The Supreme Court has ruled that bona fide purchasers can claim Input Tax Credit (ITC) even if the seller fails to deposit tax, reaffirming protection for genuine taxpayers and upholding Article 14 equality under the DVAT framework.
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NEW DELHI: In an important pronouncement impacting indirect tax jurisprudence, the Supreme Court of India has reaffirmed that a bona fide purchasing dealer cannot be denied Input Tax Credit (ITC) merely because the selling dealer failed to deposit the collected tax with the Government.
The judgment reaffirms the Delhi High Court’s earlier interpretation of Section 9(2)(g) of the Delhi Value Added Tax Act, 2004 (DVAT Act) and upholds the constitutional validity of protecting genuine taxpayers under Article 14 of the Constitution of India.
Background
The respondent-purchaser, M/s Shanti Kiran India (P) Ltd., had purchased goods from certain registered selling dealers and paid the corresponding VAT, as reflected in valid tax invoices. Subsequently, it was discovered that the selling dealers had defaulted in depositing the tax with the Department.
Although the selling dealers were registered on the date of the transaction, the Department sought to deny ITC to the purchaser under Section 9(2)(g) of the DVAT Act, alleging that the tax had not been deposited by the sellers.
The Delhi High Court, relying on its earlier decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi (2017 SCC OnLine Del 13037), held that denying ITC to a bona fide purchaser would be arbitrary and violative of Article 14, and allowed ITC after due verification.
The Commissioner of Trade and Taxes challenged this ruling before the Supreme Court.
Legal Issue
Whether a bona fide purchasing dealer is entitled to claim Input Tax Credit under the DVAT Act when the selling dealer, though registered at the time of the transaction, subsequently defaults in depositing the tax collected with the Government?
Statutory Framework
Section 9(1) of the DVAT Act, 2004 entitles a registered dealer to claim ITC on purchases made during the tax period for use in taxable sales. However, Section 9(2)(g) restricts such ITC if “the tax paid by the purchasing dealer has not been actually deposited by the selling dealer with the Government.”
This clause, as interpreted literally, often led to situations where bona fide purchasers were penalized for the defaults of selling dealers, a concern the judiciary has repeatedly addressed.
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Supreme Court’s Observations and Decision
The Supreme Court, while dismissing the appeals filed by the Commissioner, endorsed the Delhi High Court’s reasoning and held that:
- The selling dealers were registered at the time of the transaction.
- The purchaser acted in good faith and had valid invoices.
- There was no evidence of collusion between the buyer and seller.
- The Department did not dispute the genuineness of the transactions.
Accordingly, the Court held that the purchasing dealer was entitled to ITC after due verification.
“The remedy for the Department is to recover from the defaulting selling dealer – not to penalize the bona fide purchaser.”
The Court further noted that the principle laid down in On Quest Merchandising (supra) had already attained finality, as the earlier SLP (Civil No. 36750 of 2017) had been dismissed without interference.
Input Tax Credit (ITC)
What is Input Tax Credit (ITC)?
Input Tax Credit (ITC) means the tax paid on business purchases (inputs) that can be deducted from the tax payable on sales (output).
Example:
If a manufacturer pays ₹300 GST on raw materials and collects ₹450 GST on the sale of finished goods, they can claim ₹300 as ITC and pay only the balance ₹150 to the government.
This process of adjusting input tax against output tax is called utilization of ITC.
Who Can Claim ITC?
Only GST-registered persons can claim ITC, subject to these conditions:
- Must hold a valid tax invoice.
- Goods or services must have been received.
- The supplier must have paid the tax to the government.
- GSTR-3B must be filed.
- Payment for the invoice must be made within 180 days.
- ITC can be claimed only for business-related (taxable) supplies.
- No ITC if depreciation is claimed on the tax portion of capital goods.
- The claim must be made by 30th November of the next financial year or before filing the annual return, whichever is earlier.
- Must not be registered under the composition scheme.
What Can Be Claimed as ITC?
ITC is available only for business purposes. It cannot be claimed for:
- Personal use
- Exempt supplies
- Items restricted under Section 17(5) of the CGST Act
Ineligible ITC (Section 17(5) CGST Act):
ITC cannot be claimed on:
- Motor vehicles used personally
- Food, beverages, and club memberships
- Health and life insurance (unless mandated)
- Construction of immovable property
- Goods lost, stolen, or destroyed
Documents Required for ITC Claim:
- Tax invoice or debit note from the supplier
- Bill of entry (for imports)
- ISD invoice (Input Service Distributor)
- Bill of supply (in specific cases)
Case Title:
The Commissioner Trade & Taxes, Delhi vs. M/s Shanti Kiran India (P) Ltd.
Civil Appeal Nos. 2042–2047 of 2015 & 9902 of 2017
READ ORDER
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