ITC Denial Quashed as Supplier’s GSTR-3B Filing Proves Tax Payment.
Issue
Can the GST department deny Input Tax Credit (ITC) to a bona fide purchaser under Section 74 (fraud) on the grounds that the supplier’s registration was cancelled subsequently, even when the taxpayer has furnished all necessary documents (invoices, e-way bills) and proven that the supplier had filed their GSTR-3B (and thus paid the tax)?
Facts
- The petitioner, a registered trader in iron scrap, purchased goods from a supplier who was registered at the time of the transaction (August 2018).
- The transactions were supported by valid tax invoices and e-way bills, and all payments were made through banking channels.
- The supplier had filed both GSTR-1 and GSTR-3B returns for the relevant period.
- The GST department initiated proceedings against the petitioner under Section 74 (fraud), proposing to reverse the ITC and impose an equal penalty.
- The department’s sole ground was that the supplier’s registration had been cancelled at a later date, implying the transaction was bogus.
- The Adjudicating Authority and the Appellate Authority both confirmed the ITC reversal and penalty.
Decision
- The High Court quashed the impugned orders (both the Order-in-Original and the Appellate Order).
- It held that the assessee had discharged their preliminary burden by providing proof of valid invoices, e-way bills, and bank payments.
- The court noted that the filing of a GSTR-3B is not possible without the simultaneous payment of the tax due. This served as sufficient evidence that the tax had been paid to the government treasury.
- It was ruled that no adverse inference could be drawn against the purchasing assessee merely because the supplier’s registration was cancelled at a subsequent date.
- The burden was on the authorities to verify the supplier’s existence at the time of the transaction, which they failed to do.
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.
HIGH COURT OF ALLAHABAD
Singhal Iron Traders
v.
Additional Commissioner
Piyush Agrawal, J.
WRIT TAX No. 1357 of 2022
NOVEMBER 4, 2025
Suyash Agarwal, Sr. Adv. for the Petitioner.
ORDER
1. Heard learned counsel for the petitioner and learned A.C.S.C. for the State-respondents.
2. By means of instant writ petition, the petitioner has assailed the order dated 23.06.2022 passed by the Additional Commissioner Grade-2 (Appeal)-I, State Tax, Agra/respondent no.1 and the order dated 30.09.2021 passed by the Assistant Commissioner State Tax, Sector-4 Agra/respondent no.2 for the period August 2018 passed under Section 74 of the GST Act, 2017.
3. Learned counsel for the petitioner submits that the petitioner is a proprietorship firm which is engaged in the trading and supply businesses of all kinds of Iron Scrap etc. During the Assessment Year 2018-19, the petitioner purchased Iron Scrap in the month of August 2018 from the registered dealer namely M/s Arvind Metal Suppliers, Nunhai, Agra, against two tax invoices and two e-way bills for Rs.10,83,600/-, including CGST and SGST of Rs.1,95,048/-, the said payment was made to the supplier through banking channels.
4. He further submits that the supplier/seller also filed his GSTR-01 and GSTR-3B for the period of August, 2018 within time on the GST Portal. However, GSTR-3B can only be filed after making payment of due tax by the supplier.
5. He further submits that the proceedings against the petitioner were initiated under Section 74 of the GST Act, 2017 and a notice was issued to the petitioner on 27.3.2021 to show cause as to why RITC and penalty may not be imposed as the registration of the supplier was cancelled on 31.1.2019 and no business activity was undertaken to which the petitioner filed his detailed reply, annexing all the documentary evidence, stating therein that the petitioner had validly claimed the ITC, but without considering the same, respondent no.2 passed the order in GST DRC-07 and made RITC of Rs. 1,95,048/- and imposed penalty of Rs.1,95,048/-, whereby an inference was also drawn against the petitioner that the ITC claimed by the selling dealer may be reversed. Being aggrieved to the said order, an appeal was filed by the petitioner, which was also dismissed without considering the material available on record, confirming the proceedings initiated under Section 74 of the GST Act against the petitioner.
6. Counsel for the petitioner further submits that the petitioner purchased the goods and at the time of transactions for the same, the selling dealer was a registered dealer, but thereafter, on the application moved by the selling dealer, the registration was cancelled and therefore, no inference against the petitioner can be drawn if the selling dealer was found nonexisting at the subsequent stage of survey.
7. He further submits that the supplier filed his return and deposited the tax in form GSTR-3B and GSTR-01. He further submits that no fraud or misrepresentation was made by the petitioner.
8. He further submits that merely on the information received that the supplier was found non-existing, the authority ought to have verified the same at its own level before using the same against the petitioner.
9. Per contra, learned A.C.S.C. supports the impugned order and submits that the supplier of goods, which were made to the petitioner, was found non-existing, and therefore, the seven purchases shown by the petitioner are unregistered and as such, the proceedings were rightly been initiated against the petitioner.
10. After hearing the parties, the Court has perused the record.
11. It is not in dispute that the petitioner is a registered dealer having GST Registration No.ZD090421000805R for the purchase of Iron Scrap etc. For the period of August, 2018, two purchases were made by the petitioner to which due e-way bills were generated and the payments were shown to be made through banking channels. However, thereafter, the proceedings under Section 74 of the GST Act were initiated against the petitioner on the ground that the registration of the supplier was cancelled subsequent to the transactions in questions while the purchases were disclosed from a non-existing dealer.
12. It is also not in dispute that the supplier filed its return in the forms of GSTR-01 and GSTR-3B. Moreover, it is also not in dispute that without making payment of due taxes, GSTR-3B cannot be generated. Once the tax was paid by the petitioner in the forms of GSTR-01 and GSTR-3B, no adverse inference can be drawn against the petitioner on the premise that the registration of the dealer from whom the purchases were shown to be made, was cancelled subsequently.
13. It was the duty of the authorities to verify the said information as to whether at the time of transactions, the firm was in existence or not, and therefore, without verifying the same, the authorities ought not to have initiated the proceedings against the petitioner only on the borrowed information as the petitioner discharged its preliminary duty by making the payment of due taxes through banking channels.
14. Further, it is not the case of the revenue that the vehicle used for transportation was not found registered and therefore, the initiation of proceedings against the petitioner cannot be said to be justified and are liable to be quashed by this Court.
15. In view of the above facts as stated, the impugned orders cannot be sustained in the eyes of law and the same are hereby quashed.
16. Accordingly, the writ petition is allowed.