ITC Eligibility Due to Supplier’s Default: Conflicting Allahabad HC Rulings

1. Introduction:- The Goods and Services Tax (GST) regime in India is built on the principle of seamless credit flow, with Input Tax Credit (ITC) serving as a key mechanism to eliminate cascading taxes. However, recent judicial pronouncements have brought to light significant legal ambiguities, particularly concerning the recipient’s eligibility for ITC when the supplier defaults in tax payment.

2. Background: Input Tax Credit (ITC) under GST

The Input Tax Credit (ITC) mechanism is a cornerstone of the Goods and Services Tax (GST) framework, aimed at eliminating cascading tax and ensuring seamless credit flow throughout the supply chain.

As per Section 16(2) of the CGST Act, 2017, a registered person is eligible to claim ITC if the following conditions are fulfilled:

• Possession of a valid tax invoice.
• Receipt of goods or services.
• The supplier has paid the tax to the Government.
• The recipient has furnished the return under Section 39.

The most contentious provision has been Clause (c), which links the recipient’s eligibility to the supplier’s tax payment—a factor often beyond the recipient’s control.

3. The Conflict: Recent Allahabad High Court Judgments

Case 1: R.T. Infotech v. Commissioner of State Tax, U.P. (Allahabad High Court) Date of Judgment: 30 May 2025

i. Key Facts:

• • The purchaser complied with all statutory conditions: valid tax invoice, receipt of goods, payment through banking channels.
  • The supplier defaulted in depositing tax with the Government.

ii. Court’s Ruling:

• • ITC cannot be denied solely because the supplier failed to pay tax.
  • Bonafide purchasers who have complied with all statutory obligations should not be penalized for the supplier’s default.
  • Emphasized substantial compliance and equitable treatment.

ii. Legal Standpoint:

• • Aligns with the post-2022 amendment regime, protecting genuine taxpayers.
  • Supports a trust-based compliance system, not requiring recipients to enforce supplier compliance beyond reasonable due diligence.

Case 2: Trendships Online Services Pvt. Ltd. v. Commissioner (Allahabad High Court) Date of Judgment: 13 June 2025

i. Key Facts:

• • The recipient had all required documentation: valid invoice, proof of payment, receipt of good s.
  • The supplier defaulted in depositing GST to the Government.
  • The transaction pertained to the pre-2022 amendment period.

ii. Court’s Ruling:

• • ITC cannot be allowed if the supplier has not deposited tax.
  • The recipient’s compliance was not sufficient to bypass the mandatory condition under Section 16(2)(c).

iii. Legal Standpoint:

• • Strictly follows the pre-amendment GST framework, where tax payment by the supplier was a prerequisite for ITC.
  • Adopted a strict compliance approach.

4. Key Distinguishing Factors: Why the Divergence?

5. Statutory Background: Key GST Provisions

• Section 16(2)(c) of CGST Act: ITC can be availed only if the tax charged on supply is actually paid to the Government.
• Pre-October 2022: ITC eligibility strictly dependent on supplier’s tax payment.
• Post-October 2022 (Amendments to Sections 16 & 41): Introduced sequential credit mechanism, reducing liability of genuine purchasers and allowing reversal and re-availment of credit.

6. Practical Implications for Taxpayers

• Transaction Timeline Awareness: Different treatment for pre- and post-amendment periods.
• Vendor Due Diligence: Conduct thorough supplier vetting, perform regular GSTR-2B reconciliations, and ensure timely GST return filings.
• Risk Mitigation: Include contract clauses to protect against ITC loss due to supplier default.
• Litigation Preparedness: Anticipate scrutiny and be ready for conflicting rulings until resolved by higher judiciary.

7. Conclusion: Urgent Need for Clarity

The conflicting Allahabad High Court decisions within two weeks have created significant legal uncertainty.

Until definitive Supreme Court guidance is issued:

• Strengthen vendor selection processes.
• Continuously monitor supplier compliance.
• Stay informed on judicial trends and CBIC circulars.
• Adopt conservative positions in high-risk cases to safeguard against potential credit reversals.

8. FAQS:-

1: Can a taxpayer be held liable for a supplier’s non-compliance under GST?

A: Under the pre-2022 GST framework, yes. Section 16(2)(c) made ITC conditional on the supplier’s tax payment, effectively transferring compliance risk to the recipient. Post-2022 amendments aim to reduce this burden, but judicial interpretations still vary, especially for transactions before the amendment.

2. How can businesses prove ‘bonafide’ status in case of supplier default?

A: Courts have considered the following as indicators of bonafide conduct:

• Possession of valid tax invoices.
• Payment made through banking channels.
• Receipt of goods/services.
• Regular reconciliation with GSTR-2B.
• No collusion or fraudulent intent.

Documenting these steps can strengthen a taxpayer’s defense in litigation.

3: What is the legal risk of claiming ITC when supplier defaults, even post-2022?

A: While the law now allows reversal and re-availment of ITC, risk remains due to:

• Lack of uniform judicial interpretation.
• Departmental audits and scrutiny.
• Potential interest and penalty on reversed ITC.
• Litigation costs and reputational impact.

4: Can contractual safeguards fully protect against ITC denial?

A: Not entirely. While indemnity clauses and supplier warranties help mitigate financial exposure, they do not override statutory provisions. Courts and tax authorities will prioritize compliance with GST law over private contracts.

5: Is there a possibility of retrospective relief for pre-2022 transactions?

A: Currently, no retrospective relief has been legislated. Courts have strictly applied the law as it stood at the time of the transaction. Only a Supreme Court ruling or legislative amendment can provide retrospective protection.

6: How should businesses handle ITC claims in high-value transactions with supplier risk?

A: Adopt a conservative approach:

• Delay ITC claim until supplier compliance is verified.
• Use escrow mechanisms or conditional payment terms.
• Engage in real-time compliance tracking via GSTN tools.
• Seek advance rulings or legal opinions for complex cases.

7: What is the role of GSTR-2B in defending ITC claims?

A: GSTR-2B is a static statement reflecting eligible ITC based on supplier filings. It serves as prima facie evidence of supplier compliance but is not conclusive. Courts may still examine actual tax payment status and timing.