Genuine ITC Cannot Be Denied for Supplier Default or Retrospective Cancellation Alone: Allahabad HC

When GST Becomes a Trial of the Honest: Allahabad High Court on Retrospective Cancellation, Supplier Default, and the Limits of Section 74

Summary: Article discusses recent judicial developments concerning denial of input tax credit (ITC), retrospective cancellation of supplier registration, and proceedings under Section 74 of the GST law. It states that the Allahabad High Court, in M/s R.T. Infotech v. Additional Commissioner Grade-2 and others, held that ITC could not be denied where invoices were genuine, payment was made through banking channels, and the purchaser had discharged its obligations, observing that the buyer cannot compel the seller to file GSTR-1 or pay tax. Referring to Safecon Lifescience, the content states that the High Court held proceedings under Section 74 could not be justified where movement of goods and payment were proved and no rebuttal was brought on record, while criticising reliance on unverified information. It further notes that the Supreme Court dismissed the Department’s SLP in Suncraft Energy Pvt. Ltd., leaving the Calcutta High Court’s relief undisturbed. The article also outlines suggested litigation and pre-litigation practices, including preserving transaction records, challenging invocation of Section 74 where fraud, wilful misstatement or suppression is not established, and seeking disclosure and verification of material relied upon by the department.

Introduction: There is a painful irony in many GST disputes today. The buyer who paid by banking channel, received the goods, held a valid invoice, and ran a genuine business is often made to answer for the later disappearance, default, or retrospective cancellation of the supplier’s registration. In practice, this has led to large demands of tax, interest, and penalty being raised years after the transaction, often under Section 74, as if the bona fide purchaser were the insurer of the supplier’s conduct.

The Allahabad High Court has now given professionals a line of reasoning that is both commercially realistic and legally disciplined. Its recent rulings show that GST cannot be administered on suspicion alone, and that the department must prove fraud, sham transactions, or at least a real factual foundation before fastening liability on an honest recipient.

The recurring GST hardship

In the field, the pattern is familiar. A notice is issued four or five years later, the supplier is later found non-existent or unreachable, the registration is cancelled retrospectively, and the department then asks the buyer to reverse ITC with interest and penalty. The transaction is not tested afresh on its facts; instead, the department leans heavily on hindsight, mismatch data, or the later status of the supplier.

That approach causes immediate injustice. A bona fide buyer has no practical control over whether the supplier files a return years later, whether the supplier remains traceable, or whether the department later treats the supplier as bogus. If the buyer has invoices, payment proof, receipt of goods, and books that reflect the transaction, the law should not presume guilt merely because the supplier subsequently failed.

R.T. Infotech relief

The Allahabad High Court’s decision in M/s R.T. Infotech v. Additional Commissioner Grade-2 and others is especially important for genuine purchasers. The Court held, on the facts reported, that ITC could not be denied where payment had been made through banking channels, invoices were genuine and undisputed, and the purchaser had discharged its obligations. The Court also observed that a buyer cannot compel the seller to file GSTR-1 or pay tax to the Government.

What makes this ruling powerful is its practical honesty. The Court recognised that a purchaser can verify documents, but cannot police the supplier’s future compliance with the same degree of control that the department itself possesses. In substance, the Court refused to convert supplier default into automatic buyer liability.

The judgment is also valuable because it rejected the idea that a GSTR-2A mismatch, by itself, can be treated as conclusive proof for ITC denial. That matters because many demands are still built on system-generated differences rather than on a full factual inquiry into the underlying supply.

Safecon Lifescience line

The Allahabad High Court’s later decision in Safecon Lifescience goes even further in protecting the bona fide recipient against mechanical anti-evasion action. In that case, the Court held that once actual movement of goods and payment were proved, and no rebuttal was brought on record, proceedings under Section 74 could not be justified.

The Court’s criticism of the department was sharp and direct. It found that the adjudicating authority had acted on information received from another office “with closed eyes,” without independent verification of the material before using it against the registered dealer. That is a crucial reminder that intelligence is not evidence unless it is tested, verified, and linked to the actual assessee.

The Court also reiterated the statutory discipline behind Section 74. Proceedings under that section are not meant for every mismatch or every supplier-side failure; they require fraud, wilful misstatement, or suppression of facts with intent to evade tax. That distinction is not a technicality. It is the difference between lawful adjudication and revenue-driven overreach.

What the court really said

The Allahabad High Court’s buyer-friendly reasoning rests on a simple proposition: if the transaction is genuine on the date of supply, later developments cannot automatically erase it. If the seller was registered at the time, the buyer paid through banking channels, goods were received, and the transaction stood in the books and returns, the department cannot casually destroy ITC merely because the supplier later defaulted or disappeared.

The Court also drew a line between a genuine transaction and a sham transaction. If the department can establish collusion, bogus invoices, no movement of goods, or any other false commercial trail, the buyer cannot hide behind paper compliance. But where the case rests only on retrospective cancellation or later non-existence of the supplier, the burden cannot be shifted mechanically to the recipient.

That is why these decisions matter far beyond the individual case. They restore the basic legal principle that tax demands must be built on proof, not presumption. They also remind field officers that a harsh order is not the same thing as a defensible order.

Section 74 in practice

Section 74 has become the most frequently used pressure point in these disputes. In theory, it is a fraud provision. In practice, it is often being used like a recovery shortcut whenever the department wants to recover ITC from the buyer instead of first completing a proper investigation of the supplier.

That misuse creates a serious inversion of justice. The buyer is told to reverse credit because the supplier later failed, while the supplier-side inquiry remains incomplete or delayed. This is exactly the kind of adjudication the Allahabad High Court has warned against, especially where the assessee has already established movement of goods, payment, and a genuine business trail.

Professionals should therefore attack the foundation of Section 74 at the earliest stage. If the notice does not clearly plead fraud, wilful misstatement, or suppression with intent to evade tax, the very invocation of Section 74 becomes vulnerable. A fraud label cannot be attached by habit. It must be supported by facts.

Supreme Court signal

The Supreme Court’s order in Suncraft Energy Pvt. Ltd. gives this line of reasoning important practical force. The Court dismissed the Department’s SLP and thereby left the Calcutta High Court’s relief undisturbed. That High Court had held that ITC should not be denied merely because the supplier failed to remit tax, especially where the recipient had produced invoices and banking proof and where the department had not first properly investigated the supplier.

It is important, however, to write this carefully. An SLP dismissal is not the same as a detailed speaking judgment laying down a universal ratio. Even so, the practical message is strong: the Supreme Court did not interfere with the High Court’s protection for the bona fide recipient, and that strengthens the broader judicial trend against mechanical buyer liability.

For readers and clients, the lesson is plain. The recipient is not the automatic guarantor of the supplier’s tax compliance. Where the buyer has acted honestly and the transaction is real, the department must first pursue the supplier and establish the legal basis for denial before turning against the purchaser.

Case history table

What professionals should do

For litigation and pre-litigation strategy, the first task is factual discipline. Preserve invoices, e-way bills, bank statements, transport documents, stock registers, inward records, email trails, and any contemporaneous correspondence that proves the transaction was real. If possible, show that the supplier was registered on the date of supply and that the goods were in fact received and used in business.

The second task is legal discipline. If the department is invoking Section 74 without proving fraud, wilful misstatement, or suppression, challenge the very jurisdiction to proceed under that provision. If the notice merely repeats system mismatch, retrospective cancellation, or supplier non-traceability, the defence should insist that this is not enough by itself to reverse ITC from a genuine recipient.

The third task is to press the natural justice point. When the department relies on adverse intelligence or third-party material, that material must be disclosed, tested, and independently verified before it is used against the dealer. A demand built on secret assumptions is not an adjudication; it is only a conclusion looking for a legal reason.

Closing thought

The deeper message from the Allahabad High Court, reinforced by the Supreme Court’s refusal to interfere in Suncraft Energy, is that GST law cannot be run on a presumption of guilt against honest trade. Retrospective cancellation of registration, later non-existence of the supplier, or upstream default cannot by themselves destroy a genuine buyer’s ITC when the transaction is otherwise real, documented, and made in the ordinary course of business.

Section 74 is a serious weapon, not a casual recovery tool. It cannot be used to turn suspicion into demand, nor can it be used to make the honest buyer pay for a supplier’s later failure without proof of fraud or sham conduct. For bona fide buyers and the professionals who defend them, the message from these courts is clear and worth repeating: proof first, demand later.

Cases Discussed

• M/s R.T. Infotech v. Additional Commissioner Grade-2 and 2 Others, Writ Tax No. 1330 of 2022, decided on 30 May 2025, Neutral Citation No. 2025:AHC:93151 (Allahabad High Court).
• M/s Safecon Lifescience Private Limited v. Additional Commissioner Grade-2 and Another, Writ Tax No. 389 of 2023, decided on 09 September 2025, Neutral Citation No. 2025:AHC:158800 (Allahabad High Court).
• Additional Commissioner Grade-2 & Anr. v. M/s Safecon Lifescience Private Limited, SLP (Civil) No. 23993 of 2026, order dated 17 July 2026 (Supreme Court of India), dismissing the Revenue’s SLP against the Allahabad High Court judgment.
• The Assistant Commissioner of State Tax, Ballygunge Charge & Ors. v. Suncraft Energy Private Limited & Ors., SLP (Civil) Nos. 27827–27828 of 2023, order dated 14 December 2023 (Supreme Court of India)