Input tax credit requires independent factual scrutiny and cannot rest only on the selling dealer's tax default.

Input tax credit cannot be denied solely because the selling dealer failed to deposit tax or file returns; the purchasing dealer's genuine transaction and payment to the seller must be independently examined on the facts and evidence. On the purchase of old used machinery as capital goods, the rejection of credit was unsustainable because the order did not show adequate merits-based scrutiny. The reassessment and demand were set aside and the matter was remanded for fresh consideration with all contentions left open.

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Issues: (i) Whether input tax credit could be denied merely because the selling dealer had not deposited the collected tax. (ii) Whether denial of input tax credit in respect of purchase of old used machinery as capital goods was sustainable.

Issue (i): Whether input tax credit could be denied merely because the selling dealer had not deposited the collected tax.

Analysis: The claim of the purchasing dealer was not disputed as to the genuineness of the purchase transaction. Denial of credit was founded principally on the selling dealer's failure to deposit tax and non-filing of returns. The burden to establish the correctness of the claim remained relevant, but the assessment could not rest only on the selling dealer's default without examining the purchasing dealer's transaction and payment of tax to the seller in the light of the governing precedent.

Conclusion: The denial of input tax credit on this ground was not affirmed and the matter required reconsideration.

Issue (ii): Whether denial of input tax credit in respect of purchase of old used machinery as capital goods was sustainable.

Analysis: The rejection of credit for the purchase of old used machinery from the dealer claimed as capital goods was not supported by satisfactory reasons. The order did not disclose adequate examination of the claim on its merits.

Conclusion: The denial of input tax credit on this aspect was unsustainable.

Final Conclusion: The impugned reassessment and demand were set aside and the matter was sent back for fresh consideration, leaving all contentions open.

Ratio Decidendi: Input tax credit cannot be denied solely on the ground that the selling dealer failed to deposit tax unless the purchasing dealer's claim is independently examined on the facts and evidence.

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