ITC Reversal Not Sustainable When Supplier Was Registered and Tax Was Paid at Time of Transaction – Allahabad High Court

1. Background: The Real-World GST Dilemma

In GST litigation, one issue keeps resurfacing—can a bona fide buyer be punished for alleged wrongdoing of the supplier? The present judgment of the Allahabad High Court answers this question decisively. The case revolves around M/s Saniya Traders, a registered dealer who purchased old scrap batteries from a supplier who was validly registered on the date of transaction, complied with statutory requirements, and paid tax to the government. Yet, the department attempted to deny Input Tax Credit (ITC) to the purchaser on allegations raised much later.

2. Facts of the Case: Everything Done by the Book

The petitioner purchased scrap batteries on 28.06.2021 from Mohan Enterprises, Bihar. At that time:

• The supplier was fully registered under GST

• Tax invoice was issued

• E-way bill was generated

• Outward supply was disclosed in GSTR-1

• IGST was paid via GSTR-3B

• Payment was made through banking channels

• ITC was auto-reflected in GSTR-2A

In short, the transaction had complete statutory and documentary backing.

3. The Twist: Post-Transaction Allegations

Subsequently, Bihar State Tax authorities conducted an inspection and alleged that Mohan Enterprises and some other entities had indulged in fictitious trading and issuance of fake invoices. Based on these allegations—raised after the transaction date—the petitioner was served a show cause notice under Section 74, demanding reversal of ITC along with interest and penalty.

4. Department’s Stand: Guilt by Association

The department’s entire case was based on the theory that since the supplier was later found to be dubious, the purchaser’s ITC must automatically fail. Authorities ignored the fact that:

• Tax had already reached the government

• No discrepancy existed in statutory returns

• No adverse finding was recorded against the petitioner

This approach effectively attempted to convert GST into a buyer-risk regime, contrary to legislative intent.

5. High Court’s Core Observation: Timing Matters

The Allahabad High Court categorically rejected the department’s logic. The Court held that the legality of ITC must be tested at the time of transaction, not on the basis of subsequent developments. When the supplier was validly registered on the transaction date, had filed returns, and paid tax, ITC availed by the purchaser cannot be denied retrospectively.

6. GSTR-2A as Statutory Evidence Ignored by Authorities

A crucial observation of the Court was regarding GSTR-2A. The supply was clearly reflected in the petitioner’s GSTR-2A, which acts as statutory corroboration of tax payment. The Court strongly criticised the authorities for completely ignoring this electronic evidence, despite it being part of the GST compliance framework itself.

7. Section 74 Invoked Without Any Fraud by Buyer

The Court further noted that Section 74 can be invoked only when there is fraud, wilful misstatement, or suppression of facts. In this case:

• No allegation of fraud was made against the petitioner

• No evidence of collusion or knowledge was produced

• The buyer acted in a bona fide and diligent manner

Hence, invoking Section 74 against the petitioner was held to be legally unsustainable.

8. Supplier’s Registration Cancellation Has No Retrospective Effect

A key legal principle reaffirmed in this judgment is that subsequent cancellation of supplier’s registration cannot invalidate past genuine transactions. ITC validly availed earlier cannot be retrospectively reversed, unless buyer involvement in fraud is clearly established.

9. Reliance on Earlier Judgments

The High Court relied upon:

• Supreme Court of India judgment in Shakti Kiran India Pvt. Ltd.

• Its own earlier rulings in Solvi Enterprises and Khurja Scrap Trading Co.

All these decisions consistently protect bona fide purchasers from consequences of supplier-side violations discovered later.

10. Rejection of Department’s Case Law Argument

The department attempted to rely on Ecom Bill Coffee Trading Pvt. Ltd., but the Court distinguished it on facts, observing that in the present case:

• Actual movement of goods was proved

• Statutory documents were complete

• Tax payment was undisputed

Thus, the precedent was held to be inapplicable.

11. Final Verdict: Complete Relief to the Taxpayer

The Allahabad High Court:

• Quashed the adjudication order dated 20.12.2022

• Set aside the appellate order dated 05.02.2024

• Cancelled the entire demand of tax, interest, and penalty

12. Key Takeaway for GST Professionals

The message from the Court is loud and clear:

“When the supplier is registered at the time of transaction, tax is paid to the government, statutory returns are filed, and the buyer acts bona fide—ITC cannot be denied merely because the supplier is later alleged to be fake.”

This judgment is a strong shield for genuine taxpayers and a reminder that GST law does not punish diligence.