Input tax credit cannot be denied to a bona fide purchaser merely because the supplier failed to remit tax.

Input tax credit cannot be denied to a bona fide purchasing dealer who bought from a registered supplier, received the goods and paid through banking channels merely because the supplier failed to remit the tax collected. The Department's remedy lies against the defaulting supplier, not against the purchaser, unless material shows the transaction was not bona fide or was entered into in collusion. On that basis, the demand and penalty founded solely on the supplier's default could not be sustained, and the impugned order was set aside and quashed.

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Issues: Whether input tax credit can be denied to a bona fide purchasing dealer merely because the selling dealer failed to deposit the tax collected, and whether the impugned order confirming demand and penalty could be sustained on that basis.

Analysis: The controlling principle applied was that a bona fide purchaser who has transacted with a registered supplier, received goods, paid through banking channels and complied with the statutory requirements cannot be penalised for the default of the selling dealer in remitting tax to the Government. In such a situation, the Department's remedy lies against the defaulting supplier. The exception recognised is where material exists showing that the transactions were not bona fide or were entered into in collusion, in which event proceedings may be taken in accordance with law.

Conclusion: The demand founded solely on the alleged failure of the supplier to deposit tax could not be sustained against the petitioner, and the impugned order was set aside and quashed.

Ratio Decidendi: Input tax credit cannot be denied to a bona fide purchasing dealer merely because the supplier failed to deposit tax collected on the transaction, unless the Department establishes lack of bona fides or collusion.

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