2025 (11) TMI 249 - HC - GST

Orders imposing penalty and denying ITC under s.74 set aside where supplier was registered at transaction time

M/s Singhal Iron Traders Versus Additional Commissioner And Another

HC set aside orders levying penalty and denying ITC under s.74 of the GST Act where proceedings were initiated because the supplier's registration was ... Reversal of ITC - levy of penalty u/s 74 of GST Act - initiation of proceedings u/s 74 of the GST Act on the ground that the registration of the supplier was cancelled subsequent to the transactions in questions while the purchases were disclosed from a non-existing dealer - HELD THAT:- It is not in dispute that the supplier filed its return in the forms of GSTR-01 and GSTR-3B. Moreover, it is also not in dispute that without making payment of due taxes, GSTR-3B cannot be generated. Once the tax was paid by the petitioner in the forms of GSTR-01 and GSTR-3B, no adverse inference can be drawn against the petitioner on the premise that the registration of the dealer from whom the purchases were shown to be made, was cancelled subsequently. It was the duty of the authorities to verify the said information as to whether at the time of transactions, the firm was in existence or not, and therefore, without verifying the same, the authorities ought not to have initiated the proceedings against the petitioner only on the borrowed information as the petitioner discharged its preliminary duty by making the payment of due taxes through banking channels. The impugned orders cannot be sustained in the eyes of law and the same are hereby quashed - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reversal of input tax credit (RITC) and imposition of penalty under Section 74 of the GST Act can be sustained against a registered recipient where the supplier's GST registration was cancelled after the transaction. 2. Whether the recipient's contemporaneous documentary records (tax invoices, e-way bills, bank payments) together with the supplier having filed GSTR-1 and GSTR-3B (with tax payment) preclude adverse inference against the recipient absent independent proof of fraud or misrepresentation by the recipient. 3. Whether tax authorities may initiate proceedings under Section 74 based solely on information that the supplier was later found to be non-existent, without verifying the supplier's existence or the genuineness of transactions at the time they occurred. 4. Whether the absence of allegations or findings regarding unregistered transport (e-way/vehicle non-registration) or other defects in transportation/documentation affects the validity of proceedings under Section 74 against the recipient. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reversal of ITC and penalty where supplier's registration was cancelled post-transaction Legal framework: Section 74 (penalty/proceedings for fraudulent availment of ITC) and general GST provisions governing availability of input tax credit and reversal where supplies are not genuine. Precedent Treatment: No prior authorities were invoked or considered in the judgment; the Court proceeded on statutory text and evidentiary facts. Interpretation and reasoning: The Court held that where the recipient is a registered dealer and the purchases were documented by valid tax invoices and e-way bills, and payment has been shown through banking channels, the mere fact that the supplier's registration was cancelled subsequent to the transaction cannot, by itself, justify RITC and penalty under Section 74. The Court reasoned that payment of tax by the supplier (as evidenced by filed GSTR-1 and GSTR-3B returns) and the recipient's compliance with transactional formalities negate an inference that the recipient fraudulently availed ITC. Ratio vs. Obiter: Ratio - orders reversing ITC and imposing penalty under Section 74 cannot be sustained solely because supplier registration was cancelled after the transaction when recipient's transactions are supported by invoices, e-way bills, bank payments, and supplier's filing of returns with tax payment. Obiter - none additional. Conclusions: The impugned RITC and penalty based solely on subsequent cancellation of supplier registration were quashed. Issue 2: Sufficiency of contemporaneous records and supplier's returns to preclude adverse inference absent fraud Legal framework: Principles governing availment of ITC - availability where there are valid tax invoices, the supplier has paid tax (as per returns), and recipient has complied with statutory formalities. Precedent Treatment: Not cited; Court applied statutory logic and evidentiary standards. Interpretation and reasoning: The Court emphasized that GSTR-3B cannot be filed without payment of due tax; therefore, the supplier's filing of GSTR-1 and GSTR-3B for the relevant period and evidence of bank payments substantively supports genuineness. In such circumstances, absent materials showing that the recipient engaged in fraud or misrepresentation, an adverse inference against the recipient is unwarranted. The recipient discharged a preliminary duty by undertaking payments and maintaining documents; the burden to independently verify or establish fraud rests with the authorities. Ratio vs. Obiter: Ratio - contemporaneous documentary evidence and supplier returns showing tax payment bar initiation of penal proceedings against the recipient in absence of material showing fraud or misrepresentation by the recipient. Obiter - suggestion that authorities must verify supplier status at the time of transactions. Conclusions: The recipient's documentary compliance and supplier's returns negate justification for RITC/penalty without further evidence of recipient's culpability. Issue 3: Obligation of authorities to verify supplier's existence/status at the time of transaction before initiating proceedings Legal framework: Administrative duty to verify material facts before invoking penal or adverse measures under GST law; principles of fair administrative action and requirement for material satisfaction. Precedent Treatment: Not relied upon; the Court applied principles of administrative fairness and statutory scheme. Interpretation and reasoning: The Court held that initiation of proceedings based on 'borrowed information' - namely that the supplier was later found non-existent - without verification whether the supplier existed and conducted business at the time of the transactions was improper. Authorities are required to verify the supplier's status at the relevant time and assess genuineness of transactions rather than mechanically relying on subsequent cancellation to penalize the recipient. Ratio vs. Obiter: Ratio - authorities must verify existence/genuineness at the time of transaction before proceeding under Section 74; reliance on later cancellation alone is insufficient. Obiter - none significant beyond that verification duty. Conclusions: Proceedings initiated without such verification were unjustified and liable to be quashed. Issue 4: Relevance of absence of findings regarding transportation/documentation defects Legal framework: Validity of transactions also assessed by presence of legitimate transportation documents (e-way bill, vehicle registration) and other corroborative evidence. Precedent Treatment: Not discussed. Interpretation and reasoning: The Court noted that the revenue did not allege or establish any defect in transportation documents (such as vehicle non-registration) for the goods in question. In the absence of such adverse findings, the initiation of proceedings could not be justified on the basis that the purchases were from an unregistered or non-existent dealer, particularly when e-way bills and bank payments existed. Ratio vs. Obiter: Ratio - absence of any finding of transportation/documentation irregularity weakens the case for invoking Section 74 against the recipient. Obiter - none. Conclusions: Lack of adverse findings regarding transport/documentation contributed to quashing of the impugned orders. Overall Conclusion The Court quashed the orders imposing RITC and penalty under Section 74 because the recipient had valid tax invoices, e-way bills, bank payments, and the supplier had filed GSTR-1 and GSTR-3B (indicating tax payment); no material showed recipient's fraud or misrepresentation; and the authorities failed to verify the supplier's existence or the genuineness of transactions at the relevant time before initiating penal proceedings. The quashing constitutes the operative ratio of the decision.