Supplier Default Cannot Deny ITC - Section 74 Cannot Be Invoked to Overcome Limitation

The Central Question - Can a Genuine Purchaser Be Penalised for the Supplier's Default?

Input Tax Credit is a fundamental feature of the GST framework, but its availability is subject to the conditions prescribed in Section 16 of the CGST Act, 2017. One of the most contentious conditions is contained in Section 16(2)(c), which links the recipient's entitlement to credit to the actual payment of tax to the Government. This creates a recurring difficulty where the purchaser has received the goods, possesses valid tax invoices, and has paid the supplier through banking channels, but the supplier subsequently fails to deposit the tax or file the prescribed return.

The Calcutta High Court has examined this issue in M/s. Cart Infralog Ltd. & Anr. Versus The Additional Commissioner, HQ Anti-Evasion Unit, CGST & CX, Kolkata South Commissionerate & Ors. - 2026 (8) TMI 1843 - CALCUTTA HIGH COURT. The dispute involved the denial of ITC because certain suppliers allegedly failed to deposit the tax, failed to file Form GSTR-3B, and the corresponding invoices were not reflected in the recipients' Form GSTR-2A. The proceedings also raised an equally important issue concerning the mechanical invocation of Section 74 to overcome the normal limitation under Section 73.

The judgment is significant because it brings together three recurring areas of GST litigation: protection of a bona fide purchaser against supplier default, the limits on the invocation of Section 74, and the availability of writ jurisdiction despite an appellate remedy. Its underlying message is that ITC cannot be denied merely because of a portal mismatch or supplier default without examining the genuineness of the recipient's transactions, just as extended limitation cannot be invoked merely by reproducing statutory expressions such as fraud, wilful misstatement, or suppression of facts.

A Rs. 2.37 Crore ITC Dispute Resulting in Proposed Liability of About Rs. 6.3 Crore

The petitioners were issued a show cause notice dated 11.06.2025 under Section 74 for Financial Years 2018-19, 2019-20 and 2023-24. The notice alleged the availment and utilisation of ineligible ITC amounting to Rs. 88,57,040 and irregular excess ITC of Rs. 1,48,84,011 in Form GSTR-3B, as compared with the credit appearing in Form GSTR-2A. The principal demand therefore aggregated to Rs. 2,37,41,051, and after adding interest and penalty, the proposed liability was approximately Rs. 6.3 crore.

The Department's case was substantially founded on defaults attributable to the suppliers. Certain suppliers allegedly did not deposit the tax or file Form GSTR-3B; as a result, the relevant invoices did not appear in the petitioners' Form GSTR-2A. Significantly, the Department had itself initiated separate proceedings against M/s Aster Trading Company, one of the suppliers, for non-filing of Form GSTR-3B for Financial Year 2019-20. The petitioners repeatedly requested that the tax, interest and penalty be recovered from the defaulting suppliers rather than from them.

The petitioners approached the High Court against the show cause notice and, during the pendency of the writ petition, submitted a detailed reply dated 10.11.2025, along with supporting documents. Nevertheless, the Department passed an Order-in-Original dated 09.12.2025. The petitioners alleged that their reply and supporting documents were not properly considered, that the order lacked application of mind, and that it violated the requirements of reasoned adjudication.

The Purchaser's Defence - Genuine Transactions Supported by Documentary Evidence

The petitioners did not rest their ITC claim solely on entries in their GST returns. They also relied on tax invoices issued by registered suppliers, e-way bills, goods transport receipts, evidence of receipt of goods, and bank statements showing payment through normal banking channels. The High Court took judicial notice of these documents, together with Form GSTR-2A, Form GSTR-3B, the reply dated 10.11.2025, and material relating to proceedings already initiated against M/s Aster Trading Company.

Their principal argument was that a bona fide purchaser who had entered into genuine transactions could not be made responsible for a subsequent default by the supplier. They placed strong reliance on Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others - 2023 (8) TMI 174 - CALCUTTA HIGH COURT, which the Supreme Court affirmed when it dismissed the Special Leave Petition on 14.12.2023, reported as THE ASSISTANT COMMISSIONER OF STATE TAX, BALLYGUNJGE CHARGE & ORS. Versus SUNCRAFT ENERGY PRIVATE LIMITED & ORS. - 2023 (12) TMI 739 - SC Order. They also relied on On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), Damson Technologies Pvt. Ltd., Solvochem, M/s. Meenu Trading Co., & Mahan Polymers Versus Government of NCT of Delhi & Ors. & Commissioner of Trade & Taxes, Delhi And Ors - 2017 (10) TMI 1020 - DELHI HIGH COURT , against which the Revenue's Special Leave Petition was dismissed, reported as Commissioner of Trade And Taxes Delhi Versus Arise India Limited, On Quest Merchandising India Pvt. Ltd. - 2018 (1) TMI 555 - SC Order.

The petitioners therefore maintained that the non-reflection of an invoice in Form GSTR-2A could not, by itself, extinguish otherwise genuine ITC. Their case was strengthened by the absence of any allegation of collusion with the defaulting supplier. The dispute was thus not about fictitious invoices or non-receipt of goods, but about whether the recipient should lose ITC because of a tax-compliance failure attributable to the supplier.

Section 16(2) - The Real Dispute Was Confined to Payment of Tax by the Supplier

The High Court examined the controversy in light of the conditions in Section 16(2). Importantly, the show cause notice did not allege that the petitioners lacked tax invoices issued by suppliers registered under the Act. Nor was the receipt of the goods or services disputed. Accordingly, the conditions in Sections 16(2)(a) and 16(2)(b) were satisfied.

The dispute was essentially confined to Section 16(2)(c), which requires that the tax charged in respect of the supply have actually been paid to the Government. This distinction was crucial. The case was not one where the purchaser had failed to establish the underlying supply; rather, the Department sought to deny credit because of the supplier's subsequent tax default.

The Court therefore declined to treat the supplier's failure and the recipient's entitlement as automatically interchangeable. Where the recipient possesses the necessary documents and establishes the genuineness of the purchase, a supplier's default requires a more careful enquiry before the recipient can be deprived of credit.

Supplier Default Cannot Automatically Destroy Genuine ITC

The judgment draws substantial support from Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others - 2023 (8) TMI 174 - CALCUTTA HIGH COURT, where the Division Bench protected ITC despite the supplier's failure to report the transaction. The Supreme Court dismissed the Revenue's SLP against that decision on 14.12.2023, reported as THE ASSISTANT COMMISSIONER OF STATE TAX, BALLYGUNJGE CHARGE & ORS. Versus SUNCRAFT ENERGY PRIVATE LIMITED & ORS. - 2023 (12) TMI 739 - SC Order.

Suncraft Energy also relied on On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), Damson Technologies Pvt. Ltd., Solvochem, M/s. Meenu Trading Co., & Mahan Polymers Versus Government of NCT of Delhi & Ors. & Commissioner of Trade & Taxes, Delhi And Ors - 2017 (10) TMI 1020 - DELHI HIGH COURT, where a bona fide purchaser was protected against the selling dealer's failure to deposit tax. The Revenue's SLP was dismissed in Commissioner of Trade And Taxes Delhi Versus Arise India Limited, On Quest Merchandising India Pvt. Ltd. - 2018 (1) TMI 555 - SC Order.

The principle, however, is not that every supplier default automatically entitles the recipient to ITC. Protection is available where the recipient establishes the genuineness of the transaction through appropriate evidence, and there is no allegation of collusion with the defaulting supplier.

Department Must First Proceed Against the Defaulting Supplier

A significant fact was that the Department had already initiated proceedings against M/s Aster Trading Company for non-filing of GSTR-3B. Having identified the supplier as the defaulter, the Department was required to first pursue recovery against it under Section 79 rather than shift the tax burden to the recipient.

The absence of any allegation of collusion was equally important. Where the recipient establishes a genuine transaction and no collusion with the defaulting supplier is alleged, ITC cannot ordinarily be denied merely because of the supplier's default. Cases involving fictitious invoices, sham transactions or collusion, however, would stand on a different footing.

GSTR-2A Mismatch Cannot Become the Sole Test of ITC Entitlement

The Court did not accept that the non-reflection of invoices in Form GSTR-2A, by itself, could determine ITC entitlement. The recipient had produced invoices, e-way bills, transport receipts, proof of receipt of goods, bank statements, and supplier correspondence supporting the genuineness of the transactions.

The judgment does not render Form GSTR-2A irrelevant. It establishes that a mismatch cannot be treated as conclusive where genuine supply and payment are supported by contemporaneous evidence and there is no allegation of collusion.

Section 74 Cannot Be Used Merely Because Section 73 Has Become Time-Barred

The second major issue concerned limitation. The show cause notice dated 11.06.2025 covered, among other periods, Financial Year 2018-19. The Court found that the proceedings for that year were, on the face of it, beyond the normal limitation contemplated under Section 73(10). The Department had instead invoked Section 74 by alleging fraud, wilful misstatement and suppression of facts.

The difficulty was that the notice did little more than employ these statutory expressions. It did not explain how fraud was inferred or how concealment was detected. Mere reproduction of the ingredients of Section 74 could not create the jurisdiction necessary to invoke the extended provision. Extended limitation requires a factual foundation demonstrating why the case falls within the exceptional circumstances contemplated by Section 74.

For this proposition, reliance was placed upon GR Infra Projects Limited Ratlam Through Its Authorized Signatory Mr. Bhoori Singh Versus The State of Madhya Pradesh And Others - 2025 (11) TMI 484 - MADHYA PRADESH HIGH COURT. Significantly, during the pendency of the present proceedings, the matter reached the Supreme Court, which, by its order dated 19.08.2026 in M/s G.R. Infra Projects Limited Ratlam Versus The State of Madhya Pradesh & Ors. - 2026 (8) TMI 1497 - SC Order  set aside the show cause notice and the High Court order. The Supreme Court categorically ruled that extended limitation under Section 74 cannot be invoked merely by mechanically using expressions such as "fraud", "wilful misstatement" or "suppression of facts"; the material particulars giving rise to such an inference must emerge from the notice itself.

The Calcutta High Court expressly applied this Supreme Court ruling and found that, apart from a bare allegation of fraud or concealment, the notice did not disclose how such conduct was inferred. Invocation of Section 74 for Financial Year 2018-19 was consequently held to be without jurisdiction, dehors the statute and a colourable exercise of power. The decision reinforces an important principle in GST adjudication: extended limitation cannot be created by drafting; the foundational facts necessary to invoke Section 74 must actually exist and must be disclosed in the show cause notice itself.

Supplier's Default Is Not, by Itself, Fraud by the Recipient

The Section 74 issue also has an important connection to the ITC controversy itself. The Department sought to rely on supplier defaults and alleged irregular ITC while invoking the extended provision against the recipient. However, a supplier's failure to deposit tax does not automatically establish fraud, wilful misstatement or suppression by the purchaser.

This distinction is fundamental. Section 74 attaches serious consequences to specified culpable conduct. The conduct necessary to attract it must therefore be attributable to the person against whom the proceedings are initiated. A supplier's non-filing of Form GSTR-3B cannot, without additional material, establish that the recipient fraudulently availed credit.

The judgment accordingly prevents the Department from converting an ordinary ITC eligibility dispute into a fraud case merely because the normal limitation period poses a difficulty. Where fraud or suppression is alleged, the notice must disclose the facts connecting the recipient with such conduct.

Alternative Remedy Did Not Cure Jurisdictional and Natural Justice Defects

The Department questioned the writ petition on the ground that the adjudication order was appealable under Section 107, relying on Fanmade11 Fantasy Sports Private Limited Versus Union Of India & Ors. - 2026 (7) TMI 1044 - SC Order. The Court distinguished that decision since the present case involved non-consideration of material documents and a jurisdictional challenge to the invocation of Section 74 for Financial Year 2018-19.

Relying on the settled exceptions recognised in Whirlpool Corporation Versus Registrar of Trade Marks, Mumbai & Ors. - 1998 (10) TMI 510 - Supreme Court, the Court entertained the writ petition despite the availability of an appellate remedy, as the challenge involved both violation of natural justice and lack of jurisdiction.

Fresh Adjudication Ordered - Documentary Evidence Must Be Examined

The Order-in-Original dated 09.12.2025 and the consequential recovery notice were quashed, with directions to reconsider the petitioners' reply and supporting documents in light of Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others - 2023 (8) TMI 174 - CALCUTTA HIGH COURT, and the Supreme Court ruling in M/s G.R. Infra Projects Limited Ratlam Versus The State of Madhya Pradesh & Ors. - 2026 (8) TMI 1497 - SC Order A fresh speaking order is to be passed after a personal hearing within four weeks.

The remand does not amount to an unconditional grant of ITC. The petitioners must establish the genuineness of the transactions through relevant documentary evidence, and the authority must examine that evidence and decide the matter afresh in accordance with the binding precedents.

Rs. 10 Lakh Deposit - Relief Made Conditional

As a measure of bona fides, the petitioners were directed to deposit Rs. 10 lakh through Form GST DRC-03 under protest within four weeks. The amount will be adjusted against any final liability or refunded if the petitioners succeed in fresh adjudication.

The relief is expressly conditional. Failure to make the deposit within the stipulated period will automatically result in the order's benefit being vacated, enabling the Department to proceed with the recovery of approximately Rs. 6.3 crore in accordance with law.

The Larger Principle - Bona Fide ITC Requires Evidence, Not Mere Portal Matching

Cart Infralog distinguishes a bona fide purchaser affected by the supplier's default from a recipient involved in a fictitious or collusive transaction. Protection of ITC therefore depends on evidence establishing the genuineness of the supply, including invoices, e-way bills, transport documents, proof of receipt, and banking records.

The decision reinforces that a Form GSTR-2A mismatch is relevant but not conclusive. ITC entitlement must be determined by examining the underlying transaction, the recipient's bona fides, and whether the default is actually attributable to the recipient.

Supplier Default and Recipient Entitlement Must Not Be Conflated

Cart Infralog reinforces two safeguards: genuine ITC cannot be denied merely because of supplier default or portal mismatch, and Section 74 cannot be invoked to overcome a limitation on the basis of bare allegations of fraud, wilful misstatement or suppression without supporting facts.

The recipient must still establish the genuineness of the transaction. The principle is one of balance-a bona fide purchaser must prove the ITC claim but should not automatically bear the tax consequences of the supplier's default.

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