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

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 liable to reverse ITC under section 16(2)(c) of the GST Act as the supplier failed to discharge tax liability. The court distinguished the case from Calcutta HC precedents where no inquiry was made against the supplier. However, the penalty imposed was quashed due to lack of prior intimation in Form GST DRC-01A. The appeal was disposed of with modification of the order to remove the penalty, affirming the reversal of ITC but setting aside the penalty for procedural lapses.

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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.

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