Goods & Services Tax (GST) in IndiaRECIPIENT’S ITC CANNOT BE DENIED BECAUSE OF THE DEFAULT BY SUPPLIER’S

The Hon’ble Uttarakhand High Court in Subhash Singh v. Deputy Commissioner, SGST [Special Appeal No. 100 of 2024] decided on.03/05/2024 held that Input Tax Credit (hereinafter referred to as  “ITC”) cannot be denied because of supplier’s default, as ITC is a statutory right.

FACTS

Subhash Singh, (hereinafter referred to as ‘the Appellant’) a purchasing dealer, claimed ITC  based on legally valid invoices from his suppliers.

The suppliers, however, failed to file their Goods and Service Tax Returns (hereinafter referred to as “GSTR”)and did not pay the taxes collected from Subhash Singh.

The proceedings against the Appellant were initiated under Section 74 of the Central Goods and Services Tax Act, 2017,(hereinafter referred to as “CGST“) which deals with fraud and suppression of facts in availing ITC.

An Impugned order dated 22.06.2023 was passed against the appellant, denying the ITC and demanding tax payment from him, leading him to challenge the order before the Hon’ble Uttarakhand High Court.

ISSUES BEFORE THE UTTARAKHAND HIGH COURT

• Whether ITC claimed by the Petitioner can be denied merely because the supplier failed to file returns and pay taxes?
• Whether the demand under Section 74 of the CGST Act be confirmed under Impugned Order merely for non-filing of returns by the supplier despite the availability of valid invoices?

CONTENTIONS OF THE PARTIES

Contention of the Appellant

• The appellant argued that he had validly claimed ITC as per the law. He contended that all invoices from his suppliers were duly produced, and therefore, he had complied with his obligations under the GST laws.
• The appellant argued that it was the responsibility of the suppliers to file their GST returns and pay the taxes collected from him. Since the failure to file returns and pay taxes was on the part of the suppliers, the appellant should not be penalized for their non-compliance.
• He argued that his claim for ITC was not fraudulent or with any intention to evade taxes. Hence, penal action under Section 74 of the CGST which deals with fraud was unjustified.
• The appellant sought modification of the assessment order to relieve him from the burden of paying taxes that his suppliers had failed to remit, as his claim of ITC was made in good faith.

Contention of the Respondents

• The Respondent argued that since the suppliers had not filed their returns and paid the taxes, the ITC claimed by the appellant was improper. They contended that the GST laws require the supplier to remit the taxes to the government before the purchasing dealer can validly claim ITC.
• The respondent held that the appellant should be held accountable for the non-compliance of his suppliers. As the taxes were not deposited by the suppliers, the purchasing dealer could not avail of the ITC, regardless of the invoices produced.

DECISION AND FINDINGS

The Observation of Hon’ble Uttarakhand High Court modified the Impugned Order and held that the Appellant had not availed of the ITC in a fraudulent manner, as all the invoices from the suppliers were duly produced. The failure of the suppliers to file their returns should not result in the denial of ITC to the purchasing dealer.

The Hon’ble High Court noted that it was the responsibility of the suppliers to file their GST returns and pay the taxes they collected. The purchasing dealer should not suffer the consequences of the suppliers’ defaults. further the Hon’ble High Court observed that proceedings under Section 74 should ideally not be instituted against the purchasing dealer in such cases, as the benefit of ITC was not availed fraudulently.

The Hon’ble High Court, considering the provisions of Section 107(6)(d) of the Uttarakhand Goods and Services Tax Act, 2017, (hereinafter referred to as “UGST”) modified the assessment order. It directed the appellant to deposit only 10% of the amount demanded instead of the entire demand.

AMLEGALS Remarks

The Hon’ble High Court’s decision in Subhash Singh v. Deputy Commissioner, SGST sets a significant precedent for the protection of taxpayers’ rights under GST law. By affirming that ITC cannot be denied solely due to the supplier’s failure to file returns or pay taxes, the Hon’ble High Court reinforces the principle that the burden of compliance must be on the defaulting party, not the innocent purchaser.

This judgment serves as a critical reminder of the importance of procedural fairness in tax administration. It highlights that tax authorities must balance their enforcement efforts with the rights of taxpayers who act in good faith. By allowing relief in such cases, the Hon’ble High Court ensures that compliant taxpayers are not unduly penalized for issues beyond their control, which fosters greater trust in the GST regime.

The decision underscores the need for a context-specific approach in tax assessments, promoting accuracy, transparency, and accountability. This ruling can pave the way for future judicial decisions that prioritize equitable treatment and prevent undue hardships for taxpayers. It reflects a positive step towards reinforcing taxpayer protections while maintaining the integrity of the GST system.

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