2025 (8) TMI 308 - HC - GST

ITC Reversal Upheld Under Section 16(2)(c) of GST Act; Penalty Quashed for Procedural Lapse

M/s RV ENTERPRISES AND ANR. Versus STATE OF GUJARAT AND ORS.

The HC upheld the disallowance of input tax credit (ITC) and cancellation of GST registration, finding the supplier to be non-genuine and the petitioner ... Principles of natural justice - proper service of SCN or not - issuance of SCN u/s 73 of the GST Act without prior intimation in Form GST DRC-01A - disallowance of ITC - cancellation of GST registration - HELD THAT:- Considering the material placed on record and on perusal of the impugned show cause notice as well as order-in-original and the averments made in the affidavit-in-reply filed on behalf of the respondent no.2, it appears that supplier of the goods to the petitioner i.e. M/s. Parshvi Tradelinks is a non genuine supplier and the petitioner has not placed on record any material to show that the supplies received by the petitioner are supported by invoices, eway bill, transport receipt etc. as the petitioner has not provided such details on the ground that there is no allegation made in the show cause notice against the genuineness of the transactions entered into by the petitioner. However, once it is found by the respondent authority that the supplier of the goods to the petitioner has failed to discharge the tax liability as per the provisions of section 16(2)(c) of the GST Act, the petitioner is liable to pay such tax or input tax credit availed by the petitioner is liable to be reversed. It is not inclined to apply the decision in case of Suncraft Energy Pvt. Ltd.(supra) of Calcutta High Court which is followed in Lokenath Construction Pvt. Ltd. [2024 (5) TMI 362 - CALCUTTA HIGH COURT] as the facts before the Hon’ble Calcutta High Court was that there was difference between GSTR-2A and GSTR-3B which was made the basis of disallowance of input tax credit and further Revenue in the said case failed to inquire on the supplier despite clarifications and denial of credit due to supplier’s default was held to be unconstitutional. It is also found by the Hon’ble Calcutta High Court that there was an admission of the fact that assessee had made payment of tax to supplier against transaction and such tax had not been remitted to the State Exchequer, then the elementary principle to be adopted was to cause the inquiry with supplier and without doing so to penalise the petitioner was held to be arbitrary. However in facts of the case the respondent has already made an inquiry of the supplier of the goods to the petitioner and found that no outward tax liability has been discharged by the supplier and as per provisions of section 16(2)(c), the petitioner is rightly held to be liable for reversal of input tax credit availed by it on the supplies received by the petitioner against which no tax was paid to State Exchequer. The contention of the petitioner that as the impugned show cause notice and the order-in-original was passed under section 73 and not under section 74 and therefore, the respondent authorities have believed the supplies received by the petitioner is genuine is concerned, in view of facts of the case, it is true that respondent authorities have not doubted the supplies received by the petitioner but has stated in the impugned order-in-original as well as the show cause notice that supplier of the petitioner has failed to discharge the tax liability and therefore, the petitioner was required to reverse the input tax credit availed on the supplies received by the petitioner. The penalty imposed by the respondent authorities is not required to be levied in absence of intimation issued in Form GST DRC-01A by the respondent authorities and as such, the impugned order is modified to that extent and penalty levied in the impugned order is quashed and set aside. Appeal disposed off. ISSUES: Whether issuance of show cause notice under section 73 of the GST Act without prior intimation in Form GST DRC-01A affects jurisdiction and entitlement to reply.Whether input tax credit (ITC) can be disallowed under section 16(2)(c) of the GST Act where the supplier's registration is cancelled ab initio due to non-payment of outward tax liability.Whether a bona fide recipient who has paid value and tax to the supplier can be saddled with reversal of ITC and tax demand when the supplier fails to pay output tax.Whether the provisions of section 16(2)(c) of the GST Act can be 'read down' to exempt bona fide recipients from disallowance of ITC in cases of supplier default.Whether penalty can be imposed under the impugned order in absence of intimation in Form GST DRC-01A.Whether the impugned order-in-original is sustainable when it relies on documents not disclosed in the show cause notice. RULINGS / HOLDINGS: The show cause notice issued without prior intimation in Form GST DRC-01A is not without jurisdiction, as issuance of such intimation is not mandatory, particularly after amendment of section 142(1A) of the GST Act.Input tax credit availed by the petitioner must be reversed under section 16(2)(c) of the GST Act where the supplier's registration was cancelled ab initio and no outward tax was paid to the Government, since 'no registered person shall be entitled to the credit of any input tax' unless 'the tax charged in respect of such supply has been actually paid to the Government.'The petitioner, being a recipient of supplies from a non-genuine supplier who failed to discharge tax liability, cannot avoid reversal of ITC despite being a bona fide purchaser; the loss of revenue to the State justifies application of section 16(2)(c).The provisions of section 16(2)(c) cannot be read down in the facts of the case to exempt the petitioner, as the supplier was found non-genuine and the tax was not deposited with the State Exchequer.Penalty imposed under the impugned order is quashed and set aside due to absence of intimation in Form GST DRC-01A, which is required to save penalty, but the rest of the order-in-original is confirmed.The impugned order-in-original relying on documents not disclosed in the show cause notice is not held to be invalid, as the petitioner was given opportunity to reply and the order is based on inquiry into supplier's default. RATIONALE: The Court applied the provisions of the Central Goods and Services Tax Act, 2017, particularly section 16(2)(c) which conditions entitlement to input tax credit on actual payment of tax by the supplier to the Government.The Court distinguished the facts from precedents where the supplier was genuine and the Revenue failed to inquire into supplier's default, noting that in the present case, the supplier's registration was cancelled ab initio after inquiry and non-payment of tax was established.The Court relied on statutory burden of proof under section 155 of the GST Act, which lies on the person claiming ITC to prove validity of purchases and tax payment by the supplier.The Court noted that the amendment to section 142(1A) clarified that issuance of intimation in Form GST DRC-01A is not mandatory and is intended to save penalty, thus absence of such intimation does not vitiate jurisdiction.The Court rejected the plea to 'read down' section 16(2)(c) to protect bona fide recipients from reversal of ITC where the supplier is non-genuine and tax is unpaid, emphasizing the loss of revenue and statutory mandate.Penalty was quashed due to procedural deficiency (absence of intimation in Form GST DRC-01A), reflecting a doctrinal balance between procedural fairness and substantive tax liability.