The Gauhati High Court ruled that a genuine purchaser who has paid GST to a registered supplier cannot be denied Input Tax Credit (ITC) merely because the supplier failed to file GST returns or deposit the tax. This decision came in the case involving M/s Advance Engineering Farms and Equipments, who purchased generators and paid the corresponding GST to the supplier. However, the supplier did not file the necessary GST returns, leading the authorities to demand tax, interest, and penalty from the petitioner.
Read more: Supreme Court - Input Tax Credit cannot be claimed if the supplier has not deposited the tax, and the provision imposing this condition is constitutionally valid [Order attached]
The petitioner received a show cause notice for allegedly claiming excess ITC, despite having paid the GST to the supplier. Although a subsequent rectification application resolved most issues, the ITC related to the purchases from the supplier was still denied, prompting the petitioner to seek relief from the High Court. The court relied on previous rulings, including its own in National Plasto Moulding and the Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd., to support its conclusion.
The court emphasized that a genuine purchaser should not be penalized for the supplier's failure to deposit the collected tax. The proper remedy should be to initiate recovery proceedings against the defaulting seller. Given that the petitioner had paid the full consideration along with GST, supported by valid tax invoices and delivery documents, the court found the denial of ITC unjustified. Consequently, it quashed the demand against the petitioner but allowed for recovery actions against the supplier under the CGST and Assam GST Acts.
Order Date - 16 July 2026
Parties: M/s Advance Engineering Farms and Equipments Vs State of Assam & 3 Others
Facts -
- Petitioner M/s Advance Engineering Farms and Equipments purchased generators worth ₹9.44 lakh during FY 2017-18 from Respondent No. 4 and duly paid the invoice value along with CGST and SGST of ₹72,000 each to the supplier.
- Petitioner later received a show cause notice alleging excess ITC claim. Despite explaining that GST had already been paid to the supplier, the authorities passed an order demanding tax, interest and penalty against the petitioner.
- Petitioner filed a rectification application, after which most issues were accepted by the department. However, ITC relating to purchases from Respondent No. 4 was still denied, leading to the writ petition before the High Court.
- During the proceedings, it emerged that the supplier had received the GST amount from the petitioner but failed to file GST returns. The department sought to recover the ITC from the purchasing dealer because of the supplier's default.
Issue -
- Whether a bona fide purchasing dealer can be denied Input Tax Credit merely because the selling dealer failed to file GST returns or deposit the tax collected from the purchaser.
Order -
- The High Court relied on its earlier Division Bench ruling in National Plasto Moulding and the Delhi High Court's decision in On Quest Merchandising India Pvt. Ltd. to reiterate that a genuine purchaser cannot be denied ITC when purchases are made from a registered dealer through valid tax invoices and without collusion.
- The Court observed that if the selling dealer collects GST but fails to deposit it with the Government, the proper remedy is to initiate recovery proceedings against the defaulting seller. Such failure cannot automatically result in denial of ITC to an honest purchasing dealer.
- Examining the facts, the Court found that the petitioner had paid the full consideration along with applicable GST, supported by tax invoices and delivery documents. Therefore, treating the ITC as excess solely because the supplier failed to file returns was contrary to the settled legal position.
- Accordingly, the Court quashed the demand raised through the rectification order but clarified that the tax authorities remain free to recover the unpaid tax from the defaulting supplier under the CGST and Assam GST Acts.
