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 must be read down to avoid unequal treatment by confining its operation to transactions that are collusive, fraudulent, or not bona fide. The court relied on the statutory distinction between non fraudulent and fraudulent assessment procedures and on principles disfavoring penal consequences for taxpayers acting in good faith; because the impugned assessment contained no findings of collusion or fraud and proceeded under non fraud procedure, the purchaser was held entitled to the claimed input tax credit.

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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.

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