Since the inception of GST, input tax credit has been the biggest roadblock in order to ensure that GST has smoothen the business operations and has eased the compliance burden on the industry. Various amendments, reforms and clarifications have been issued on the said subject matter wherein major issues have been duly taken up and appropriately resolved by the GST Council. However, one of the biggest challenge (rather elephant in the room) has been the statutory condition stipulated in Section 16(2)(c) of the CGST Act, 2017 mandating that applicable taxes have been discharged to the exchequer on the input supplies for which credit is being claimed.

Subsequent to this, the reconciliation of GSTR 2A vis-à-vis the purchase register has also been introduced in a phased manner and has been gradually mandated over the period. However, one of the key issue of the said reconciliation is that a bona-fide purchaser is penalized for the wrongdoings of his vendor which is grossly not in line with the settled laws.

Having said above, it is highly critical to discuss the said matter in order to safeguard the taxpayers from unnecessary credit loss and guide as to how the same can be taken up in case of department litigations. Below are certain grounds basis which the said issue can be analysed and tackled with. 

Conditions with respect to availing input tax credit are duly fulfilled by the taxpayer

  • For ease of reference, the provisions stated under Section 16 of CGST Act, 2017 are re-produced below:

“16. Eligibility and conditions for taking input tax credit. 

Availing ‘Input tax Credit not appearing in GSTR 2A’ and how to tackle the consequent litigations

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. 

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,- 

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed; 

(b) he has received the goods or services or both. 

Explanation.-

For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person. 

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and 

(d) he has furnished the return under section 39:           

…………. 

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. 

………… ”

  • Basis the above provisions, it can be construed that following are the four conditions to avail ITC as per the GST provisions:
  • The recipient is having a valid tax invoice;
  • Goods/ services have been received;
  • Tax charged with respect to such supplies has been actually paid to the Government;
  • Returns for the relevant period have been filed
  • Pursuant to above, a taxpayer can substantiate that it has fulfilled all the conditions as mentioned in Section 16(2) of the CGST Act to avail input tax credit. The same can be as below–

1. Taxpayer is in possession of valid tax invoices for the said purchases. Copy of the said invoices can be produced on a sample basis.

2. Taxpayer has received eligible goods and services from the vendors against the invoices issued by the vendors to the taxpayer.

3. With respect to the condition that payment of tax charged on the invoice should have been paid to the Government by the supplier, it can be submitted that the taxpayer has duly paid the component of GST on the invoice to such goods/ service providers and has availed input tax credit of GST paid. Further, the payment of GST to the Government is the liability of the supplier which is triggered when GSTR 3B is filed by them. Whether the payment has been made or not by the suppliers in GSTR 3B cannot be ascertained by the GSTR 2A available on the portal as GSTR 2A is auto populated from GSTR 1 filed by the suppliers which is not an evidence for payment of taxes. Given that the taxpayer has paid the GST amount to vendors, the third condition is fulfilled by it and the credit has been rightfully availed. Copy of payment proofs for the said purchases evidencing that applicable tax amounts has been discharged to the respective sellers can be produced on a sample basis.

4. Taxpayer has filed all the returns (GSTR 1 and GTSR 3B) within the due dates. In this respect, returns filing status as downloaded from the GST portal can be produced for reference.

  • Having said above, the taxpayer can substantiate that it has availed credit in a bona-fide manner and has fulfilled the applicable conditions prescribed by law to avail ITC. Further, the credit availed by the taxpayer should not be disallowed merely on the ground that the respective seller has not disclosed the relevant invoices in their returns for outward supplies i.e. GSTR-1.
  • Recovery action should be initiated against the seller in case it is established that the seller has collected tax from the purchasing dealers
  • The aforesaid view was upheld by Hon’ble Madras High Court in the case of M/S. D.Y. Beathel Enterprises Versus The State Tax Officer (Data Cell) , (Investigation Wing) Commercial Tax Buildings, Tirunelveli.( 2021 (3) TMI 1020 – MADRAS HIGH COURT) wherein it was held that liability has to be eventually borne by one party, either the seller or the buyer in case tax with respect to a supply has not reached the kitty of the Government. Further, recovery action is required to be undertaken against the seller in case it is established that the seller has collected tax from the purchasing dealers. Relevant extract is produced below:

“12.Therefore, if the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer. In the case on hand, the respondent does not appear to have taken any recovery action against the seller / Charles and his wife Shanthi, on the present transactions.

13.The learned counsel for the petitioners draws my attention to the order, dated 27.10.2020, finalising the assessment of the seller by excluding the subject transactions alone. I am unable to appreciate the approach of the authorities. When it has come out that the seller has collected tax from the purchasing dealers, the omission on the part of the seller to remit the tax in question must have been viewed very seriously and strict action ought to have been initiated against him.

……

16.Therefore, the impugned orders are quashed and the matters are remitted back to the file of the respondent. The stage upto the reception of reply from the petitioners herein will hold good. Enquiry alone will have to be held afresh. In the said enquiry, Charles and his wife Shanthi will have to be examined as witnesses. Parallely, the respondent will also initiate recovery action against Charles and his wife Shanthi.”

“3. Insofar as the restriction of the amount for prior sufferance of taxes, the Assessing Officer was of the view that some of the sellers from whom the petitioner had purchased the goods had not paid tax to the Government. This issue has been dealt with in the case of Assistant Commissioner (CT), presently Thiruverkadu Assessment Circle, Kolathur, Chennai Vs. Infiniti Wholesale Ltd., reported in [2017] 99 VST 341 (Mad), wherein it has held that Input Tax Credit cannot be disallowed on the ground that the seller has not paid tax to the Government, when the purchaser is able to prove that the seller has collected tax and issued invoices to the purchaser. As such, restriction of the amount of Input Tax Credit on this ground, cannot be sustained and requires re-consideration.

  • Assistant Commissioner (CT), Presently Thiruverkadu Assessment Circle, Kolathur, Chennai Versus Infiniti Wholesale Ltd.(2016 (9) TMI 1431 – MADRAS HIGH COURT)

“To say the least, the show-cause notice issued by the assessing officer  proposing to reverse the I. T. C. availed of by the respondent/writ petitioner/dealer is lacking any valid or sustainable basis. If the sales effected to the writ petitioner/dealer are not disclosed by such a seller either in the form of return filed monthly or the tax collected from the writ petitioner/ dealer is not made over to the Department by such seller, the action lies against such a defaulting seller but not against the purchaser. Obviously, the error, if any is not attributable to the writ petitioner/dealer in claiming I. T. C. based upon the invoice generated by its seller, but it is liable against the so-called seller. Instead of trying to cross verify the I. T. C. availed of by the petitioner with specific reference to each one component, action is directed by the assessing officer against the writ petitioner/dealer. In our opinion, the learned single judge (Infiniti Wholesale Limited v. Assistant Commissioner (CT) [2015] 82 VST 457 (Mad)) rightly interfered with, in exercising jurisdiction by setting aside the order of the assessing officer which is prima facie against the principle of law.”

“25. …………….

 When all the conditions precedent have been satisfied, to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed. We may hasten to explicate that we have expressed our opinion as required in the present case pertaining to clauses 4 and 5 of the notification.”

  • Similar view has been upheld in the case of Sri Vinayaga Agencies Versus The Assistant Commissioner (CT)-(2013 (4) TMI 215 – MADRAS HIGH COURT) wherein it was held that the authorities are not empowered to revoke the availed input tax credit on a plea that the selling dealer has not paid the tax. Further, the authorities must proceed against the defaulting seller dealer for recovery of tax and the said liability cannot be casted upon the purchasing dealer who has shown proof of payment of tax on purchases made. Relevant extract is produced below:

“8. It is another matter that the selling dealer has not paid the collected tax and that liability has to be fastened on the selling dealer. It cannot be mulcted on the petitioner-purchasing dealer, which had shown proof of payment of tax on purchases made.

9. Sub-section (16) of Section 19 states that the input tax credit availed is provisional. It, however, does not empower the authority to revoke the input tax credit availed on a plea that the selling dealer has not paid the tax. It only relates to incorrect, incomplete or improper claim of input tax credit by the dealer. It is not so in these cases. In the present case, the petitioner-dealer, admittedly, had paid the tax to the selling dealer and claimed input tax credit and that was accepted at the time when the self-assessment was made. Even the pre-revision notices and the orders under challenge fairly state that the petitioner-dealer had paid tax to the dealer. It is, therefore, for the department to proceed against the selling dealer for recovery of tax in the manner known to law. The provision under which the present action has been initiated, namely invoking sub-section (16) of Section 19, does not appear to be correct on the admitted facts as above. All the revision orders revising the input tax credit on the admitted case of tax having been paid to the selling dealer, therefore, are found to be totally incorrect, erroneous and contrary to the provisions of the TNVAT Act and Rules. As a result, all the orders are liable to be set aside.”

“53. In light of the above legal position, the Court hereby holds that the expression “dealer or class of dealers” occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 of the Act where there is no mismatch of the transactions in Annexures 2A and 2B. Unless the expression “dealer or class of dealers” in Section 9 (2) (g) is “read down” in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.

54. The result of such reading down would be that the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction with a registered selling dealer who has issued a tax invoice reflecting the TIN number. In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however, the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act.

55. Resultantly, the default assessment orders of tax, interest and penalty issued under Sections 32 and 33 of the DVAT Act, and the orders of the OHA and Appellate Tribunal insofar as they create and affirm demands created against the Petitioner purchasing dealers by invoking Section 9 (2) (g) of the DVAT Act for the default of the selling dealer, and which have been challenged in each of the petitions, are hereby set aside.”

The aforesaid judgment was later on affirmed by the Honorable Apex Court as well in the case of Commissioner of Trade and Taxes Delhi versus Arise India Limited (2018 (1) TMI 555 – SC ORDER)

“17. The reasons assigned by the Assessing officer establishes that the petitioner-assessee has fully discharged the burden of proof to claim the deduction of input tax as per the tax invoices but the selling dealer has failed to remit the said collected taxes. The purchaser dealer having paid the amount of VAT to the registered selling dealer, his entitlement to claim input tax credit need not be tagged with the registered selling dealer depositing the said collected tax amount in full or a part thereof. The charging provision of Section 3 provides that the tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered in accordance with the provisions of the Act. Further, the tax shall also to be levied, and paid by every registered dealer or dealer liable to be registered on the sale of taxable goods to him for use in the course of his business, by a person who is not registered under this Act. Indisputably, the petitioner has purchased the goods from a registered dealer not from an unregistered dealer. Section 9 of the KVAT Act provides collection of tax by registered dealers. If there is any default on the part of such registered dealers in not remitting the tax, so collected into the Government treasury or any designated bank and furnish monthly returns as specified under Section 35 to the prescribed authority, the proceedings are required to be initiated against such registered selling dealers in accordance with the provisions of the KVAT Act.

……………

20. In view of admission of the genuine transaction as well as bonafide claim and in the absence of any other allegations made against the purchasing dealer in the assessment orders, merely for the reason that selling dealers have not deposited the collected tax amount or some of the selling dealers have been subsequently deregistered cannot be a ground to deny the input tax credit.

“13. Having heard learned counsels for both the sides and upon going through the peculiar facts of this case, we find that the petitioner firm had acted absolutely in a bona fide manner, as is also apparent from the impugned order dated 20.11.2017, as contained in Annexure-5 to the writ application, and had discharged its tax liability by paying the VAT amount to the selling dealer and had filed its return within time, claiming the applicable ITC, but it was solely due to the laches on the part of the selling dealer, that the return had not been filed by the selling dealer, and the tax amount was not deposited in the Government Treasury. As such, it is apparent that the amount of tax and interest has been saddled upon the petitioner firm and has also been realised by way of garnishee order, which have been challenged in the other writ application, for no fault on part of the petitioner, but solely due to the fault of the selling dealer. We are satisfied that the petitioner had discharged its liability under the VAT Act, and there being no mechanism under the JVAT Act, by which, the petitioner could compel the seller also to discharge their duty, it was not within the competency of the petitioner to compel the selling dealer to file the return within the stipulated time, and deposit the tax collected from the petitioner in the Government Treasury.”

  • The State of Karnataka versus Sri Rajesh Jain (2017 (1) TMI 333 – KARNATAKA HIGH COURT)

“9. We do not find that the matter can be stretched to that extent as sought to be canvassed. Once the purchaser dealer-assessee satisfactorily demonstrates that while purchasing goods, he has paid the amount of VAT to the selling dealer, the matter should end so far as his entitlement to the claim input tax credit.

If the selling dealer has not deposited the amount in full or a part thereof, it would be for the Revenue to proceed against the selling dealer. But thereby the benefit of input tax credit cannot be deprived to the purchaser dealer.”

  • Gheru Lal Bal Chand versus State Of Haryana And Anr.( 2011 (9) TMI 492 – PUNJAB AND HARYANA HIGH COURT)

“To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.  “

On con-joint reading of the above produced judicial pronouncements given by the Apex Court and High Courts of various states, it can be evidently construed that Input Tax Credit cannot be disallowed on the ground that the seller has not paid tax to the Government, when the purchaser is able to prove that the seller has collected tax and issued invoices to the purchaser. As such, restriction of the amount of Input Tax Credit on this ground is non-sustainable.

  • Principle of “lex non-cogit ad impossibilia” is also applicable in the said case basis which the taxpayer cannot be expected to perform something which is impossible to do
  • The maxim “Lex non Cogit Ad impossibilia” means the law does not compel a man to do anything vain or impossible or to do something which he cannot possibly perform. This maxim along with the maxim “Impotentia excusat legam” propagates that when law creates a duty or charge and the party is disabled to perform it, without any default in him, and has no remedy over it, then the law in general will excuse him.
  • In the present case, the fact of payment or otherwise of the tax by the supplier is neither known to the taxpayer nor is the same verifiable. Thereby, it can be said that such condition is impossible to perform and it is a settled principle that the law does not compel a person to do something which he cannot possibly perform. Accordingly, it can be said that the condition, which is not possible to satisfy, need not be satisfied and shall be considered as deemed fulfilled.
  • Moreover, the courts have also adopted this principle and done away with a requirement which is impossible to perform in peculiar facts & circumstances. As elaborated above, the Delhi High Court in the case of On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (Huf) , Damson Technologies Pvt. Ltd., Solvochem, M/S.Meenu Trading Co., & Mahan Polymers Versus Government Of Nct Of Delhi & Ors. & Commissioner Of Trade & Taxes, Delhi And Ors.(2017 (10) TMI 1020 – DELHI HIGH COURT) has held that the purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealer and avoid transacting with such selling dealers. Moreover, the denial of ITC shall be restricted only to the selling dealers who had failed to deposit the tax collected by them and not to punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution. Relevant extract is produced below:

“39. Applying the law explained in the above decisions, it can be safely concluded in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was 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 latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.”

Accordingly, basis the above discussed maxim(s), it is to be noted that the mechanism of filing GSTR 1 pertains to only reporting of invoices by a seller and payment status against the said invoices is not available in the said return. Further, the payment of taxes by a seller is undertaken vide filing GSTR 3B.

Moreover, there may be a possibility wherein the seller has not reported certain invoices in his GSTR 1, however has discharged applicable taxes on the same in his GSTR 3B. Accordingly, the fact that tax has been actually discharged to the exchequer can only be ascertained on the verification of seller. The requirement of verifying the seller with respect to actual payment of taxes to the exchequer is an impossible act for the purchaser and the law doesn’t expect fulfillment of something which is impossible to perform.

Further, the intention of law is not to punish a bona-fide purchaser who has discharged applicable tax amounts to the respective sellers and is in possession of valid tax documents.

Accordingly, it is evident that on fulfillment of above conditions, the taxpayer has availed ITC in a bona-fide manner and has fulfilled the applicable conditions prescribed by law to avail ITC. Further, the credit availed by it should not be disallowed merely on a ground which is impossible to be performed i.e. verifying the actual payment of tax by the sellers.

  • Notwithstanding above, ITC should be allowed to the taxpayer upto the statutory extent basis the provisions of Rule 36(4) of CGST Rules as amended from time to time
  • It is pertinent to note that the Rule 36(4) of CGST Rules, 2017 provides the availability of ITC to the extent of 20%/10%/5% as the case maybe of the eligible ITC appearing in GSTR – 2A in case the relevant details of invoice or debit note is not furnished by supplier in GSTR-1. The relevant provision is reproduced below for your reference:

(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 5 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”

Accordingly, basis the above discussion, it is evident that a taxpayer is eligible to claim credit to the tune of 20%/10%/5% as the case maybe of reconciled ITC in addition to the ITC matched with GSTR 2A of the respective period.

Having said above, it can be concluded that ITC not appearing in GSTR 2A can be claimed on the below grounds (although relief at lower authorities is unlikely and the same is highly litigative):

  • Conditions with respect to availing input tax credit are duly fulfilled by the taxpayer
  • Recovery action should be initiated against the seller in case it is established that the seller has collected tax from the purchasing dealers
  • Principle of “lex non-cogit ad impossibilia” is also applicable in the said case basis which the taxpayer cannot be expected to perform something which is impossible to do
  • ITC should be allowed to the taxpayer upto the statutory extent basis the provisions of Rule 36(4) of CGST Rules as amended from time to time

Author Bio

Qualification: CA in Practice
Company: Hari Ram Agarwala & Associates
Location: New Delhi, Delhi, India
Member Since: 22 Oct 2021 | Total Posts: 2
CA Kartik Bansal is a qualified Chartered Accountant with multiple All India Rank(s) at both CA-IPCC and CA-Final level. He graduated from Hansraj College, Delhi University and has worked with Ernst & Young for 5 years in the indirect taxation domain. He is a practicing Chartered Accountant s View Full Profile

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One Comment

  1. HK says:

    We face this 5% problem constantly, as the 3B amount is increased by GST payable under Reverse Charge Mechanism and can be taken as ITC.
    Not all exempted suppliers provide an invoice or file their returns on the GST website. For example small truck owners.

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