ITC Denial Quashed as Supplier’s GSTR-3B Filing Proves Tax Payment.

ITC Denial Quashed as Supplier’s GSTR-3B Filing Proves Tax Payment.

Issue

Can a taxpayer (assessee) be denied Input Tax Credit (ITC) under Section 74 (fraud) on the grounds that their supplier’s registration was subsequently cancelled, even when the supplier had an active registration and had filed their GSTR-1 and GSTR-3B returns at the time of the transaction?

Facts

• The assessee, a registered dealer in iron scrap, made purchases from a supplier who was also registered under GST.
• The tax department initiated proceedings against the assessee under Section 74, alleging fraudulent availment of ITC.
• The department’s SCN claimed that the supplier’s registration had been cancelled and that the supplier was not conducting any actual business.
• An order was passed in FORM DRC-07 disallowing the Reclaimed Input Tax Credit (RITC) and imposing a penalty. This order was subsequently upheld by the appellate authority.
• The assessee contended that at the time of the transaction, the supplier’s registration was active and valid.
• Crucially, the assessee provided evidence that the supplier had filed both their GSTR-1 (Statement of Outward Supplies) and GSTR-3B (Summary Return and Tax Payment) for the relevant period.

Decision

• The High Court quashed and set aside both the original order-in-original and the appellate order.
• It was held that the filing of GSTR-1 and GSTR-3B by the supplier was an undisputed fact.
• The court noted that under the GST framework, a GSTR-3B return cannot be generated or filed without the payment of the due taxes to the government.
• Since the supplier had filed GSTR-3B, it served as sufficient proof that the tax had been paid to the treasury.
• The court ruled that no adverse inference could be drawn against the assessee merely on the premise that the supplier’s registration was cancelled at a later date.
• The duty was on the tax authorities to verify the supplier’s existence and genuineness at the time of the transaction before penalizing the bona fide purchaser.

Key Takeaways

• GSTR-3B Filing is Proof of Tax Payment: The court recognized that the GSTN system architecture makes the filing of GSTR-3B contingent upon the payment of taxes. This filing can be used as strong evidence by the purchaser that the tax has been deposited by their supplier.
• Protection for Bona Fide Purchaser: A buyer cannot be penalized for the subsequent actions of a supplier (like having their registration cancelled). The critical factor is the supplier’s compliance and active status at the time of the transaction.
• Burden of Proof on Authorities: The onus is on the tax department to prove that the supplier was non-existent or fraudulent at the time of the supply. A subsequent cancellation is not, by itself, sufficient proof to deny ITC to the recipient, especially when tax payment is evidenced by GSTR-3B.
• Section 74 Requires Intent: To sustain a demand under Section 74 (fraud), the department must establish fraudulent intent on the part of the assessee. In this case, the assessee’s reliance on the supplier’s active registration and return filing demonstrated their bona fides.