2026 (2) TMI 654 - HC - GST

Denial of Input Tax Credit under Section 16(2)(c) limited where purchaser acted bona fide; ITC restored to purchaser.

Whether denial of input tax credit under Section 16(2)(c) can be invoked against a purchasing dealer where the seller failed to deposit tax: the provision ... Denial of Input Tax Credit in bona fide transactions - Interpretation and reading down of provision to avoid arbitrariness under Article 14 - Liability of purchasing dealer for seller's failure to deposit tax collected - Distinction between proceedings under Section 73 and Section 74 - Constitutional validity of denying ITC to bona fide purchasers - HELD THAT:- The show cause notice dt.14.01.2021 issued by the sixth respondent to the petitioner in the instant case, as well as the order passed on 17.02.2022 by the said officer, do not contain any findings therein that the transaction between the parties i.e. the petitioner and the seventh respondent, is not bona fide, or is a collusive, or a fraudulent transaction to defraud the revenue. If such a situation had been there, certainly the sixth respondent would not have invoked Section 73 of the Act which lays down the procedure for determination of tax for reasons other than fraud or any wilful misstatement or suppression of facts. He would certainly have invoked Section 74 of the Act which lays down the procedure for determination of tax not paid or short paid or erroneously refunded or input tax credited wrongly availed or utilized by reason of fraud or any wilful misstatement or suppression of facts. Therefore, the ratio of the judgment in M/s Sahil Enterprises [2026 (1) TMI 385 - TRIPURA HIGH COURT] is clearly attracted, and the transaction between the parties i.e. the petitioner and the seventh respondent in the instant case, has to be held to be a bona fide transaction, and consequently for the failure of the seventh respondent to make over the tax collected by it from the petitioner, the petitioner cannot be punished by applying Section 16(2)(c) of the Act. Therefore, the Writ Petition is allowed, and the order dt.17.02.2022 passed by the sixth respondent is set aside, and the respondents are directed to forthwith allow the petitioner ITC to the extent of Rs. 22,09,964/-. Issues: Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 can be invoked to deny Input Tax Credit to a bona fide purchasing dealer where the selling dealer has failed to deposit the tax collected with the Government.Analysis: Section 16(2)(c) operates to deny ITC in specified circumstances but does not, on its face, distinguish between bona fide purchasers and purchasers involved in collusive or fraudulent transactions. Sections 73 and 74 of the Central Goods and Services Tax Act, 2017 set out distinct procedures for determination of tax where there is no fraud or where fraud/wilful misstatement/suppression is alleged respectively. Established principles require that penal or disproportionate consequences not be visited on a taxpayer acting in good faith. Applying the reasoning in M/s Sahil Enterprises (Tripura High Court), reading down is appropriate to preserve constitutionality under Article 14 by confining the denial of ITC under Section 16(2)(c) to transactions that are not bona fide, or are collusive or fraudulent. In the present case the impugned show cause notice and order under Section 73 contain no findings that the purchase transactions were collusive, fraudulent, or otherwise not bona fide; the assessment proceeded under the procedure for non-fraudulent cases rather than under Section 74 for fraud.Conclusion: Section 16(2)(c) cannot be applied to deny ITC where the purchasing dealer has bona fide transacted and there is no finding of collusion, fraud, or wilful misstatement; accordingly the purchaser is entitled to the claimed ITC.