Input tax credit cannot be reversed against a compliant purchaser merely because the seller defaulted on tax obligations.

Input tax credit under the Tamil Nadu Value Added Tax Act, 2006 could not be reversed against a purchasing dealer merely because the selling dealer failed to file returns, remit tax, or later became a cancelled dealer, where the purchaser had complied with the prescribed return and payment requirements. The court applied Section 19(1) and Rule 10(2) to hold that, once the buying dealer establishes statutory compliance and purchases from a registered dealer, the Revenue must proceed against the defaulting seller rather than fasten the seller's non-remittance on the purchaser. The assessment orders and notices based on reversal were therefore unsustainable, and the purchaser's credit claim was protected.

---

---

Issues: Whether input tax credit claimed by a purchasing dealer under the Tamil Nadu Value Added Tax Act, 2006 could be reversed merely because the selling dealer had not filed returns, had not remitted tax, or was a cancelled dealer, when the purchasing dealer had complied with the prescribed requirements.

Analysis: The purchase-side entitlement to input tax credit was examined with reference to Section 19(1) of the Tamil Nadu Value Added Tax Act, 2006 and Rule 10(2) of the Tamil Nadu Value Added Tax Rules, 2007. Where the purchasing dealer establishes compliance with the prescribed return and payment requirements, and the seller is shown as a registered dealer, the Revenue cannot deny or reverse credit solely on the ground that the selling dealer later failed in its tax obligations. Any action for non-remittance lies against the defaulting selling dealer, not against the purchaser who has satisfied the statutory conditions. The notices and orders, which proceeded on the premise that the petitioner had purchased from cancelled dealers and therefore must suffer reversal, did not accord with the settled legal position.

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

Final Conclusion: The assessment orders were set aside and the writ petitions were allowed on the footing that compliance by the purchasing dealer protected its input tax credit claim, and the default of the selling dealer could not be fastened on the purchaser.

Ratio Decidendi: A purchasing dealer's input tax credit cannot be denied or reversed merely because the selling dealer failed to remit tax, so long as the purchaser complied with the statutory requirements for claiming credit.

---