Input tax credit cannot be denied to bona fide purchasers solely for supplier default absent collusion.

The petitioners challenged a show-cause notice dated 11 June 2025 issued under Section 74 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) for financial years 2018–19, 2019–20 and 2023–24. The notice alleged availment and utilisation of ineligible input tax credit (“ITC”) of ₹88,57,040 and excess ITC of ₹1,48,84,011 compared with the ITC reflected in GSTR-2A, resulting in a principal demand of ₹2,37,41,051 and an aggregate demand of approximately ₹6.3 crore including interest and penalty

The Department’s case was substantially based on the suppliers’ failure to file GSTR-3B, cancellation of supplier registrations and non-reflection of invoices in GSTR-2A. The petitioners relied on tax invoices, e-way bills, transport receipts, proof of receipt of goods, bank statements and GST returns, and contended that proceedings had also been initiated against the defaulting supplier, M/s. Aster Trading Company, for non-filing of GSTR-3B

During the pendency of the writ petition, the petitioners filed a detailed reply dated 10 November 2025. The adjudicating authority thereafter passed an Order-in-Original dated 9 December 2025, which the petitioners alleged had failed to consider their reply and supporting documents and had mechanically invoked Section 74 to overcome the limitation applicable under Section 73(10)

The respondents opposed the writ petition on the ground that the Order-in-Original was appealable under Section 107 of the CGST Act. They also contended that the petitioners had wrongly availed ITC from suppliers who had not filed returns and that the relevant facts had been considered in the adjudication

1. Whether ITC can be denied to a bona fide purchasing dealer merely because the supplier failed to deposit the tax, failed to file GSTR-3B or the invoices were not reflected in GSTR-2A, in the absence of an allegation or finding of collusion?

2. Whether the Department could invoke the extended limitation and penal provisions under Section 74 of the CGST Act for 2018–19 by merely alleging fraud, wilful misstatement or suppression of facts without stating the material particulars supporting those allegations?

3. Whether the writ petition was maintainable despite the availability of an appellate remedy under Section 107 where the Order-in-Original allegedly violated natural justice, failed to consider the petitioner’s reply and documents, and was non-speaking?

The Court applied Sections 16(2), 59, 73(10), 74, 75(4), 75(6), 79 and 107 of the CGST Act. Section 16(2) prescribes the statutory conditions for ITC, while Section 73(10) provides the ordinary limitation period and Section 74 permits extended proceedings only where tax has not been paid or ITC has been wrongly availed by reason of fraud, wilful misstatement or suppression of facts.

The Court relied principally on Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax, Ballygunge Charge, which held that non-reflection of invoices in GSTR-2A does not automatically justify denial of ITC to a bona fide purchaser and that the Department should proceed against the defaulting supplier unless collusion is established.

It also relied on Arise India Ltd. v. Commissioner of Trade and Taxes, Delhi, affirmed by the Supreme Court, for the principle that a bona fide purchasing dealer should not bear the consequences of the selling dealer’s default absent collusion.

The Court further relied on G.R. Infra Projects Ltd. v. Ratlam for the proposition that the expressions “fraud”, “wilful misstatement” and “suppression of facts” cannot be invoked mechanically to extend limitation without disclosure of the factual basis.

Under the principles recognised in Whirlpool Corporation v. Registrar of Trademarks, the existence of an alternative remedy does not bar writ jurisdiction where there is violation of natural justice or the impugned order is non-speaking.

The Court found that the show-cause notice did not allege that the petitioners lacked tax invoices issued by registered suppliers or that they had not received the goods or services. Accordingly, the requirements under Sections 16(2)(a) and 16(2)(b) were not disputed; the controversy concerned only the supplier’s payment of tax under Section 16(2)(c).

Since the Department had itself initiated proceedings against M/s. Aster Trading Company for non-filing of GSTR-3B, it could not, in the absence of any allegation or finding of collusion, seek recovery both from the supplier and the bona fide recipients. Mere non-reflection in GSTR-2A was therefore insufficient for automatic denial of ITC.

The Court further held that the notice, insofar as it concerned 2018–19, was prima facie beyond the ordinary limitation under Section 73(10). The Department’s attempt to rely on Section 74 was unsupported by particulars explaining how fraud, wilful misstatement or suppression had been committed by the petitioners. The mechanical use of those expressions could not confer extended jurisdiction or cure limitation.

The Order-in-Original also failed to properly consider the petitioners’ reply and supporting documents, amounting to non-application of mind and breach of natural justice. These defects justified writ intervention notwithstanding the statutory appeal under Section 107.

It accordingly quashed and set aside the Order-in-Original and the consequential recovery notice dated 12 June 2026.

The matter was remitted to Respondent No. 1 to reconsider the petitioners’ reply dated 10 November 2025 and all supporting documents in light of Suncraft Energy and G.R. Infra Projects, after granting a personal hearing, and to pass a reasoned and speaking order within four weeks of communication of the judgment.

The petitioners were directed to produce specified records, including invoices, e-way bills, transport documents, proof of receipt, bank statements, GSTR-2A/2B and GSTR-3B records, supplier correspondence and proof of proceedings against defaulting suppliers.

As a condition of remand and prima facie proof of bona fides, the petitioners were directed to deposit ₹10 lakh in Form GST DRC-03 under protest within four weeks. The amount would be adjusted against any final liability or refunded if the petitioners succeeded. Failure to deposit the amount would automatically vacate the benefit of the order and permit the Department to recover approximately ₹6.3 crore in accordance with law.