since long. The Court emphasized that a bona fide purchaser who has paid GST via banking channels on valid tax invoices cannot be penalized for the seller’s non-compliance.

This judgment, delivered by Hon’ble Justice Piyush Agrawal on 30th May 2025, adds to a growing body of jurisprudence shielding genuine taxpayers from cascading consequences of defaults committed by their suppliers.

Factual Background

• Petitioner: R.T. Infotech, a registered GST dealer and authorized distributor for Bharti Airtel Ltd.
• Disputed Period: July 2017 to March 2018
• Amount Involved:
• • Total invoice value: ₹1,58,46,502
  • ITC claimed: ₹28,52,370 (CGST ₹14,26,185 + SGST ₹14,26,185)

The petitioner procured mobile recharge services from Bharti Airtel Ltd. and paid the entire tax amount via RTGS against valid tax invoices. However, the revenue authorities denied the ITC under Section 16(2)(c) of the CGST Act, citing that the supplier had not deposited the corresponding tax with the government, hence ITC cannot be allowed to the recipient

Department’s Stand

Department took the view that ITC can be confirmed only when the seller has paid due taxes to the Government under section 16(2)©. Since there was no reflection of the tax deposit in the government’s system, the petitioner was issued a Show Cause Notice under Section 73, and later, the ITC was disallowed with penalty and interest.

Petitioner’s Arguments

The petitioner argued that:

• All purchases were backed by valid tax invoices.
• GST was paid through proper banking channels (RTGS).
• Responsibility for deposit of tax lies with the supplier, and the buyer has no mechanism to ensure such deposit. Buyer has no control over the affairs of the seller and certainly cannot compel the seller to do compliances which is required on his part.
• Recovery proceedings, if any, should be initiated against the defaulting supplier, not the bona fide purchaser.

The petitioner relied on key judicial precedents:

• Suncraft Energy Pvt. Ltd. vs. ACST (2023) – Supreme Court dismissed SLP against Kolkata HC decision.
• D.Y. Beathel Enterprises vs. STO (2021) – Madras High Court held that department should first proceed against the defaulting seller, before any recourse to the buyer.

High Court’s Observations

The Court observed:

“The petitioner cannot be penalized for the non-performance of duties by the selling dealer. The purchaser has no control over whether the seller files return or deposits the tax.”

It was further noted that:

• Payment was made through RTGS against genuine invoices.
• Action against the supplier had already been initiated by the tax department.
• The buyer had fulfilled all statutory obligations diligently.
• The purchasing dealer cannot be left at the mercy of the selling dealer.

Verdict

The Hon’ble High Court quashed the ITC denial orders and remanded the matter for fresh adjudication, instructing the authorities to pass a reasoned and speaking order after hearing all stakeholders within two months.

Key Takeaways

1.Reinforces Buyer Protection: A bona fide purchaser cannot be held accountable for the seller’s default if payment has been made through valid banking channels.

2. Burden on Department: Authorities must take action against the defaulting supplier before denying ITC to the buyer.

3. Judicial Alignment: Aligns with the evolving jurisprudence under GST, including landmark rulings by the Supreme Court and High Courts.

4. Clarity on Section 16(2)(c): This provision must be interpreted reasonably to avoid penalizing the innocent.

Concluding Remarks

In my opinion, what comes out of this judgment is that though the law provides that for ITC to be made available to the buyer, it is mandatory that the seller must have paid the due tax either through e credit ledger or through e cash ledger to the Government on outward supplies made by him to the buyer. This is understandable from the view point that the Government should receive tax before credit for the same can be given to the buyer. However, there is a flip side to it that the buyer does not have control or access to the affairs of the seller. Once they have made full payment to the buyer along with GST, it is the duty of the seller solely to remit the tax collected to the exchequer as he then holds the same as custodian for the Government. In case he makes any default then the department must first initiate action against him and seek to recover the same from him. Otherwise coming directly at the buyer would mean that there is double taxation on the same transaction. Certainly, there has to be some consideration and section 16(2)© should not be invoked in arbitrary or mechanical manner.

The Allahabad High Court’s ruling is a welcome relief for taxpayers who often face denial of due to factors beyond their control. It emphasizes that compliance responsibility cannot be one-sided, and the tax administration must take equitable and lawful actions. This judgment will undoubtedly influence how similar disputes are adjudicated in the future and may set the stage for more robust checks on errant suppliers rather than compliant purchasers.