GST Seller's Failure To File Returns Cannot Deny ITC To Bona Fide Purchaser: Gauhati High Court

The Gauhati High Court on 16 July held that a bona fide purchaser cannot be denied Input Tax Credit (ITC) merely because the selling dealer failed to file GST returns after collecting tax from the purchaser, and that the department must proceed against the defaulting seller.

Justice Devashis Baruah allowed a writ petition by Advance Engineering Farms and Equipments challenging the rejection of ITC on generators bought in FY 2017-18, holding that treating the claim as excess ITC went against the Division Bench ruling in National Plasto Moulding v. State of Assam. The Court observed:

“...the imposition of the ITC or holding that the Petitioner has made excess claim of ITC is contrary to the law laid down by the learned Division Bench of this Court in National Plasto Moulding...”

Advance Engineering Farms and Equipments had purchased generators from a registered supplier and paid the sale consideration along with GST. Although the purchaser claimed ITC on the transaction, the authorities rejected the claim after the supplier failed to file GST returns and proceeded to raise a demand towards tax, interest and penalty against the purchaser.

During the proceedings, counsel appearing for the supplier admitted that the supplier had collected the GST amount from Advance Engineering Farms and Equipments but had not filed the required returns. The Court held that the purchaser could not be penalised for the seller's failure in the absence of any material showing collusion between the parties.

In National Plasto Moulding, the Gauhati High Court Division Bench held that Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017, which prescribe conditions for claiming ITC, must be read down so that a bona fide purchaser who has purchased goods from a registered supplier, paid GST and possesses valid tax invoices cannot be denied ITC merely because the selling dealer failed to deposit the tax or file returns.

The Division Bench had relied on the principles laid down by the Delhi High Court in On Quest Merchandising India Pvt. Ltd. that a bona fide purchasing dealer cannot be denied ITC merely because the selling dealer defaults, unless there is evidence of collusion between the parties. It clarified that the department's remedy in such cases is to proceed against the defaulting selling dealer.

Accordingly, the High Court quashed the rectification order dated 10 April 2024 raising demands of Rs. 1,60,506 each towards Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) against Advance Engineering Farms and Equipments.

It clarified that the authorities remain at liberty to recover the tax from the defaulting selling dealer in accordance with the provisions of the Central Goods and Services Tax Act and the Assam Goods and Services Tax Act.

Appearance for the Petitioner: Mr. S. S. Zia, Advocate

Appearance for the Respondent: Mr. B. Gogoi, Additional Advocate General, Assam (for the State respondents), Mr. D. Gogoi, Advocate (for Respondent No. 4)