Facts of the Case

  • The Petitioner's Profile: The petitioner, Sri Shib Das Kangsa Banik, is the 71-year-old proprietor of M/s S.K. Traders based in Silchar, Assam. The business is engaged in the procurement and sale of scrap and waste batteries.
  • Bona Fide Procurement: During the financial years 2017–18 and 2018–19 (July 2017 to March 2019), the petitioner purchased goods from various registered suppliers based in Kolkata.
  • Compliance and Documentation: Upon receiving the goods, the petitioner fully discharged the value of the supplies along with the applicable GST through formal banking channels. The transactions were fully backed by genuine tax invoices, GSTR-1, and GSTR-3B filings.
  • Investigation and Search: On allegations of availing ineligible Input Tax Credit (ITC) from certain proprietorship firms without actual physical receipt of goods, the Directorate General of GST Intelligence (DGGI), Guwahati Zonal Unit, issued summons. The petitioner cooperated fully, submitting all original purchase invoices and returns. Subsequently, a search conducted at the business premises yielded no incriminating materials or unaccounted inventory.
  • Adjudication Violations: The respondent authorities issued a Show Cause Notice dated July 22, 2022, alleging wrongful ITC utilization of ₹15,58,125. The petitioner contended that no effective opportunity for a personal hearing was provided, the notices were not properly uploaded onto the GST portal, and they were served manually past the hearing dates.
  • Impugned Order: Bypassing standard procedural rules and without issuing Form GST DRC-07 properly, the Assistant Commissioner of CGST & Central Excise, Silchar Division, passed the Order-in-Original No. 38/GST/AC/SIL/2023-24 dated March 28, 2024. The order confirmed a total demand of ₹15,58,152 (comprising IGST, CGST, and SGST), along with interest under Section 50 and an equivalent 100% penalty under Section 74(1) of the CGST Act.

Issues Involved

  1. Whether a bona fide purchasing dealer can be denied Input Tax Credit (ITC) under the CGST/SGST Act solely due to the default of the selling dealer in depositing the collected tax with the Government exchequer.
  2. Whether the GST department can demand tax recovery from a purchaser when the sole basis of the demand rests on a third-party non-compliance that is entirely beyond the control of the purchasing dealer.
  3. Whether the impugned Order-in-Original was legally sustainable given the procedural lapses, including the denial of a natural justice hearing, faulty service of notice, and the impermissible clubbing of multiple distinct assessment years under a consolidated order.

Petitioner’s Arguments

  • Full Compliance Under Section 16: The petitioner argued that all statutory conditions laid down under Section 16(2) of the CGST Act, 2017, were fulfilled transparently. The invoices were genuine, payments were routed through banking channels, and returns were timeously filed.
  • No Control Over Supplier Actions: It was strongly contended that a purchaser cannot be expected to do the impossible—i.e., supervise or guarantee that a registered supplier deposits the tax collected into the government accounts. The petitioner acted in absolute good faith.
  • Absence of Supply Negates Tax Demand: Referring to the CBIC Circular dated July 06, 2022, the petitioner argued that if the department's premise is that no actual supply took place, then no tax liability can legally be demanded under the mechanism, as GST is strictly leviable only on the "supply" of goods or services.
  • Binding Precedent: The petitioner’s counsel relied heavily on the Division Bench judgment of the Gauhati High Court in National Plasto Moulding Vs. State of Assam & Ors. (2024), which settled that buyers cannot be penalized for a seller's systemic failures.

Respondent’s Arguments

  • Defense of Revenue Interests: The Revenue originally initiated the demand on the grounds that the input tax credit was availed on the strength of paper invoices without actual movement or receipt of the underlying goods, violating Section 16(2)(a) and (b) of the CGST Act.
  • Concession on Legal Standing: During the court proceedings, the Standing Counsel for the GST department fairly admitted that the core legal issue regarding the penalization of a bona fide purchaser is squarely covered by the National Plasto Moulding precedent.
  • Liberty to Probe Fraud: The respondent requested that while disposing of the writ petition, the department must be granted the express liberty to initiate appropriate legal recovery actions if any future evidence reveals that the transactions lacked bona fides or involved active collusion.

Court Order / Findings

  • Adoption of Precedent: The Single Bench of Hon’ble Justice Kardak Ete observed that the matter is completely covered by the prior Division Bench ruling in National Plasto Moulding, which extensively adopted the principles set by the Delhi High Court in On Quest Merchandising India Pvt. Ltd. Vs. Government of NCT of Delhi.
  • Impossibility of Performance: The Court reiterated that asking a purchasing dealer to ensure that the selling dealer actually deposits the tax places an "onerous and impossible burden" on honest taxpayers. Such a blanket application of recovery rules without distinguishing between bona fide and collusive buyers violates Article 14 of the Constitution of India.
  • Primary Recovery Target: The Court established that in cases where a selling dealer defaults on depositing collected tax, the department's primary and lawful remedy is to proceed directly against the defaulting supplier to recover the amount, rather than shifting the financial burden onto the innocent purchaser.
  • Final Verdict: The Gauhati High Court allowed the writ petition, thereby setting aside and quashing the impugned Order-in-Original dated March 28, 2024. However, the Court granted the GST authorities the liberty to initiate fresh proceedings only if tangible material demonstrates that the purchase transactions were fraudulent or executed in collusion with the suppliers.

Important Clarification

Key Legal Takeaway: A purchasing dealer cannot be punished or denied Input Tax Credit (ITC) for the statutory defaults of a selling dealer, provided the purchaser has acted in good faith, holds valid tax invoices, and has cleared all payments (including tax) through formal banking channels. The Revenue must exhaust remedies against the defaulting supplier first, except in proven cases of mutual collusion or tax evasion conspiracies.

Sections Involved

  • Section 16(2), 16(2)(a) & 16(2)(b) of the CGST Act, 2017: Eligibility, conditions, and statutory restrictions for availing Input Tax Credit (ITC).
  • Section 50 of the CGST Act, 2017: Interest levied on the delayed payment of tax.
  • Section 73 & 74 of the CGST Act, 2017: Determination of tax unpaid, short-paid, or ITC wrongly availed/utilized by reason of fraud, willful misstatement, or suppression of facts.
  • Section 122 of the CGST Act, 2017: Penalties applicable for designated offenses under the GST regime.

Link to download the order - https://mytaxexpert.co.in/uploads/1783060696_326compressed.pdf

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