Introduction
The Hon’ble Guwahati High Court in Gurucharan Kangsa Banik v. Union of India, W.P.(C) No. 2881 of 2026, decided on 03.06.2026, set aside an Order-in-Original which had denied input tax credit (“ITC”) to a bona fide purchasing dealer solely on the ground that the selling dealer had failed to deposit the tax collected from him. The Hon’ble Guwahati High Court held that a purchasing dealer who has genuinely transacted with a registered supplier, paid the price along with applicable GST through proper banking channels, and complied with statutory return filing requirements cannot be penalised for the default of the supplier, and that the remedy for such default lies against the defaulting supplier and not against the purchasing dealer.
Factual Background
The Petitioner M/s Sree Guru Metal, Silchar, Assam was involved in the business of selling scrap batteries. In financial year 2017-18 and 2018-19, Petitioner has purchased goods from the registered suppliers, Kolkata while receiving the goods paid the invoice value with an applicable GST and credited the same to the bank account using proper tax invoices. The Petitioner timely filed GSTR-1 and GSTR-3B returns and claimed ITC strictly under the provisions of Section 16(2) of the Central Goods and Services Tax Act, 2017 (“CGST Act”).
The Directorate General of GST Intelligence (“DGGI”), Guwahati Zonal Unit, issued summons against the Petitioner for availed ineligible ITC based on the invoices without supply of goods. Petitioner appeared and offered all necessary documents. A subsequent search at Petitioner’s business premises on 09.07.2019 did not yield any incriminating material and the statement of Petitioner confirmed the actual receipt of the goods and depositing funds in the bank including the GST to the suppliers.
However, a Show Cause Notice dated 26.08.2022 was raised for the wrongful availment of ITC of Rs.69,56,794/- in violation of Section 16(2)(a) and (b) of the CGST Act. The adjudicating authority then passed Order-in-Original No. 37/GST/AC/SIL/2023-24 dated 28.03.2024 and confirmed the demand of tax and also of interest under Section 50 and penalty under Section 74(1) of the CGST Act without providing an effective opportunity of hearing to the Petitioner and without issuing form GST DRC-07.
Issues Before The Hon’ble High Court
- Whether a purchasing dealer can be denied ITC and penalised on this single ground that the selling dealer did not deposit the tax collected from the purchasing dealer without proving any collusion or lack of good faith on the part of the purchasing dealer?
- Whether the impugned Order-in-Original issued without giving an effective opportunity of hearing, without Form GST DRC-07 is sustainable in law?
- Whether calling for action under Section 74 of the CGST Act was admissible when the limitation period for invoking under Section 73 of CGST Act had expired?
Contentions Of The Parties
The counsel for the petitioner relying upon the Division Bench judgment of the Hon’ble Guwahati High Court in National Plasto Moulding v. State of Assam, submitted that the controversy was squarely covered by the said decision, as a purchasing dealer cannot be penalised for the selling dealer’s failure to deposit the tax collected from the purchaser.
It was further submitted that the sole basis for denial of ITC was the suppliers’ alleged failure to discharge tax liability, a circumstance entirely beyond the Petitioner’s control, and that the Petitioner had acted in good faith by verifying invoices, receiving goods and making payments through proper banking channels.
The learned Standing Counsel appearing for the Respondents, properly accepted the issue raised was squarely covered by National Plasto Moulding and contended that this writ petition could be disposed off by granting liberty to the Respondent authorities to proceed in cases where the transactions were found not to be bona fide.
Decision And Findings
The Hon’ble Court allowed the writ petition and quashed the impugned Order-in-Original dated 28.03.2024 in its entirety.
The Hon’ble High Court, acknowledging the Division Bench decision in National Plasto Moulding, which in turn followed the Hon’ble Delhi High Court’s decision in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi, reiterated that a bona fide purchasing dealer who has made a transaction with a validly registered selling dealer against a proper tax invoice, and without there being any mismatch regarding the transaction records of the selling dealer, cannot be denied ITC just because the selling dealer failed to deposit the tax with the Government. The Hon’ble Court noted that it would be “unfeasible” for a purchasing dealer to ensure that the selling dealer will in fact deposit the tax collected and that the right of a purchasing dealer to the ITC is subject to such an outside influence would nullify the statute.
Accordingly, the Hon’ble Court observed that in such situation, the remedy that the Department could pursue would be through a proceeding against the defaulting selling dealer for recovery of tax, and not a denial to the purchasing dealer of ITC. The Hon’ble Court also clarified that this protection would not be afforded in circumstances where the Department could prove that the purchase transactions were involved with collusion between the purchasing and selling dealer or that the transactions were otherwise not bona fide in which case the Department could proceed as it was entitled to do under the law.
Since both parties agreed that the controversy stood squarely covered by National Plasto Moulding (supra), the Hon’ble Court found no further adjudication necessary and accordingly set aside the Order-in-Original, while granting liberty to the Department to proceed afresh only upon discovery of material indicating collusion or want of bona fides on the part of the Petitioner.
AMLEGALS Remarks
The decision in the case of Gurucharan Kangsa Banik vs Union of India, underscores the rule that a legitimate purchaser who meets all the conditions specified under Section 16(2) of the CGST Act will not have their ITC claim disallowed simply on the grounds that the selling dealer did not pay the tax to the government. According to the guidelines set out in the cases of National Plasto Moulding and On Quest Merchandising, the Hon’ble court made it clear that the ITC would be disallowed only if there is collusion or bad faith.
As per the principles set out in the National Plasto Moulding case and On Quest Merchandising case, the Hon’ble Court held that it will be unjust to impose the repercussions of non-performance of a supply upon an innocent purchaser where there is no collusion and bad faith involved. In addition, the Hon’ble Court has emphasized that denials made by the ITC must comply with the principle of natural justice, and any action taken under Section 74 of the CGST Act needs to prove fraud, misrepresentation, or concealment of facts, and not non-deposit of tax.
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