Facts of the Case

The petitioner, Sri Gurucharan Kangsa Banik, proprietor of M/s Sree Guru Metals, challenged Order-in-Original No. 37/GST/AC/SIL/2023-24 dated 28.03.2024 passed by the Assistant Commissioner, Central Goods and Services Tax & Central Excise Division, Silchar.

By the impugned order, a total GST demand of ₹69,56,794 was confirmed for the period July 2017 to March 2019, comprising:

  • IGST: ₹50,19,230
  • CGST: ₹9,68,782
  • SGST: ₹9,68,782

The adjudicating authority also directed recovery of applicable interest under Section 50 of the CGST Act, 2017, along with corresponding provisions of the SGST and IGST laws, and imposed an equal penalty of ₹69,56,794 under Section 74(1) read with Section 122 of the CGST Act, 2017 and Section 20 of the IGST Act, 2017.

The petitioner stated that, during the initial phase of GST implementation, business entities faced practical difficulties in filing GSTR-1 and GSTR-3B returns, including data-entry discrepancies concerning output tax liability, ITC reporting and invoice matching.

For the assessment years 2017-18 and 2018-19, the petitioner purchased goods from suppliers in Kolkata and claimed that the value of the goods together with applicable GST was paid to the sellers through proper banking channels against valid invoices.

On allegations that the petitioner had availed ineligible ITC on invoices without actual receipt or supply of goods, summons were issued by the DGGI, Guwahati Zonal Unit. The petitioner appeared on 05.04.2019 and submitted relevant documents, including GSTR-1, GSTR-3B and purchase invoices relating to the period from July 2017 to March 2019.

Thereafter, a search was conducted at the petitioner’s business premises on 09.07.2019. According to the petitioner’s case recorded in the judgment, no incriminating material was recovered or seized during the search. The petitioner explained the nature of the scrap/waste battery business, procurement and sales process, transportation arrangements, storage practices and payments made through banking channels.

A Show Cause Notice dated 26.08.2022 was subsequently issued alleging wrongful availment and utilisation of ITC amounting to ₹69,56,794, purportedly in violation of Section 16(2)(a) and Section 16(2)(b) of the CGST Act, 2017, on the allegation that goods had not actually been received.

The petitioner further alleged that no effective opportunity of hearing had been granted, notices were not uploaded on the GST portal and were manually served beyond the hearing date, after which the impugned Order-in-Original dated 28.03.2024 was passed.

Issues Involved

The principal issues before the Court were:

  1. Whether ITC could be denied to a purchasing dealer solely because the selling dealer allegedly failed to deposit the tax collected with the Government.
  2. Whether a bona fide purchaser who received goods, possessed tax invoices and made payment through proper banking channels could be penalised for the supplier’s default.
  3. Whether the demand of ₹69,56,794, interest and equal penalty imposed under Sections 50, 74(1) and 122 of the CGST Act and Section 20 of the IGST Act could legally survive.
  4. Whether the controversy was squarely governed by the Gauhati High Court Division Bench decision in National Plasto Moulding vs State of Assam & Ors., reported in [2024] 129 GSTR 544 (Gauhati).
  5. Whether the Department remained entitled to proceed where materials established that purchase transactions were not bona fide or were entered into in collusion with suppliers.
  6. Whether the proceedings were affected by the petitioner’s allegations regarding denial of meaningful hearing, non-uploading of notices on the GST portal, limitation under Sections 73 and 74, and impermissible clubbing of multiple assessment years.

Petitioner’s Arguments

The petitioner contended that the ITC had been claimed in accordance with Section 16(2) of the CGST Act, 2017 after fulfilling the prescribed statutory conditions.

It was argued that:

  • goods were actually purchased and received;
  • proper tax invoices were available;
  • the value of goods and applicable GST were paid through banking channels;
  • relevant GST returns and purchase documents were submitted before the authorities;
  • no incriminating material was recovered during the search;
  • the petitioner had no control over the subsequent conduct of suppliers concerning deposit of tax with the Government;
  • denial of ITC solely due to the supplier’s alleged failure to discharge tax liability was unjustified;
  • no effective opportunity of hearing was granted;
  • notices were allegedly not uploaded on the GST portal and were manually served beyond the hearing date;
  • the impugned order was allegedly passed without meaningful hearing and without issuance of Form GST DRC-07;
  • if there was no actual supply, tax could not be demanded merely on a supposed transaction, and reliance was placed on the Circular dated 06.07.2022;
  • Sections 73 and 74 could not validly be invoked in the manner adopted;
  • the proceedings were time-barred; and
  • multiple assessment years could not be clubbed into a consolidated GST order.

Most importantly, relying on National Plasto Moulding vs State of Assam & Ors., the petitioner submitted that a purchasing dealer cannot be penalised for the selling dealer’s failure to deposit tax collected from the purchaser.

Respondent’s Arguments

The learned Standing Counsel for GST fairly submitted that the issue raised in the writ proceeding was squarely covered by the decision in National Plasto Moulding.

The respondents acknowledged the legal principle emerging from that decision, which had relied upon the Delhi High Court judgment in On Quest Merchandising India Pvt. Ltd. vs Government of NCT of Delhi, reported in [2018] 56 GSTR 177 (Delhi).

The respondent’s position, as recorded by the Court, was that:

  • a bona fide purchasing dealer cannot be denied ITC merely because the selling dealer failed to deposit tax with the Government; but
  • the Department may proceed in accordance with law where purchase transactions are found not to be bona fide.

Court Order / Findings

The Gauhati High Court examined the Division Bench ruling in National Plasto Moulding vs State of Assam & Ors. and noted that it had considered the law laid down by the Delhi High Court in On Quest Merchandising India Pvt. Ltd. vs Government of NCT of Delhi.

The Court reaffirmed the governing principle that a purchasing dealer cannot be punished for the failure of the selling dealer to deposit tax collected from the purchaser, where the purchasing dealer has entered into bona fide transactions and complied with the applicable statutory requirements.

The Court observed that the Division Bench had categorically held that:

  • where a purchasing dealer transacts bona fide with a registered supplier;
  • where statutory requirements are complied with; and
  • where the only default is the supplier’s failure to deposit tax,

denial of ITC to the bona fide purchasing dealer is not justified.

In such circumstances, the Department’s remedy lies against the defaulting supplier, rather than against the bona fide purchaser.

However, the Court maintained an important distinction: where there is material indicating collusion, lack of bona fides or non-genuine purchase transactions, the Department remains free to proceed in accordance with law.

Since both parties agreed that the controversy was covered by the Division Bench decision in National Plasto Moulding, the Court held that no further adjudication was required.

Accordingly, the Gauhati High Court:

  • set aside and quashed Order-in-Original No. 37/GST/AC/SIL/2023-24 dated 28.03.2024;
  • thereby nullified the impugned demand order involving ₹69,56,794, consequential interest and the equal penalty imposed under the stated provisions; and
  • expressly preserved the Department’s liberty to proceed in accordance with law if materials indicated that the transactions were not bona fide or were entered into in collusion with suppliers.

The writ petition was accordingly disposed of.

Important Clarification

This judgment does not lay down an absolute rule that ITC must be allowed in every case of supplier default.

The protection recognised by the Court applies to a bona fide purchasing dealer. The Department remains legally entitled to take action where evidence demonstrates:

  • collusion between purchaser and supplier;
  • sham or fictitious transactions;
  • absence of bona fides;
  • non-genuine purchases; or
  • other legally sustainable material showing that the transactions were not genuine.

Therefore, the decisive distinction is between a genuine purchaser suffering because of an independent supplier’s tax default and a purchaser involved in a collusive or non-bona fide transaction.

Sections Involved

Central Goods and Services Tax Act, 2017

  • Section 16(2)(a) – Possession of tax invoice or prescribed tax-paying document as a condition for ITC.
  • Section 16(2)(b) – Receipt of goods or services or both as a condition for ITC.
  • Section 16(2)(c) – Condition concerning payment of tax charged on the supply to the Government.
  • Section 16(2)(d) – Furnishing of return under Section 39.
  • Section 50 – Interest on delayed payment of tax.
  • Section 73 – Determination of tax not paid, short paid, erroneously refunded, or ITC wrongly availed or utilised for reasons other than fraud, wilful misstatement or suppression of facts.
  • Section 74(1) – Determination involving fraud, wilful misstatement or suppression of facts.
  • Section 122 – Penalty for specified offences.

Integrated Goods and Services Tax Act, 2017

  • Section 20 – Application of specified provisions of the CGST Act to integrated tax matters.

Constitution of India

  • Article 14 – Equality before law and equal protection of laws, discussed through the related precedent relied upon in the judgment.

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783067147_419compressed.pdf

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