ITC Can’t Be Denied Solely Due to Supplier Later Being Declared Non-Existent: Madras HC

Clear Secured Service Private Limited Vs Assistant Commissioner (ST) (Madras High Court)

ITC Cannot Be Denied Solely on the Ground that the Supplier was Subsequently Declared Non-Existent, Without Examining the Documentary Evidence Furnished by the Assessee: Madras High Court 

The Madras High Court held that the Revenue Department cannot deny Input Tax Credit (ITC) solely because the supplier was subsequently declared non-existent without examining the documentary evidence produced by the assessee. The petitioner had furnished bank statements, tax invoices, e-way bills, ledger extracts and Form GSTR-2A and GSTR-2B to substantiate the genuineness of the supplies. The Court observed that while the burden of proving eligibility for ITC lies on the claimant, the assessing authority was required to consider the documents and, if found insufficient, provide an opportunity to furnish additional evidence. Instead, the tax proposal was confirmed only on the ground that the supplier’s registration had been cancelled. The Court also noted that the show cause notice referred to Section 73 of the CGST/TNGST Act, whereas the assessment order was passed under Section 74. Accordingly, the assessment order was set aside and the matter remanded for fresh consideration, with a direction to pass a fresh order within three months after granting the petitioner a reasonable opportunity of hearing.

Facts:

Clear Secured Service Private Limited (‘the Petitioner’), a registered person under the Central Goods and Services Tax Act, 2017 (“the CGST Act”)/Tamil Nadu Goods and Services Tax Act, 2017 (“the TNGST Act”) at Chennai, had availed ITC in respect of supplies received from M/s. Jay Steels (‘the Supplier’) during the relevant period.

Pursuant to an intimation, the Petitioner filed a reply dated January 27, 2025 enclosing proof of payment (bank statement), copies of tax invoices, e-way bills, ledger extracts and screenshots of Form GSTR-2A and Form GSTR-2B, to substantiate the genuineness of the supplies received from the Supplier. Thereafter, a Show Cause Notice dated February 26, 2025 was issued to the Petitioner calling upon it to show cause as to why the ITC claimed in respect of supplies received from the Supplier should not be reversed, and requiring the Petitioner to submit original tax invoices, e-way bill copies, purchase register, lorry receipt and proof of payment. Pertinently, the Show Cause Notice stated in more than one place that it had been issued under Section 73 of the applicable GST statutes.

However, the Assistant Commissioner (ST), Porur Assessment Circle (‘the Respondent’), passed the assessment order dated September 02, 2025 along with the summary order in Form GST DRC-07 dated September 08, 2025 under Section 74 of the CGST/TNGST Act, confirming the tax proposal solely on the ground that the Supplier’s registration was cancelled with effect from March 27, 2024, thereby categorising the Supplier as non-existent, without adverting to the documentary evidence placed on record by the Petitioner.

The Respondent contended before the High Court that bill trading activities are carried on by making payments through banking channels and that, in the absence of documents establishing the actual movement of goods, no case was made out to interfere with the order.

Aggrieved by the assessment order, the Petitioner approached the High Court by filing a writ petition under Article 226 of the Constitution of India seeking quashing of the impugned order as arbitrary, without authority of law and passed in violation of the principles of natural justice.

Issue:

Whether the Revenue Department can deny ITC and confirm a tax proposal solely on the ground that the supplier was subsequently declared non-existent, without duly examining the documentary evidence furnished by the assessee to substantiate the genuineness of the supplies?

Held:

The Hon’ble Madras High Court in Writ Petition No. 23402 of 2026 held as under:

• Observed that, the burden of proof in relation to a claim for ITC is statutorily imposed on the person claiming such credit and, to that extent, the Respondent cannot be faulted for calling for proof that the supplies received by the Petitioner were genuine.
• Noted that, the Petitioner had submitted several documents of relevance in this regard, namely, the bank statement, tax invoices, e-way bills, ledger extracts and the Form GSTR-2A and GSTR-2B returns, to establish the genuineness of the supplies received from the Supplier.
• Held that, the said documents should have been duly considered by the Respondent and, if there was any shortcoming, the Petitioner should have been given an opportunity to submit additional documents.
• Observed that, instead, the tax proposal was confirmed solely on the ground that the Supplier was declared non-existent with effect from March 27, 2024, and such an approach cannot be countenanced, especially considering the fact that the order was issued under Section 74 although the Show Cause Notice stated in more than one place that it had been issued under Section 73.
• Accordingly held that, the impugned order was liable to be set aside and the matter remanded for re-consideration, with a direction to the Respondent to pass a fresh order within a period of three months from the date of receipt of a copy of the order, after providing a reasonable opportunity of hearing to the Petitioner.

Our Comments:

The judgment reiterates the settled principle that a bona fide recipient, who has received supplies against valid tax invoices, made payment (including the tax component) through banking channels and duly reflected the transactions in Form GSTR-2A/2B, cannot be denied ITC merely because the supplier’s registration was cancelled at a later point of time, often with retrospective effect. The determinative factor is the position prevailing at the time of the transaction and the genuineness of the underlying supply, and not the subsequent conduct or status of the supplier, over which the recipient has no control. At the same time, the Court has struck a careful balance by acknowledging that, in terms of Section 155 of the CGST Act, the burden of proving eligibility to ITC lies on the person claiming such credit. The Revenue is, therefore, entitled to call for proof of genuineness, but it cannot brush aside the evidence actually produced and confirm the demand on a solitary, extraneous ground without affording the assessee an opportunity to cure any perceived deficiency.

A similar view has been consistently taken by various High Courts. The Hon’ble Calcutta High Court in Gargo Traders v. Joint Commissioner, Commercial Taxes (State Tax) [W.P.A. No. 1009 of 2022, order dated June 12, 2023] held that ITC cannot be denied to a genuine buyer where the supplier’s registration was cancelled with retrospective effect after the date of the transaction. In LGW Industries Limited v. Union of India [W.P.A. No. 23512 of 2019, order dated December 13, 2021] and Sanchita Kundu v. Assistant Commissioner of State Tax [W.P.A. No. 7231 of 2022, order dated May 05, 2022], the Calcutta High Court held that where the purchases were genuine, supported by valid documents, and were effected before the cancellation of the suppliers’ registration, the benefit of ITC cannot be refused. The Hon’ble Madras High Court in D.Y. Beathel Enterprises v. State Tax Officer [W.P. (MD) No. 2127 of 2021, order dated February 24, 2021] held that where the recipient has paid the tax component to the seller, the Department ought, in the first instance, to proceed against the defaulting seller, and reversal of ITC in the hands of the buyer without examining the seller is impermissible. Further, the Hon’ble Calcutta High Court in Suncraft Energy Private Limited v. Assistant Commissioner, State Tax [M.A.T. No. 1218 of 2023, order dated August 02, 2023] held that ITC cannot be reversed in the hands of the recipient on account of the supplier’s default without first proceeding against the supplier, save in exceptional circumstances such as collusion or where the supplier is missing or has closed its business, and the Department’s Special Leave Petition against the said decision was dismissed by the Hon’ble Supreme Court [SLP (C) Nos. 27827-27828 of 2023, order dated December 14, 2023]. Under the erstwhile VAT regime as well, the Hon’ble Delhi High Court in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi [W.P. (C) No. 6093 of 2017, order dated October 26, 2017] read down Section 9(2)(g) of the DVAT Act so as not to penalise bona fide purchasing dealers for the selling dealer’s default in depositing tax, and the Special Leave Petition against the said decision was dismissed by the Hon’ble Supreme Court in Commissioner of Trade & Taxes, Delhi v. Arise India Limited [SLP (C) No. 36750 of 2017, order dated January 10, 2018].

However, a note of caution flows from the decision of the Hon’ble Supreme Court in State of Karnataka v. Ecom Gill Coffee Trading Private Limited [Civil Appeal No. 230 of 2023, order dated March 13, 2023], rendered in the context of Section 70 of the Karnataka VAT Act, 2003, wherein it was held that the dealer claiming ITC must discharge the burden of proving the actual physical movement of goods and the genuineness of the transaction, and that mere production of invoices and proof of payment through banking channels is not, by itself, sufficient. Details such as vehicle numbers, freight payments, delivery acknowledgements and the like assume critical importance. Read together, the jurisprudence makes it clear that while the taxpayer must maintain a complete and credible documentary trail, the Revenue must, in turn, actually evaluate that trail rather than resting the demand on the supplier’s subsequent status alone.

Equally significant is the Court’s observation on the jurisdictional defect in the proceedings, namely, that the Show Cause Notice was issued under Section 73 of the CGST Act (cases not involving fraud, wilful misstatement or suppression of facts), whereas the final order was passed under Section 74 of the CGST Act (cases involving fraud, wilful misstatement or suppression of facts to evade tax). The two provisions operate in distinct fields with materially different consequences, including an extended period of limitation, penalty up to 100% of the tax, and loss of the concessional closure options available under Sections 73(5), 73(8) and 73(11) of the CGST Act. An order under Section 74 must be founded on a specific allegation, and establishment, of the ingredients of fraud or suppression in the Show Cause Notice itself, and the adjudicating authority cannot mid-stream convert proceedings initiated under Section 73 into proceedings under Section 74. It may also be noted that for tax periods from FY 2024-25 onwards, the unified Section 74A of the CGST Act, inserted by the Finance (No. 2) Act, 2024, governs the determination of tax, making it all the more important that allegations of fraud or suppression are specifically pleaded and proved for invoking the higher penalty track.

Relevant Provisions:

Section 155 of the Central Goods and Services Tax Act, 2017

“155. Burden of proof.-

Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.”

Section 16(2)(c) of the Central Goods and Services Tax Act, 2017

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

(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,–

(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;”

Cases Discussed

1. Clear Secured Service Private Limited Vs Assistant Commissioner (ST), W.P. No. 23402 of 2026, Madras High Court.
2. Gargo Traders v. Joint Commissioner, Commercial Taxes (State Tax), W.P.A. No. 1009 of 2022, Calcutta High Court, order dated 12 June 2023.
3. LGW Industries Limited v. Union of India, W.P.A. No. 23512 of 2019, Calcutta High Court, order dated 13 December 2021.
4. Sanchita Kundu v. Assistant Commissioner of State Tax, W.P.A. No. 7231 of 2022, Calcutta High Court, order dated 05 May 2022.
5. D.Y. Beathel Enterprises v. State Tax Officer, W.P. (MD) No. 2127 of 2021, Madras High Court, order dated 24 February 2021.
6. Suncraft Energy Private Limited v. Assistant Commissioner, State Tax, M.A.T. No. 1218 of 2023, Calcutta High Court, order dated 02 August 2023.
7. Special Leave Petition (Civil) Nos. 27827–27828 of 2023 (against Suncraft Energy Private Limited v. Assistant Commissioner, State Tax), Supreme Court, order dated 14 December 2023.
8. On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, W.P. (C) No. 6093 of 2017, Delhi High Court, order dated 26 October 2017.
9. Commissioner of Trade & Taxes, Delhi v. Arise India Limited, SLP (C) No. 36750 of 2017, Supreme Court, order dated 10 January 2018.
10. State of Karnataka v. Ecom Gill Coffee Trading Private Limited, Civil Appeal No. 230 of 2023, Supreme Court, order dated 13 March 2023.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

An assessment order under Section 74 is the subject of challenge in this writ petition.

2. Show cause notice dated 26.02.2025 was received by the petitioner calling upon the petitioner to show cause as to why the Input Tax Credit (ITC) claimed by the petitioner for supplies received from Jay Steels should not be reversed. In response, the petitioner filed a reply on 27.01.2025 enclosing proof of payment, copies of tax invoices, e-way bills, ledger extract and screenshot of the GSTR 2A & 2B. The order impugned herein was issued pursuant thereto.

3. Adverting to the impugned order, learned counsel for the petitioner submits that the tax proposal was confirmed solely on the ground that the supplier’s registration was cancelled on 27.03.2024 by categorising such supplier as non-existent.

4. Ms. G. Dhana Madhri, learned Government Counsel (Tax), accepts notice on behalf of the respondent. She submits that bill trading activities are carried on by making payments through banking channels. In the absence of documents establishing actual movement of goods, she submits that no case is made out to interfere with the order.

5. On perusal of the show cause notice dated 26.02.2025, it follows that such notice was issued under Section 73 of applicable GST statutes. The petitioner was called upon to submit original tax invoices, e-way bill copies, purchase register, lorry receipt and proof of payment. By reply dated 27.01.2025 to the intimation, the petitioner had provided bank statement, tax invoices, e-way bills, ledgers and the GSTR 2A & 2B returns.

6. The burden of proof in relation to a claim for ITC is statutorily imposed on the person claiming such credit. To that extent, the respondent cannot be faulted for calling for proof that the supplies received by the petitioner were genuine. As discussed above, the petitioner has submitted several documents of relevance in this regard. These documents should have been duly considered and, if there was any shortcoming, the petitioner should have been given an opportunity to submit additional documents. Instead, the tax proposal was confirmed solely on the ground that the supplier was declared as non-existent with effect from 27.03.2024. This approach cannot be countenanced especially considering the fact that the order was issued under Section 74 although the show cause notice states in more than one place that it has been issued under Section 73.

7. Considering these aspects, the impugned order is set aside and the matter is remanded for re-consideration. After providing a reasonable opportunity to the petitioner, a fresh order shall be issued within three months from the date of receipt of a copy of this order.

8. The writ petition is disposed of on the above terms. Consequently, connected miscellaneous petitions are closed. There shall be no order as to costs.

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