Bona fide purchasing dealers cannot be denied ITC solely because selling dealers defaulted in filing returns.

The petitioner, a proprietorship firm registered under the CGST Act, 2017, purchased generators from Respondent No. 4 during FY 2017–18 for ₹9,44,000, including CGST of ₹72,000 and SGST of ₹72,000, which was paid to the seller.

A show-cause notice dated 30.09.2023 alleged excess availment of ITC and proposed tax, interest and penalty. Although the petitioner explained the transactions and the ITC claim, an order was passed demanding tax of ₹2,08,802, interest of ₹2,16,632 and penalty of ₹20,880.

The petitioner thereafter sought rectification. By order dated 10.04.2024, the authorities accepted the petitioner’s other contentions but rejected the ITC relating to the generators purchased from Respondent No. 4.

The State’s case was that Respondent No. 4 had not filed its returns, and therefore the ITC was recoverable from the purchasing dealer.

Respondent No. 4 admitted receipt of the GST component from the petitioner but also admitted that it had not filed the relevant returns.

Whether ITC could be denied to the petitioner merely because the selling dealer had received the GST amount but failed to file returns or deposit the tax, despite the petitioner having paid the purchase price and GST under a tax invoice?

Whether the demand raised under the rectification order dated 10.04.2024 was sustainable in light of Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017 and the precedent in National Plasto Moulding v. State of Assam?

The Court applied Sections 16(2)(c) and 16(2)(d) of the Assam Goods and Services Tax Act, 2017, concerning the conditions for availment of ITC, while adopting the reading-down approach recognised in National Plasto Moulding v. State of Assam and 3 Others, 2024:GAU-AS:7506-DB.

The Division Bench in National Plasto Moulding followed On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, 2017 SCC OnLine Del 11286, where Section 9(2)(g) of the Delhi VAT Act was read down so that ITC could not be denied to a bona fide purchasing dealer who transacted with a registered selling dealer and possessed a valid tax invoice merely because the seller failed to deposit the tax.

The Department’s remedy in such circumstances is to recover the tax from the defaulting seller; denial of ITC to the purchaser may be justified only where material establishes collusion between the purchaser and seller.

The petitioner had purchased the generators from a registered dealer, paid the consideration and GST, and produced the tax invoice-cum-delivery challan dated 14.02.2018 evidencing CGST and SGST of ₹72,000 each.

The seller’s admission that it had received the GST but failed to file returns established, at most, a default by the selling dealer. There was no finding or material indicating that the petitioner had acted fraudulently or in collusion with Respondent No. 4.

Applying National Plasto Moulding and the principle in On Quest Merchandising, the Court held that the authorities could not transfer the seller’s default to the bona fide purchasing dealer by rejecting the petitioner’s ITC claim.

The State’s affidavit, which sought recovery from the petitioner solely because Respondent No. 4 had not filed returns, was therefore contrary to the binding legal position.

The writ petition was allowed to the extent that the rectification order dated 10.04.2024, Reference No. ZD180424010028S, demanding ₹1,60,506 towards CGST and ₹1,60,506 towards SGST, was set aside and quashed.

The State authorities were nevertheless permitted to initiate recovery proceedings against Respondent No. 4 under the CGST Act, 2017 and the AGST Act, 2017.

No costs were awarded.