⚖️ Landmark SC Ruling: ITC Protected for Buyers Even If Seller's GST Registration is Cancelled Post-Sale

 

The Supreme Court of India delivered a crucial judgment that reinforces the principle of fiscal fairness and provides significant protection to bona fide purchasers in the indirect tax regime. The ruling, made in the context of the erstwhile Delhi Value Added Tax Act, 2004 (DVAT Act), holds that Input Tax Credit (ITC) cannot be denied to a genuine buyer merely because the selling dealer's registration was subsequently cancelled or they defaulted in remitting the collected tax to the government.

While the case pertains to the VAT regime, its legal principle carries immense weight and is expected to influence litigation and departmental policy under the Goods and Services Tax (GST) framework.

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The Core Dispute and DVAT Framework

The controversy centered on the interpretation of Section 9(2)(g) of the DVAT Act. This clause stipulated that ITC would not be allowed where "the tax payable by the selling dealer has not actually been deposited with the Government."

In practice, tax authorities frequently invoked this clause to deny ITC to purchasing dealers whenever the seller failed to deposit the VAT, even though the buyer had:

1. Purchased the goods from a registered dealer.
2. Paid the full sale price, including the tax, against a valid invoice.
3. Acted in good faith with no knowledge of the seller’s future non-compliance.

This interpretation unfairly penalized the buyer for a default that was entirely beyond their control.

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Precedent and the Delhi High Court’s Stance

The foundation of the Supreme Court's decision rests on previous rulings, notably the Delhi High Court's verdict in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi and Ors.

The High Court had read down the controversial Section 9(2)(g). The court asserted that the provision should not apply to a purchasing dealer who has bona fide entered into a transaction with a validly registered seller. The High Court's key takeaway was:

The remedy for the Department lies against the defaulting selling dealer, not the compliant purchasing dealer. Denial of ITC to a bona fide buyer is permissible only if the Department can demonstrate collusion between the buyer and the seller.

The Supreme Court’s Affirmation

In the case of Commissioner of Trade and Tax, Delhi v. M/s Shanti Kiran India (P) Ltd., the Supreme Court upheld the High Court's protective stance. The Supreme Court bench based its decision on three undisputed facts:

1. The selling dealer's registration was active on the date of the transactions.
2. The authenticity of the tax invoices and transactions was not challenged.
3. The Department failed to establish any element of collusion between the buying and selling dealers.

Finding no reason to interfere with the lower court's decision, the Supreme Court dismissed the appeal, firmly reinforcing the entitlement of genuine dealers to claim ITC.

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Far-Reaching Implications for the GST Regime

While the ruling was issued under the DVAT Act, its principle is directly applicable to the current GST structure, which often faces similar issues regarding ITC denial due to supplier-side defaults (e.g., mismatch between GSTR-2A/2B and GSTR-3B).

The Supreme Court's pronouncement creates a strong judicial precedent for GST authorities, emphasizing that:

v  Bona Fide Transactions Protected: A buyer who makes a purchase and pays the tax in good faith cannot be arbitrarily denied ITC.

v  Burden of Proof: The burden lies with the tax authority to prove collusion or fraud on the part of the purchaser before reversing the ITC. The mere failure of the seller to remit the tax is insufficient grounds to penalize the buyer.

v  Constitutional Fairness: This decision aligns tax administration with the constitutional mandate of fairness, ensuring compliant taxpayers are not financially penalized for procedural lapses or defaults committed by third parties.

This landmark ruling significantly strengthens legal certainty for businesses, promoting confidence in commercial transactions by safeguarding the rights of genuine purchasers against potential punitive action.