Input tax credit and penalty limits: seller default alone cannot deny credit, and penal action needs recorded reasons and culpability.

Input tax credit cannot be denied merely because the selling dealer failed to remit tax, where the purchaser is not shown to be at fault; the court set aside the credit denial on that basis. A stock-variation demand cannot be sustained without considering the assessee's objections, reconciliation statement, and supporting records, so the assessment was remanded for fresh consideration. Penalty and equal addition require recorded reasons and a basis showing culpability or mens rea; in the absence of such findings, the penal levy was set aside.

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Issues: (i) Whether denial of Input Tax Credit on the ground of seller-side mismatch and non-remittance of tax was sustainable; (ii) Whether the finding on stock variation and consequent tax demand could stand without consideration of the assessee's objections and supporting records; (iii) Whether penalty and equal addition could be sustained in the absence of recorded reasons and mens rea.

Issue (i): Whether denial of Input Tax Credit on the ground of seller-side mismatch and non-remittance of tax was sustainable.

Analysis: The denial rested only on the fact that the selling dealers had not remitted the tax collected into the Government treasury. The assessee was not shown to be at fault. The authority had already accepted most of the invoices and could not reverse credit merely because of default on the part of the selling dealer. The principle applied was that a purchaser's input tax credit cannot be denied solely due to the seller's default in remitting tax.

Conclusion: The denial of Input Tax Credit to the extent of the balance amount was unsustainable and was set aside in favour of the assessee.

Issue (ii): Whether the finding on stock variation and consequent tax demand could stand without consideration of the assessee's objections and supporting records.

Analysis: The assessee had filed a detailed reply and reconciliation statement, but the authority proceeded on the assumption that the defects had been admitted during inspection. A statutory authority is bound to consider the objections and documents produced before finalising the assessment. Non-consideration of the explanation and materials amounted to a failure to exercise the statutory function properly.

Conclusion: The finding on stock variation and the related tax demand were set aside and the matter was remanded for fresh consideration in favour of the assessee.

Issue (iii): Whether penalty and equal addition could be sustained in the absence of recorded reasons and mens rea.

Analysis: The assessment order and show-cause notice did not disclose reasons showing mens rea or the basis for proposing equal addition and penalty. In the absence of specific findings justifying penal action, the levy could not be upheld.

Conclusion: The penalty and equal addition were not sustainable and were set aside in favour of the assessee.

Final Conclusion: The assessee obtained substantive relief on the credit and penalty issues, while the stock-variation issue was sent back for fresh adjudication after due consideration of objections and documents.

Ratio Decidendi: Input tax credit cannot be denied merely because the selling dealer failed to remit tax, and penalty cannot be sustained without recorded reasons establishing culpability.

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