Bona fide purchaser protection limits ITC denial where supplier defaults, unless collusion or non-bona fide dealings are shown.

Input tax credit could not be denied to a bona fide purchasing dealer merely because the supplier allegedly failed to deposit tax, where the dealer had transacted with a registered supplier and complied with statutory requirements. The Department's remedy lay against the defaulting supplier, and denial of ITC was not justified absent material showing that the transactions were not bona fide or were entered into in collusion. On that basis, the demand and penalty order denying ITC was unsustainable and was set aside, while the authorities were left free to proceed if evidence later emerged of non-bona fide dealings or collusion.

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Issues: Whether input tax credit could be denied to a bona fide purchasing dealer merely because the supplier allegedly failed to deposit tax, and whether the resulting demand and penalty order could be sustained.

Analysis: The issue was treated as covered by the earlier Division Bench decision holding that a bona fide purchaser who has transacted with a registered supplier and complied with the statutory requirements cannot be penalized solely for the supplier's default in depositing tax. In such a situation, the Department's remedy lies against the defaulting supplier. Denial of ITC is not justified unless there is material to show that the transactions were not bona fide or were entered into in collusion.

Conclusion: The demand order was unsustainable insofar as it denied ITC to the petitioner on the basis of the supplier's alleged default, and it was set aside and quashed. The respondents were left free to proceed in accordance with law if materials emerge showing non-bona fide transactions or collusion.

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