Input tax credit enquiry must focus on the immediate seller, and ex parte adverse material needs confrontation before use.

For disallowance of input tax credit, the normal enquiry under Rule 21(3) of the U.P. VAT Rules focuses on the assessee's immediate seller; if that purchase transaction is genuine and the sale is established, a further upstream enquiry is ordinarily unnecessary. Adverse material gathered in an ex parte enquiry cannot be used against the assessee unless it is confronted with that material and given a fair opportunity to rebut it, including cross-examination where appropriate. The matter was left for fresh consideration in the final assessment after observance of fair procedure.

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Issues: (i) Whether, for disallowance of input tax credit, the enquiry under Rule 21(3) of the U.P. Value Added Tax Rules, 2008 is ordinarily confined to the dealer who sold goods to the assessee; (ii) Whether adverse material collected in an ex parte enquiry could be relied upon without confronting the assessee in the assessment proceedings.

Issue (i): Whether, for disallowance of input tax credit, the enquiry under Rule 21(3) of the U.P. Value Added Tax Rules, 2008 is ordinarily confined to the dealer who sold goods to the assessee.

Analysis: The rule was treated as requiring the revenue, in the normal course, to examine the genuineness of the seller from whom the assessee claims to have purchased the goods against a tax invoice. If that transaction is found genuine and the sale of goods is established, a further enquiry is ordinarily not required merely because an upstream dealer may be suspect.

Conclusion: The enquiry is ordinarily confined to the assessee's immediate seller, and the assessee's contention was accepted to that extent.

Issue (ii): Whether adverse material collected in an ex parte enquiry could be relied upon without confronting the assessee in the assessment proceedings.

Analysis: The revenue relied not only on the status of the first selling dealer but also on other enquiries touching the assessee's suppliers. Those enquiries were ex parte, the assessee had not been confronted with the material, and no opportunity of rebuttal or cross-examination was afforded. In such circumstances, the material could not be allowed to prejudice the assessee without observance of fair procedure. As the matter arose from provisional assessment, the appropriate course was to leave it open to the assessing authority to confront the assessee with the adverse material and decide the final assessment in accordance with law.

Conclusion: Ex parte adverse material could not be used against the assessee without confrontation, and the matter was left to be considered in the final assessment proceedings.

Final Conclusion: The revisions were disposed of by permitting the assessing authority to examine the issue afresh in the pending final assessment after confronting the assessee with the adverse material, while the interim position under the Tribunal's order was preserved until final assessment.

Ratio Decidendi: For disallowance of input tax credit, the immediate seller's transaction is the normal focus of enquiry, and adverse material gathered behind the assessee's back cannot be relied upon unless the assessee is confronted with it and given an opportunity to rebut it.

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