Input tax credit cannot be reversed from a purchasing dealer solely due to seller default or cancelled registration.

Input tax credit could not be reversed against the purchasing dealer merely because the selling dealer failed to reflect the transaction in monthly returns, as earlier Division Bench precedent barred fastening that liability on the buyer alone. The same principle applied where the selling dealer's registration had been cancelled: cancellation or de-registration by itself did not justify reversal of credit or demand of tax from the purchasing dealer. The court therefore interfered only with the two input-tax-credit related demands and penalties, while leaving the remaining assessment intact and preserving the assessee's statutory remedy on the other disputed heads.

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Issues: (i) Whether reversal of input tax credit and the consequential tax demand could be sustained merely because the selling dealer had not reflected the transactions in its monthly returns. (ii) Whether reversal of input tax credit and the consequential demand could be sustained on the ground that the selling dealer's registration had been cancelled.

Issue (i): Whether reversal of input tax credit and the consequential tax demand could be sustained merely because the selling dealer had not reflected the transactions in its monthly returns.

Analysis: The Court noted that the point was already covered by earlier Division Bench decisions holding that the purchasing dealer cannot be fastened with tax liability or reversal of input tax credit solely because the selling dealer failed to disclose the transaction in its return. The impugned order had proceeded on that basis in respect of serial no. 1.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Issue (ii): Whether reversal of input tax credit and the consequential demand could be sustained on the ground that the selling dealer's registration had been cancelled.

Analysis: The Court relied on existing precedent holding that cancellation or de-registration of the selling dealer, by itself, does not justify reversal of input tax credit or levy of tax on the purchasing dealer. The impugned order had adopted that ground in respect of serial no. 6.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The appellate court interfered only to the limited extent of the two input-tax-credit related demands and penalties, while leaving the remaining assessment intact and permitting the assessee to pursue the other disputed heads by statutory remedy.

Ratio Decidendi: A purchasing dealer's input tax credit cannot be reversed, nor tax demanded from it, merely because the selling dealer did not reflect the sale in returns or because the selling dealer's registration was cancelled.

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