Delhi HC shields bona fide purchasers from ITC denial due to seller’s tax default

In a significant judgment, the Delhi High Court addressed the issue of Input Tax Credit (ITC) denial to purchasers when selling dealers fail to deposit Value Added Tax (VAT) with the government. The case, Arun Jain (HUF) Vs Commissioner, closely examined Section 9(2)(g) of the Delhi Value Added Tax (DVAT) Act, which allowed authorities to initiate proceedings against both buyers and sellers for unpaid tax. The Court’s decision primarily aims to protect purchasers who have diligently followed tax procedures.

VAT, as defined by Section 2(1)(r) of the DVAT Act, is an indirect tax. While the seller is liable to pay it to the government, the economic burden is passed on to the buyer as part of the purchase price. For a purchaser to claim ITC, the DVAT Act mandates verification of the selling dealer’s registration and obtaining a valid tax invoice. However, the Court acknowledged a crucial practical limitation: a purchaser cannot reasonably track whether the seller has actually deposited the tax with the government. Furthermore, purchasing dealers have no access to the selling dealer’s confidential tax returns under Section 98(1), making it impossible to confirm proper disclosure of transactions, unless such details are publicly released by the Commissioner.