ITC Denial Under Section 74 Set Aside Where Seller Tax Paid and No Purchaser Fraud Proven

HC quashed the impugned orders issued under Section 74 of the GST Act against the purchasing dealer and allowed the petition. It held that the tax authorities failed to consider that the selling dealer had filed GSTR-1 and GSTR-3B, and that ITC details were auto-populated in GSTR-2A, which were never disputed. As the selling dealer was registered on the date of transaction, and tax collected by the seller stood deposited with the revenue, neither the invoices nor the transactions could be doubted. In absence of proof of fraud or willful misstatement by the purchaser, denial of ITC and levy of interest and penalty were unsustainable.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether input tax credit could be denied and reversed under Section 74 of the GST Act where the purchasing dealer bought goods from a seller who was registered on the date of transaction, had filed returns and deposited tax, but whose registration was cancelled subsequently.

1.2 Whether, in the facts of the case, the statutory conditions of Section 16 of the GST Act for availing input tax credit stood satisfied by the purchasing dealer.

1.3 Whether initiation and continuation of proceedings under Section 74 of the GST Act against the purchasing dealer were justified in the absence of any fraud, wilful misstatement or suppression on its part.

1.4 Whether the burden to prove actual movement of goods and genuineness of the transaction was discharged by the purchasing dealer, and whether the precedents relied on by the revenue regarding proof of movement of goods were applicable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Denial of input tax credit under Sections 16 and 74 where the seller was registered and had paid tax; effect of subsequent cancellation of seller's registration

Legal framework (as discussed)

2.1 The Court referred to Section 16 of the GST Act to note that input tax credit can be availed by a purchasing dealer upon satisfaction of statutory conditions, including that the tax in respect of the supply has been paid by the selling dealer. Section 74 permits initiation of proceedings for recovery where input tax credit has been wrongly availed or utilized by reason of fraud, wilful misstatement or suppression of facts.

Interpretation and reasoning

2.2 The Court found from the record that the purchasing dealer had shown its purchases from a dealer who was undisputedly registered at the time of the transaction.

2.3 The record showed that the selling dealer had filed GSTR-1 and GSTR-3B up to the relevant period, and for the supplies made to the purchasing dealer the tax had been paid and deposited with the department.

2.4 The Court noted that payments for the purchases, including the tax component, were made through banking channels. It was not the case of the revenue that either the purchasing dealer or its supplier were unregistered on the transaction date; rather, the supplier's registration was cancelled only subsequently.

2.5 The Court observed that under the GST mechanism, filing of GSTR-1 enables auto-population of GSTR-2A for the recipient and opens the window for filing GSTR-3B by the supplier for payment of tax. The existence of GSTR-3B and GSTR-2A entries, auto-populated in accordance with the statute, was not disputed by the authorities, yet the impugned orders did not deal with these forms and proceeded on the contrary assumption that there was no material showing deposit of tax by the seller.

2.6 The Court held that where the selling dealer was registered on the date of transaction, the tax in respect of the supply stood deposited with the department, and the transaction was duly reflected in statutory returns and payment was made through banking channel, the conditions under Section 16 stood satisfied for the purchasing dealer to claim input tax credit.

2.7 The Court further held that subsequent cancellation of the seller's registration, especially when done with effect from a date after the transaction, could not retrospectively affect the purchasing dealer's entitlement to input tax credit for that transaction, and no adverse inference could validly be drawn against the purchaser solely on such subsequent cancellation.

2.8 Relying on binding and coordinate precedents, the Court reiterated that if on the date of transaction the seller was a registered dealer, the transaction and the invoice cannot ordinarily be doubted for purposes of input tax credit, and input tax credit ought to be granted when the tax has in fact been deposited with the revenue.

Conclusions

2.9 The Court concluded that the statutory requirements of Section 16 for availing input tax credit were fully complied with by the purchasing dealer.

2.10 The denial and reversal of input tax credit on the ground of alleged non-genuineness of the seller or subsequent cancellation of the seller's registration were held to be unsustainable.

Issue 3: Validity of proceedings under Section 74 in absence of fraud, wilful misstatement or suppression by the purchasing dealer

Legal framework (as discussed)

3.1 The Court, referring to prior decisions, reiterated that Section 74 of the GST Act can be invoked only when input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful misstatement or suppression of facts to evade tax.

Interpretation and reasoning

3.2 The Court noted that the case was proceeded with against the purchasing dealer on the basis of an investigation in another State alleging that multiple suppliers were involved in fictitious transactions and that no actual trading activity existed at their premises. However, as far as the purchasing dealer was concerned, the material on record clearly showed purchases from a registered dealer, proper tax invoices and e-way bill, banking channel payments, and filing of returns by the seller with deposit of tax.

3.3 The Court observed that there was no finding or material establishing fraud, wilful misstatement, or suppression of facts on the part of the purchasing dealer. The impugned orders proceeded essentially on assumptions regarding the supplier and its supply chain, without addressing the documentary compliance by the purchasing dealer.

3.4 On this basis, and following prior decisions of the same Court, the Court held that the factual scenario did not fall within the mischief contemplated by Section 74 and could not justify proceedings under that provision against the purchasing dealer.

Conclusions

3.5 The initiation and continuation of proceedings under Section 74 against the purchasing dealer were held to be without jurisdictional foundation, as the essential pre-conditions of fraud, wilful misstatement or suppression were absent.

3.6 The orders passed under Section 74, including reversal of input tax credit, demand of interest and imposition of penalty, were held liable to be quashed.

Issue 4: Burden of proving movement of goods; applicability of revenue's precedents

Interpretation and reasoning

4.1 The revenue argued that the purchasing dealer had failed to adduce cogent material to prove actual movement of goods and that the burden to prove such movement lay on the dealer claiming input tax credit, relying on decisions emphasizing strict proof for exemptions, deductions, or input tax credit.

4.2 The Court distinguished the precedents cited by the revenue on the ground that, in the present case, all relevant documents and statutory compliances were on record: valid registration of the seller at the time of transaction, tax invoices, e-way bill, returns filed by the seller, auto-populated GSTR-2A entries for the purchaser, GSTR-3B filed by the seller, and payments through banking channels, coupled with actual deposit of tax with the department which was not disputed.

4.3 The Court held that in such circumstances, and in light of the statutory return mechanism and the undisputed deposit of tax, the burden placed on the purchasing dealer regarding the genuineness of the transaction and movement of goods stood adequately discharged. The mere fact of a later cancellation of the seller's registration or adverse findings in respect of the seller could not, by itself, negate the purchaser's evidentiary showing.

Conclusions

4.4 The Court held that the precedents relied upon by the revenue regarding proof of movement of goods and strict construction of exemptions/deductions did not advance the revenue's case in the present factual and statutory matrix.

4.5 The Court concluded that the purchasing dealer had sufficiently established its entitlement to input tax credit and that the contrary findings in the impugned orders were inconsistent with the record and the applicable legal position.

Overall disposition

4.6 On the cumulative reasoning that the conditions under Section 16 were fulfilled, that Section 74 was wrongly invoked, and that the subsequent cancellation of the seller's registration did not affect the purchaser's vested right to input tax credit for a genuine, tax-paid transaction, the Court quashed the impugned orders and allowed the petition.

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