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The Supreme Court has ruled that Input Tax Credit (ITC) cannot be denied to bona fide purchasers merely because the seller failed to deposit the tax. This landmark judgment ensures fairness for genuine taxpayers and reinforces the principle that honest dealers should not suffer for the defaults of others.
The case is Commissioner Trade & Tax, Delhi vs. M/s Shanti Kiran India (P) Ltd. (Civil Appeal Nos. 2042–2047/2015). Under the Delhi Value Added Tax Act, 2004 (“DVAT Act”), the purchasing dealer (Shanti Kiran) bought goods from certain sellers who were registered dealers at the time of sale, and the purchaser paid VAT under the invoices issued by those sellers.
Subsequently, the sellers defaulted in depositing the VAT collected, and their registrations were cancelled. The revenue sought to deny the purchaser the Input Tax Credit (ITC) on the ground that the sellers had not remitted the tax to the government.
The revenue relied on Section 9(2)(g) of the DVAT Act, which conditions the allowance of ITC on the actual deposit of tax by the selling dealer.
On behalf of the purchaser, the arguments were: (i) the transaction was in good faith, (ii) the seller was duly registered at the time of the transaction, (iii) valid tax invoices were issued, and (iv) there was no evidence of collusion or fraud.
The Delhi High Court had earlier held that the purchaser should not be penalised by denying ITC in such a situation, effectively “reading down” Section 9(2)(g) to protect bona fide purchasers, unless collusion/fraud is established. The revenue appealed to the Supreme Court.
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