Facts of the Case

  • The petitioner, Sri Moloy Banik, is the sole proprietor of M/s Narayan Enterprise, an entity located in Silchar, Assam, engaged in the procurement and sale of scrap/waste batteries.
  • Following the rollout of the GST regime, the petitioner faced typical transitional and operational technicalities concerning data entries and mismatched invoices on the GST portal while filing GSTR-1 and GSTR-3B returns.
  • During the assessment period spanning from May 2018 to March 2019, the petitioner purchased goods from various registered suppliers based in Kolkata. The petitioner paid the full value of the goods along with the applicable GST through formal banking channels, supported by proper tax invoices.
  • The Directorate General of GST Intelligence (DGGI), Guwahati Zonal Unit, initiated an inquiry alleging that the petitioner had availed ineligible Input Tax Credit (ITC) based on invoices issued by certain firms without an actual physical supply or receipt of underlying goods.
  • The petitioner cooperated fully with the summons, submitted all monthly returns, and underwent a business premises search on July 9, 2019, during which the respondent authorities recovered no incriminating materials.
  • Despite this, the respondents issued a Show Cause Notice dated July 30, 2022, asserting violations of Section 16(2)(a) and (b) of the CGST Act, 2017, which culminated in an Order-in-Original confirming a demand of ₹22,22,695/- alongside equivalent penalties and interest. This demand was subsequently upheld by the Joint Commissioner (Appeals) via an Order-in-Appeal dated January 7, 2025.

Issues Involved

  • Whether a bona fide purchasing dealer can be legally denied Input Tax Credit (ITC) under the GST framework solely due to the default or failure of the selling dealer/supplier to deposit the collected tax into the government exchequer.
  • Whether the tax department can penalize an innocent purchaser who has complied with Section 16(2) by paying the tax to the supplier, rather than initiating recovery recovery actions directly against the defaulting selling dealer.
  • Whether the invocation of Section 74 of the CGST Act, 2017, and the passing of a consolidated order by clubbing multiple assessment periods was legally sustainable and within the limitation period.

Petitioner’s Arguments

  • Compliance with Section 16(2): The petitioner argued that all statutory conditions for availing ITC under Section 16(2) were completely satisfied, as the goods were physically received, valid tax invoices were held, and the entire consideration including the GST component was paid through transparent banking channels.
  • No Fault of Purchaser: It was contended that the sole basis for the denial of ITC was the supplier's failure to discharge their tax liability—a factor completely beyond the control and knowledge of the purchasing dealer, who acted in absolute good faith.
  • Absence of Principles of Natural Justice: The petitioner stated that no meaningful opportunity for a personal hearing was provided, as notices were manually served after the scheduled hearing dates and were not uploaded onto the GST portal.
  • Legal Precedents: Reliance was heavily placed on the Division Bench judgment of the Gauhati High Court in National Plasto Moulding Vs. State of Assam & Ors., which established that a purchaser cannot be punished for the omissions of the supplier.

Respondent’s Arguments

  • Allegation of Non-Supply: The respondents initially contended that the petitioner had wrongly availed and utilized the ITC on the strength of invoices without the actual movement or receipt of the underlying scrap goods.
  • Concession on Legal Standing: During the court proceedings, the learned Standing Counsel for the GST department fairly conceded that the central legal issue regarding the supplier's default was squarely covered by the precedent in National Plasto Moulding.
  • Liberty to Check Bona Fides: The respondents argued that while the present writ petition could be disposed of based on the precedent, the department must retain the liberty to take appropriate legal action if any transaction is discovered to be collusive or not genuine.

Court Order / Findings

  • Precedent Application: The Hon’ble High Court noted that the core issue was entirely covered by the Division Bench ruling in National Plasto Moulding, which drew from the landmark Delhi High Court judgment in On Quest Merchandising India Pvt. Ltd. Vs. Government of NCT of Delhi (upheld by the Supreme Court).
  • Protection of Bona Fide Purchasers: The Court reiterated that Section 16(2) cannot be interpreted to demand the impossible from a purchasing dealer. A buyer cannot anticipate whether a registered supplier will fail to deposit the tax. Therefore, denying ITC to a bona fide purchaser for the supplier's default violates Article 14 of the Constitution.
  • Quashing of Demands: The High Court allowed the writ petition and set aside both the Order-in-Original dated February 19, 2024, and the Order-in-Appeal dated January 7, 2025.
  • Conditional Liberty to Department: The Court granted the department the liberty to initiate fresh proceedings only if tangible material exists to prove that the transactions lacked bona fides or were executed in active collusion between the purchaser and the suppliers.

Important Clarification

Key Legal Takeaway: In the absence of established collusion or fraudulent intent, the tax department's primary remedy for non-payment of tax lies strictly against the defaulting selling dealer who collected the tax, not against the innocent purchasing dealer who holds a valid invoice and has discharged their payment obligations through regular banking channels.

Sections Involved

  • Section 16(2), Section 16(2)(a), Section 16(2)(b), Section 16(2)(c), and Section 16(2)(d) of the Central Goods and Services Tax (CGST) Act, 2017.
  • Section 50 of the CGST Act, 2017 (Interest on delayed tax payment).
  • Section 73 and Section 74 / Section 74(1) of the CGST Act, 2017 (Determination of tax unpaid/short paid or input tax credit wrongly availed).
  • Section 122 of the CGST Act, 2017 (Penalties for offences).
  • Section 20 of the Integrated Goods and Services Tax (IGST) Act, 2017.

Link to download the order - https://mytaxexpert.co.in/uploads/1783060568_325compressed.pdf

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