No Adverse Action Under Section 74 Against Bona Fide Buyer if Seller’s Registration Cancelled Retrospectively
Issue
Whether proceedings under Section 74 of the GST Act (alleging fraud/suppression) can be initiated against a purchasing dealer to deny Input Tax Credit (ITC) solely on the ground that the supplier’s GST registration was cancelled suo motu by the department subsequent to the transaction, especially when the purchaser had valid documents and the supplier had filed returns for the relevant period.
Facts
The Transaction: The petitioner, a registered dealer in iron scrap, purchased goods in August 2018 from a supplier (M/s Arvind Metal Suppliers).
Compliance at Time of Supply:
The supplier held a valid GST registration at the time of the transaction.
The petitioner possessed valid tax invoices and e-way bills.
Payments were made through banking channels.
Supplier’s Compliance: The supplier had filed GSTR-1 and GSTR-3B for the relevant period (August 2018), implying that the tax collected was deposited with the Government.
The Cancellation: The supplier’s GST registration was cancelled by the department much later, on January 31, 2019 (retrospectively or prospectively, but effective after the transaction date).
Department’s Action: Relying on the subsequent cancellation, the authorities treated the supplier as “non-existent” and initiated proceedings against the petitioner under Section 74. They demanded reversal of ITC (approx. ₹1.95 lakh) and imposed an equivalent penalty, alleging the purchases were fake.
Decision
The Allahabad High Court allowed the writ petition and quashed the demand orders (both the adjudication order and the appellate order).
Registration Valid at Time of Supply: The Court held that since the supplier’s registration was active at the time of the transaction, the petitioner could not be penalized for a cancellation that happened later. A retrospective cancellation cannot invalidate a genuine transaction entered into when the supplier was compliant.
No Fraud by Buyer: The invocation of Section 74 was held to be legally unsustainable. Section 74 requires evidence of fraud, willful misstatement, or suppression. Since the buyer paid the tax via bank and the supplier filed returns, there was no intent to evade tax by the buyer.
Borrowed Satisfaction: The Court criticized the authorities for relying on “borrowed information” regarding the supplier’s non-existence without conducting an independent inquiry to verify if the supplier existed at the time of the transaction.
Section 16(2) Complied: The petitioner had satisfied all conditions of Section 16(2) (possession of invoice, receipt of goods, tax paid to government via supplier’s return).
Key Takeaways
Protection for Bona Fide Buyers: A buyer who takes reasonable steps (checking active registration, paying via bank) is protected. The Department cannot recover tax from the buyer solely because the seller later defaulted or closed down.
Timing is Key: The status of the supplier must be verified as on the date of the transaction. Subsequent events (cancellation) do not automatically taint past genuine transactions.
Section 74 Threshold: To invoke the extended limitation and higher penalty under Section 74, the Department must prove positive acts of fraud by the buyer. Mere reliance on the seller’s non-compliance is insufficient to charge the buyer with fraud.
Recovery from Seller First: The judgment reinforces the principle that for tax collected but not paid (or paid and then registration cancelled), the Department should first pursue the supplier.