Commissioner Trade And Tax Delhi Vs Shanti Kiran India (P) Ltd. (Supreme Court of India)
Supreme Court ruled that ITC cannot be denied to bona fide purchasers when sellers fail to deposit VAT. The decision upholds Delhi HC’s view protecting good-faith taxpayers. Reiterating the On Quest Merchandising precedent, SC held that ITC cannot be denied to genuine buyers absent evidence of collusion.
The Supreme Court of India in Commissioner Trade and Tax Delhi vs Shanti Kiran India (P) Ltd. examined whether bona fide purchasing dealers are entitled to Input Tax Credit (ITC) under the Delhi Value Added Tax Act, 2004 (DVAT Act) when seller dealers—though registered at the time of sale—later failed to deposit collected tax with the government.
The dispute arose when the Department denied ITC to registered purchaser dealers who had paid taxes on purchases made from registered seller dealers. The sellers’ registrations were later cancelled, and they defaulted on tax payment. The Delhi High Court had ruled in favour of the purchasers, holding them to be bona fide dealers who made genuine transactions supported by valid tax invoices. It allowed ITC benefits after verification of invoices.
The core provision under consideration was Section 9(2)(g) of the DVAT Act, which restricts ITC when tax paid by the purchaser has not been deposited by the seller with the government. The High Court, in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017 SCC OnLine Delhi 13037), had earlier interpreted this provision. It held that denying ITC to bona fide purchasers for the seller’s default would violate Article 14 of the Constitution. To save the provision from invalidity, the Court “read down” Section 9(2)(g), ruling that:
- The expression “dealer or class of dealers” in Section 9(2)(g) does not include bona fide purchasing dealers who transact with registered selling dealers and possess valid invoices.
- If there is no evidence of collusion and the purchase details match between Annexures 2A and 2B, ITC cannot be denied merely because the seller failed to remit tax.
- The proper remedy for the Department is to recover unpaid tax from the defaulting seller, not from an innocent purchaser.
- However, if evidence of collusion exists, the Department may act under Section 40A of the DVAT Act.
The On Quest Merchandising ruling was challenged before the Supreme Court (SLP (C) No. 36750/2017), which dismissed the petition, effectively affirming the High Court’s reasoning.
