Input tax credit denied when supplier fails to deposit charged tax under Section 16(2)(c)

The Allahabad HC dismissed a petition challenging denial of input tax credit (ITC) for 2018 transactions with supplier Shree Radhey International, Delhi. The petitioner claimed ITC based on tax invoices, but the supplier never deposited the charged tax with the government. The court held that Section 16(2)(c) mandates actual tax payment by supplier for ITC eligibility. Since the supplier's registration was cancelled and no tax was deposited, the petitioner could not claim ITC benefits. The court distinguished the case from M/s Solvi Enterprises, noting that Section 16(2)(c) provisions were not properly considered in that matter. The mandatory requirement for supplier tax deposit under Section 16(2)(c) was upheld as clear and unambiguous.

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The core legal questions considered in this judgment revolve around the entitlement to input tax credit (ITC) under the U.P. Goods and Services Tax Act, 2017 ("U.P. GST Act") in respect of a transaction involving purchase of goods from a supplier whose registration was subsequently cancelled and who allegedly did not deposit the tax collected. Specifically, the issues include:

1. Whether the petitioner is entitled to claim ITC on purchases made from a supplier who was registered at the time of supply but whose registration was later cancelled and who did not deposit the tax to the government.

2. The applicability and interpretation of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 ("Central Act") and corresponding provisions under the U.P. GST Act regarding the condition that tax must have been actually paid to the government by the supplier for ITC to be claimed.

3. The evidentiary burden on the recipient of goods to prove the genuineness of the transaction, including actual physical movement of goods and payment of tax by the supplier.

4. The validity and scope of proceedings initiated under Section 74 of the U.P. GST Act for recovery of tax, interest, and penalty where ITC has been wrongly availed.

5. The relevance and impact of various judicial precedents, including judgments of coordinate benches and the Supreme Court, on the interpretation of ITC eligibility and procedural safeguards.

Issue-wise Detailed Analysis

Issue 1: Entitlement to ITC when supplier's registration is cancelled and tax not deposited

The legal framework governing ITC entitlement is primarily found in Section 16 of the Central Act and corresponding provisions of the U.P. GST Act. Section 16(1) grants a registered person the right to claim ITC subject to prescribed conditions. However, Section 16(2) imposes restrictions, notably clause (c), which mandates that the tax charged in respect of the supply must have been actually paid to the government either in cash or through utilization of ITC.

The Court noted that the transaction in question took place in 2018, when the supplier was registered. However, the supplier's registration was cancelled in 2019, and it was found that the supplier had not deposited the tax on the supplies made. The petitioner claimed ITC on the basis of tax invoices and payment through banking channels but failed to demonstrate that the tax was paid by the supplier to the government.

The Court emphasized the plain language of Section 16(2)(c), which clearly restricts ITC entitlement to cases where the tax has been actually paid by the supplier. The provision was described as unambiguous and mandatory. Therefore, the petitioner's claim was not sustainable in the absence of proof of tax payment by the supplier.

Issue 2: Interpretation of Section 16(2)(c) and related provisions

The Court extensively examined the statutory scheme, including the unamended provisions of Section 41 and Section 43A (prior to their amendment/omission by the Finance Act, 2022), which deal with the provisional acceptance and procedure for availing ITC. These provisions, read with Section 16(2)(c), collectively impose a framework that conditions ITC on the actual payment of tax by the supplier and verification of outward supplies.

The Court observed that although the dispute relates to a 2018 transaction, understanding the post-amendment framework was helpful to appreciate the legislative intent to prevent fraudulent claims and ensure compliance. The amendments underscore the importance of matching ITC claims with actual tax payments by suppliers.

Issue 3: Burden of proof on the recipient to establish genuineness and physical movement of goods

The Court relied heavily on the Supreme Court's decision in a case concerning the Karnataka Value Added Tax Act, 2003, which clarified that the burden of proving the correctness of an ITC claim lies squarely on the recipient claiming such credit. Mere production of tax invoices or payment proofs is insufficient. The recipient must prove beyond doubt the actual transaction, physical movement of goods, and payment particulars.

The petitioner in this case failed to discharge this burden. There was no evidence of actual tax payment by the supplier, nor sufficient proof of physical movement of goods beyond the tax invoices and banking transactions. The Court found that the authorities rightly initiated proceedings under Section 74 of the U.P. GST Act for wrongful availing of ITC.

Issue 4: Validity of proceedings under Section 74 for recovery of wrongly availed ITC

Section 74 of the U.P. GST Act empowers authorities to determine tax not paid or input tax credit wrongly availed due to fraud, willful misstatement, or suppression of facts. The Court noted that the issuance of a show-cause notice under Section 74 was justified as the supplier's registration was cancelled and tax was not deposited, yet the petitioner claimed ITC.

The Court explained that Section 74 proceedings are a mechanism to protect government revenue from fraudulent claims and ensure compliance with the statutory conditions for ITC. The petitioner's failure to produce evidence of tax payment by the supplier justified the demand for tax, interest, and penalty.

Issue 5: Consideration of judicial precedents relied upon by parties

The petitioner relied on several judgments from coordinate benches and other High Courts, including cases where ITC claims were allowed or matters remanded for fresh consideration. However, the Court observed that many of these judgments did not address or consider the mandatory condition under Section 16(2)(c) regarding actual tax payment by the supplier.

In contrast, the Court found the decision in a coordinate bench case rejecting ITC claims where the burden of proof was not discharged, and the Supreme Court's ruling emphasizing the recipient's burden of proof, to be more authoritative and applicable. The Court distinguished the petitioner's cited judgments on these grounds.

Application of Law to Facts and Treatment of Competing Arguments

The petitioner argued that since the supplier was registered at the time of supply, and payment was made through banking channels with tax invoices issued, ITC should be allowed. The petitioner contended that the fault lay with the supplier's failure to deposit tax, which should not affect the recipient's claim.

The Court rejected this argument, holding that the statutory scheme expressly conditions ITC entitlement on actual tax payment by the supplier. The petitioner's inability to prove tax payment or physical movement of goods meant the claim was not bona fide. The Court also noted that safeguards in the GST law are designed to prevent fraudulent claims and protect government revenue.

The respondent and the authorities relied on the statutory provisions and the Supreme Court precedent to maintain that the petitioner failed to discharge the burden of proof and that the initiation of proceedings under Section 74 was justified.

Conclusions

The Court concluded that the petitioner was not entitled to claim ITC on the disputed transaction because the supplier had not deposited the tax as required under Section 16(2)(c). The petitioner failed to prove the genuineness of the transaction, physical movement of goods, and tax payment by the supplier. The proceedings under Section 74 were rightly initiated and upheld. The Court dismissed the writ petition and discharged the interim order.

Significant Holdings

"The provision is simple and clear, and there is no ambiguity as regards actual payment of tax by supplier to Government. Once the supplier has not deposited the tax mandated under sub-section (2)(c) of Section 16, the petitioner purchaser cannot claim the benefit."

"The burden of proving the correctness of ITC remains upon the dealer claiming such ITC. Such a burden of proof cannot get shifted on the revenue. Mere production of the invoices or the payment made by cheques is not enough and cannot be said to be discharging the burden of proof."

"Section 74 is a mechanism where any input tax credit which has wrongly been availed can be taken back by Government along with interest and penalty."

"The scheme under the Act has been provided to prevent fraudulent transactions and bogus claims of ITC. Safeguards have been put in place through various provisions to match transactions which have taken place between the parties before ITC is availed."

Final determinations:

- ITC claim is not permissible without proof of actual tax payment by the supplier as per Section 16(2)(c).

- The petitioner failed to discharge the burden of proof regarding genuineness and physical movement of goods.

- Proceedings under Section 74 for recovery of wrongly availed ITC were valid and rightly upheld.

- Reliance on judgments not considering Section 16(2)(c) is misplaced.

- The writ petition is dismissed, and no interference with the orders of the authorities is warranted.

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