Input tax credit reversal requires purchaser's opportunity to prove genuineness before adverse action can stand.

Input tax credit cannot be reversed solely because the selling dealer failed to report corresponding sales in its returns. Where the Revenue identifies a discrepancy, the purchasing dealer must be confronted with it and given an opportunity to establish the genuineness of the transaction; adverse action is permissible only if the transaction is not satisfactorily proved. The Madras HC held that the reversal order was unsustainable and set it aside, while reserving liberty to the Revenue to redo the assessment after due opportunity and in accordance with law.

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Issues: Whether input tax credit could be reversed merely because the selling dealers did not report the corresponding sales in their returns.

Analysis: The reversal of input tax credit cannot rest solely on the default of the selling dealer in reporting sales. Where the Revenue finds a discrepancy, the purchaser must be confronted with it and given an opportunity to establish the genuineness of the transaction. Adverse action against the purchasing dealer is permissible only after such opportunity and only if the transaction is not satisfactorily proved.

Conclusion: The impugned order reversing input tax credit was unsustainable and was set aside. The issue was decided in favour of the assessee.

Final Conclusion: The writ petition succeeded, with liberty reserved to the Revenue to redo the assessment after due opportunity and in accordance with the governing legal principles.

Ratio Decidendi: Input tax credit cannot be reversed solely on the basis of the selling dealer's failure to report sales; the purchaser must first be given an opportunity to establish the genuineness of the underlying transaction.

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