Supreme Court Protects Genuine Dealers: ITC cannot be denied for Seller’s Failure to Deposit Tax

Supreme Court of India Judgment on Input Tax Credit Rights

The Supreme Court of India, in Commissioner, Trade & Tax, Delhi v. M/s Shanti Kiran India (P) Ltd. (Civil Appeal Nos. 2042–2047 of 2015, decided on 9 October 2025), has delivered a landmark judgment safeguarding the rights of bona fide dealers under tax law. The Court held that Input Tax Credit (ITC) cannot be denied to genuine purchasing dealers merely because the selling dealer failed to deposit tax with the Government.

Background Of The Case

The dispute arose under the Delhi Value Added Tax Act, 2004, where the Department invoked Section 9(2)(g) to deny ITC to M/s Shanti Kiran India Pvt. Ltd. on the ground that sellers had defaulted in depositing VAT, despite the purchasing dealer having paid the tax as per valid invoices. The Delhi High Court had granted ITC benefit, ruling that denial in such bona fide cases would be unconstitutional under Article 14. The Supreme Court upheld this decision, rejecting departmental appeals.

Key Observations And Judgment

The Bench comprising Justices Manoj Misra and Nongmeikapam Kotiswar Singh noted:

“There is no dispute regarding the selling dealer being registered on the date of transaction… and neither the transactions nor invoices in question have been doubted… We do not find a good reason to interfere with the order of the High Court… The appeals lack merit and are, accordingly, dismissed.”

The Court endorsed the view taken by the Delhi High Court in Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi and Ors (2017 SCC OnLine) holding that Section 9(2)(g), if applied literally, would violate Article 14 as it would unjustly punish honest dealers for defaults beyond their control.

Principles Laid Down – Protection of Bona Fide Purchasers

• ITC cannot be denied to purchasers who have bought goods from registered dealers, possessed genuine invoices, and paid tax in full through regular banking channels.
• Department’s recourse: The tax department’s remedy lies against the defaulting seller, not the innocent purchaser. Denial of ITC to a compliant dealer amounts to penalising the wrong party.
• Conditional safeguard: The benefit applies only when transactions are genuine, with no evidence of fraud or collusion between buyer and seller. Any such mala fide activity will disentitle the purchaser from ITC.
• Constitutional foundation: Arbitrary denial of ITC offends Article 14 (right to equality), reinforcing that a taxpayer acting in good faith cannot be punished for another’s wrongdoing.

Impact On GST Regime

Though the case arose under VAT law, its reasoning profoundly influences GST jurisprudence:

Related Case: Assistant Commissioner of State Tax v. Suncraft Energy Pvt. Ltd. (2023)

In Assistant Commissioner of State Tax v. Suncraft Energy Pvt. Ltd., 2023 (12) TMI 739, the Supreme Court dismissed a Special Leave Petition filed by the tax department against a Calcutta High Court decision. The ruling upheld that a buyer cannot be denied Input Tax Credit solely because the supplier failed to remit the collected tax.

The dispute arose when Suncraft Energy, the buyer, had claimed ITC based on full invoice payment (including GST). However, the tax authorities demanded reversal of ITC as the supplier’s invoices were not reflected in Form GSTR-2A and tax had not been deposited. The High Court set aside this demand, emphasizing that denial of ITC should be a last resort. The Apex Court’s refusal to intervene on December 14, 2023, reinforced that ITC denial must not be arbitrary unless collusion or fraud is proven.

Takeaways

• ITC is a substantive right, not a discretionary concession, when good faith and compliance are shown.
• Genuine dealers gain protection from cascading liabilities caused by supplier defaults.
• Administrators should focus on fraudulent or inactive sellers rather than penalising compliant purchasers.

Conclusion

This ruling marks a crucial step toward fairness in India’s tax ecosystem. By aligning tax administration with constitutional equality and commercial reality, the Supreme Court has reinforced trust in the GST system while ensuring that compliance and integrity remain its cornerstones. The judgment will likely influence interpretation of GST provisions, promoting uniformity and justice for genuine traders under the evolving indirect tax framework.

Author: Inder Chand Jain
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