The Supreme Court has reaffirmed that Input Tax Credit (ITC) cannot be denied to bona fide purchasers merely because the selling dealers failed to deposit the collected tax provided the purchaser has acted in good faith and complied with statutory requirements under the Delhi Value Added Tax Act, 2004.
Facts:
- Respondent (purchasing dealer) bought goods from registered selling dealers and paid VAT
- Subsequently, the registrations of the selling dealers were cancelled as they failed to deposit the tax collected
- The Delhi VAT Department sought to deny ITC to the Respondent on the ground that the tax was not deposited by the sellers
- The Delhi High Court held that the Respondent was bona fide purchaser who had paid taxes in good faith to registered selling dealers. Therefore, the Respondent is entitled to claim ITC benefit and accordingly allowed the said benefit to them after due verification of invoices
- The Revenue filed a civil appeal before the Hon’ble Supreme Court challenging the aforesaid Delhi High Court’s judgement
Issue before the Supreme Court:
Whether ITC can be denied to a bona fide purchaser solely because the seller failed to deposit the collected tax, despite the purchaser having fulfilled all legal obligations?
Discussion and Ruling:
- The Supreme Court dismissed the civil appeal filed by the Revenue challenging the Delhi High Court’s judgment, which had allowed ITC to bona fide purchasing dealers under the Delhi VAT Act, 2004, despite non-deposit of collected tax by the selling dealers
- The Supreme Court held that there was no dispute regarding the registration of selling dealers at the time of transactions, nor were the transactions or tax invoices questioned or found fraudulent after any inquiry. It was noted that seller’s registrations were cancelled post-transaction, and the sellers had failed to deposit the tax collected
- Referring to the Delhi High Court’s decision in case of On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, the Court reiterated that Section 9(2)(g) of the DVAT Act must be read down to exclude bona fide purchasing dealers from denial of ITC when:
- They purchased from validly registered sellers,
- Held valid tax invoices, and
- Had no collusion or fraudulent intent
- The Court emphasized that the proper recourse for the Department is to proceed against the defaulting sellers and not to deny ITC to genuine purchasers
- Consequently, the Supreme Court found no reason to interfere with the Delhi High Court’s well-reasoned order granting ITC upon due verification and dismissed the appeal due to lack of merit, disposing of all pending applications