Input tax credit cannot be denied to a bona fide purchaser merely because the selling dealer later defaults or deregisters.

A bona fide purchasing dealer who paid tax to registered sellers and held valid invoices was entitled to input tax credit; the seller's later failure to remit tax was not a condition precedent to the purchaser's claim. The Court distinguished genuine purchases from bogus transactions and held that, where the seller defaults, the Revenue's remedy lies against the seller rather than the purchaser. It also held that subsequent deregistration of the selling dealer does not defeat credit for earlier qualifying purchases, though post-deregistration purchases would not qualify. The reassessment orders and demand notices were set aside and the matter was remitted for fresh consideration after hearing.

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Issues: (i) Whether remitting of tax by the registered selling dealer is a condition precedent for the purchasing dealer to claim input tax credit on the strength of a valid tax invoice. (ii) Whether input tax credit can be denied merely because the selling dealer failed to remit tax or was subsequently deregistered, and whether the reassessment orders and demand notices could be sustained without proper consideration of the factual position.

Issue (i): Whether remitting of tax by the registered selling dealer is a condition precedent for the purchasing dealer to claim input tax credit on the strength of a valid tax invoice.

Analysis: The statutory scheme under Sections 10(2) and 10(3) of the Karnataka Value Added Tax Act, 2003 permits a registered dealer to claim input tax subject to the prescribed restrictions. Section 11(a)(9) specifically restricts input tax where the goods are purchased from a dealer required to be registered but who has failed to register. On the facts found, the purchases were from registered dealers and the assessee had paid tax against invoices. The Court followed the principle that once the purchasing dealer proves bona fide transactions and payment of tax to the selling dealer, the purchasing dealer's entitlement is not made contingent upon the seller's subsequent remittance to the Government.

Conclusion: No. Remittance by the registered selling dealer is not, by itself, a condition precedent to the purchasing dealer's claim for input tax credit on bona fide purchases supported by valid invoices.

Issue (ii): Whether input tax credit can be denied merely because the selling dealer failed to remit tax or was subsequently deregistered, and whether the reassessment orders and demand notices could be sustained without proper consideration of the factual position.

Analysis: The Court distinguished cases involving bogus invoices or non-existent dealers from cases involving genuine purchases from registered dealers. It held that if the selling dealer defaults in remitting tax, the Revenue must proceed against the selling dealer. Subsequent deregistration of the seller does not, by itself, defeat credit for an earlier tax period, though purchases made after deregistration would not qualify. Since the assessment order proceeded on the premise that default by the sellers and revenue loss justified denial, and the factual position regarding some deregistration dates required reconsideration, the reassessment orders and demand notices could not be sustained as they stood.

Conclusion: No. Input tax credit could not be denied merely on the ground of seller default or subsequent deregistration for genuine pre-deregistration purchases, and the impugned reassessment orders and demand notices were set aside for reconsideration.

Final Conclusion: The matter was sent back to the prescribed authority for fresh consideration after affording an opportunity of hearing, with the impugned reassessment and demand notices set aside in the meantime.

Ratio Decidendi: A bona fide purchasing dealer who has paid tax to a registered selling dealer and holds valid invoices cannot be denied input tax credit merely because the seller later fails to remit the tax collected; the Revenue's remedy lies against the defaulting seller, not against the bona fide purchaser.

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