Input tax credit cannot be denied to a compliant purchaser for the seller's tax default; reversal and penalty were set aside.

Input tax credit cannot be reversed against a purchasing dealer merely because the selling dealer failed to remit tax or report the transaction, where the purchaser had valid tax invoices, accounted for the purchases, paid tax to the seller, and reflected the transactions in returns. The authority's reliance solely on the seller's default was inconsistent with the governing provisions and settled principle that a compliant purchaser should not be penalised for the seller's omission. The proper course is to proceed against the defaulting selling dealer. The reversal of input tax credit and the consequential penalty order were held unsustainable and were set aside.

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Issues: Whether input tax credit could be reversed and penalty sustained merely because the selling dealer failed to remit tax or report the transaction, when the purchasing dealer had paid tax under valid invoices and reflected the purchases in returns.

Analysis: The petitioner had accounted for the purchases, paid tax to the seller, and claimed input tax credit on the strength of valid tax invoices. The impugned order proceeded only on the basis that the selling dealer had not paid or reported the tax. Such a ground does not justify denial of input tax credit to the purchasing dealer, because the purchaser cannot be penalised for the seller's default. The reasoning adopted by the authority was held to be inconsistent with the governing provisions and the settled view that, where the claim is otherwise supported by valid documents, the department must proceed against the defaulting selling dealer.

Conclusion: The reversal of input tax credit and the consequential order were unsustainable and were set aside, in favour of the petitioner.

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