ITC denial not Justified when Supplier’s Registration was cancelled after the transaction despite all ITC conditions being satisfied.
Proceedings under Section 74 of the U.P. Goods and Services Tax Act were initiated against the petitioner for the tax period June 2018, Financial Year 2018-19, by issuing a notice dated 07.09.2022. In response, the petitioner submitted detailed replies on 06.10.2022 and 25.10.2023, enclosing all relevant supporting documents such as the tax invoice, bank statements, bilty, the supplier’s tax invoice, the e-Way Bill, ledger, RCM tax invoice, GSTR-2A, and complete details of the supplier. However, without properly considering the documentary evidence placed on record, the authority proceeded to pass the order dated 17.11.2023. Subsequently, a recovery notice in Form DRC-07 was also issued against the petitioner.
Aggrieved by the said order, the petitioner filed a first appeal, specifically asserting that the goods had been intercepted in Chhattisgarh and that a rubber stamp had been endorsed on the e-Way bill during such interception. Despite this clearly recorded ground demonstrating the actual movement of goods, the appellate authority, by the impugned order dated 24.12.2024, dismissed the appeal.
Against the said order, the petitioner approached the Hon’ble High Court of Allahabad by filing a petition in M/S Kesarwani Traders vs. State of U.P. and 3 Others, WRIT TAX No. 1235 of 2025, decided on 18.08.2025. The petitioner contended before the Court that once the goods had been intercepted and verified by the Chhattisgarh mobile squad, the movement of goods could not be treated as forged or merely a paper transaction. It was further submitted that although the selling dealer’s registration was cancelled on 28.09.2018, the transaction in question had taken place prior to such cancellation, and on the date of the transaction, the supplier held a valid GST registration. Therefore, no adverse inference could be legally drawn against the petitioner so as to justify reversal of the Input Tax Credit (ITC).
Whereas the Department submitted that the proceedings had been rightly initiated against the petitioner under Section 74, as the registration of the petitioner’s seller had been cancelled. It was contended that once the seller was found to be a non-registered entity, the initiation of proceedings and the reversal of ITC stood justified.
The Court observed that the record clearly established that the registration of the seller was cancelled only after the date of the transaction. Therefore, no adverse inference could legally be drawn against the petitioner, since on the date of the transaction the seller was a validly registered dealer.
Conclusion: In essence, ITC input tax credit cannot be denied to a bona fide purchaser when all statutory conditions for availing ITC are fulfilled, the movement of goods is genuine, and the supplier was duly registered on the date of the transaction. A subsequent cancellation of the supplier’s registration cannot be used as a ground to initiate proceedings under Section 74 or to reverse ITC. Since the authorities failed to appreciate the evidence demonstrating the authenticity of the transaction, the impugned orders were quashed, and the petitioner was held entitled to the ITC.
Further, in the case of M/S Singhal Iron Traders vs. Additional Commissioner and Another, WRIT TAX No. 1356 of 2022, decided on 26 September 2025, the issue before the Hon’ble Court was whether proceedings under Section 74 of the GST Act could validly be initiated against the purchaser when the transactions were made with a registered dealer at the time of purchase, and the supplier had duly filed returns and paid taxes, though its registration was cancelled at a later stage.
The Hon’ble Allahabad High Court observed that it was not in dispute that the supplier had filed GSTR-1 and GSTR-3B returns for the period in question, and without payment of taxes, the filing of GSTR-3B was impossible. Hence, it was evident that the taxes had been duly deposited. The Court further noted that no adverse inference could be drawn against the petitioner merely because the registration of the supplier was cancelled at a later stage. It was also the duty of the authorities to independently verify whether the supplier was in existence at the time of the transactions instead of relying solely on borrowed information.
The Court held that the proceedings under Section 74 of the GST Act were unjustified, as the petitioner had made bona fide purchases, paid the consideration through banking channels, and the supplier had filed necessary GST returns and paid the tax. Therefore, no liability could be fastened upon the petitioner merely because the supplier’s registration was later cancelled. The authorities were obligated to verify the facts before initiating proceedings.
Conclusion- The judgment thus laid down that a bona fide purchaser who buys goods from a registered dealer, pays the consideration through legal means, and where the supplier has filed returns and paid tax, cannot be penalized under Section 74 of the GST Act solely on the basis that the supplier’s registration was subsequently cancelled or the dealer was later found non-existent. A bona fide purchaser who buys goods from a registered dealer, pays through banking channels, and where the supplier has filed returns and paid tax, cannot be penalized under Section 74 merely because the supplier’s registration was subsequently cancelled or the dealer was later found non-existent.
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