Input tax credit cannot be reversed against a compliant purchaser solely because the selling dealer defaulted on returns and tax remittance.

A purchasing registered dealer cannot be denied input tax credit merely because the selling dealer later failed to file returns or remit tax, where the purchaser produced invoices and other supporting records and complied with the prescribed statutory procedure. The Tamil Nadu VAT framework recognises credit when the purchaser establishes payment in the manner required by the Act and Rules. The proper remedy is to proceed against the defaulting selling dealer rather than reverse credit against the buyer. On that basis, the reversal of input tax credit and the consequential penalty were held unsustainable, and the assessment order was set aside.

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Issues: Whether input tax credit could be reversed and penalty imposed on a purchasing dealer merely because the selling dealer did not file returns or remit tax, despite the purchaser having produced invoices and other supporting records.

Analysis: The governing framework under the Tamil Nadu Value Added Tax Act, 2006 and the Tamil Nadu Value Added Tax Rules, 2007 recognises input tax credit where the purchasing registered dealer complies with the prescribed requirements and establishes payment of tax in the manner prescribed. The seller's subsequent default in filing returns or remitting tax does not, by itself, defeat the purchaser's entitlement when the purchaser has acted in accordance with the statutory procedure and the purchase is otherwise supported by documentary evidence. The proper course is to proceed against the defaulting selling dealer rather than deny the credit to the purchasing dealer.

Conclusion: The reversal of input tax credit and the consequential penalty were unsustainable; the issue was decided in favour of the assessee.

Final Conclusion: The assessment order was set aside and the writ petition was allowed, as the purchaser's entitlement to input tax credit could not be denied on the basis of the selling dealer's default alone.

Ratio Decidendi: A purchasing registered dealer who has complied with the prescribed requirements and substantiated payment for purchases cannot be denied input tax credit merely because the selling dealer failed to file returns or remit tax; the revenue must pursue the defaulting seller.

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