1) Relevant Provision
Section 16(1) and (2) of the CGST Act:
“16. Eligibility and conditions for taking input tax credit.
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
(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,––
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––
(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.
(c) subject to the provisions of section 41 or section 43A, 7]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; and
(d) he has furnished the return under section 39: Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
As per Section 16(2)(c) of the CGST Act, provides that tax has been PAID to the Government as a condition for claiming ITC by the buyer. ITC can be denied where Supplier has NOT paid the tax to Government.
2) Judicial Pronouncement: –
During the VAT regime varios High Courts have held that if the seller has not paid the tax, credit cannot be denied to the buyer especially incase where transaction is genuine i.e. without intention to deceive.
Recently the Hon’ble Madras High Court in M/s. D. Y. Beathel Enterprises v. the State Tax Officer quashed the order passed by the officer levying the entire tax liability on the purchasing dealer without involving the seller, where the payment of tax has been made by the purchasing dealer, but the same has not been remitted to the Government by the Seller.
Held that, the omission on the part of the Seller to remit the tax should have been viewed very seriously and strict action ought to have been initiated against the seller.
Two important observations are noted from above Madras HC