Case Citation

Introduction

The Core Conflict: The "Impossible Burden"

Constitutional Implications and Article 14

The Doctrine of Double Taxation

The Judicial Remedy: "Reading Down" vs. Striking Down

• The Interpretation: The expression "dealer or class of dealers" within the restrictive provisions must be interpreted to exclude bona fide purchasing dealers who have entered into genuine transactions with registered suppliers.
• The Recourse for Revenue: In cases of default, the primary remedy for the Revenue Department is to proceed against the defaulting selling dealer to recover the tax, rather than penalizing the purchaser.
• Exceptions for Collusion: The protection for recipients is not absolute; if the Department finds evidence of collusion or fraud between the buyer and seller, it retains the power to deny ITC and initiate recovery.

Important other Judgements discussed by the court

State of Karnataka vs. Rajesh Jain (2016-VIL-701 KAR)

“7. The aforesaid shows that the finding of fact has been recorded by the Tribunal that the assessee has fully discharged the burden of proof to claim the deduction of input tax as per the tax invoices. The aforesaid finding, in view of the evidence produced and referred to hereinabove by the Tribunal, cannot be said to be perverse. Hence, the question needs to be answered in favour of the assessee. Even if such question arises on the aspects of re-appreciation of the evidence such would result into question of fact. Hence, we do not find that any question of law would arise for consideration, as sought to be canvassed.",

“8. Mr.T.K.Vedamurthy, learned AGA attempted to contend that if the selling dealer has not deposited the amount of VAT with the Government, then the purchaser dealer would not be entitled to claim the benefit of entry tax credit and the said aspect is not examined by the Tribunal."

“9. We do not find that the matter can be stretched to that extent as sought to be canvassed. Once the purchaser dealer-assessee satisfactorily demonstrates that while purchasing goods, he has paid the amount of VAT to the selling dealer, the matter should end so far as his entitlement to the claim input tax credit. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the Revenue to proceed against the selling dealer. But thereby the benefit of input tax credit cannot be deprived to the purchaser dealer.”,

2. On Quest Merchandizing India Pvt. Ltd. vs. Government of NCT of Delhi (2017 SCC OnLine Delhi 13037)

“39. Applying the law explained in the above decisions, it can be safely concluded in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution.",

“40. The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana (supra)... It was held that: 'In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender... Law cannot envisage an almost impossible eventuality... In the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of Articles 14 and 19 of the Constitution of India...'",

“41. The Court respectfully concurs with the above analysis and holds that in the present case, the purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the Government the tax collected by him... Indeed Section 9 (2) (g) of the DVAT Act places an onerous burden on a bonafide purchasing dealer.",

“42. All this points to a failure to make a correct classification on a rational basis so that the denial of ITC is not visited upon a bonafide purchasing dealer. This failure to make a reasonable classification, does attract invalidation under Article 14 of the Constitution... [as] weighed with the Court in Shanti Kiran India Pvt. Ltd. (supra)...",

“53. In light of the above legal position, the Court hereby holds that the expression ‘dealer or class of dealers’ occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers... Unless the expression ‘dealer or class of dealers’ in Section 9 (2) (g) is ‘read down’ in the above manner, the entire provision would have to be held to be violative of Article 14 of the Constitution.",

“54. The result of such reading down would be that the Department is precluded from invoking Section 9 (2) (g) of the DVAT to deny ITC to a purchasing dealer who has bona fide entered into a purchase transaction... In the event that the selling dealer has failed to deposit the tax... the remedy for the Department would be to proceed against the defaulting selling dealer... and not deny the purchasing dealer the ITC.",

3. Commissioner of Trade and Taxes vs. Arise India Limited (2022 (60) GSTL 215 (SC))

“1. On hearing Learned Additional Solicitor General appearing for the petitioner, we are not inclined to interfere with the impugned order. The special leave petition is dismissed."

“2. Learned Additional Solicitor General, however, submits that a batch of petitions were decided by the impugned order and there are some of the case where the purchase transactions are not bona fide like the present case and those case ought to have been remitted back to the competent authority.",

“3. Learned Additional Solicitor General Submits that the petitioner would move the High Court with necessary particulars for directions in this behalf for which liberty is granted, as prayed for.”

4. Onyx Designs vs. Asst. Commr. Of C.T. ((2019) 67 GSTR 209)

“12. From the aforesaid rulings, it is clear that the benefit of input tax cannot be deprived to the purchaser dealer, if the purchaser dealer satisfactorily demonstrates that while purchasing goods, he has paid the amount of tax to the selling dealer. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the selling dealer.",

“20. In view of admission of the genuine transaction as well as bona fide claim and in the absence of any other allegations made against the purchasing dealer... merely for the reason that selling dealers have not deposited the collected tax amount or some of the selling dealers have been subsequently de registered cannot be a ground to deny the input-tax credit.”,

5. Jain Steels & Alloys Mfrs. vs. CCT (2019 SCC OnLine Kar 3943)

“7. Having heard the learned counsel appearing for the parties and perusing the material on record, it is ex fade apparent that the assessing authority has denied the input tax credit mainly on the ground that the selling dealer has not deposited the taxes collected... There is no dispute regarding the genuineness of the purchase made by the petitioner-purchasing dealer. The assessing authority... merely for the reason that the selling dealer has not deposited the collected tax amount, ought not to have arrived at a decision to deny the input tax credit.",

“11. There is no cavil on the said legal proposition. Now, the fulcrum of dispute is whether the assessee has discharged the burden of proving the claim of input tax credit on the payment of taxes alleged to have been made. Without examining the same, merely on the ground that no selling dealer has deposited the collected taxes, input tax credit has been denied. This factual aspect requires to be reconsidered by the assessing authority in the light of the judgments referred to above.”,

6. Commissioner Trade and Tax Delhi vs. Shanti Kiran India (P) Ltd. ((2025) 25 Centax 222 (SC))

“2. In these appeals the short issue that arose for consideration... was whether the benefit of Input Tax Credit (ITC) is available to the registered purchaser dealers (respondents herein) who paid taxes to registered seller dealer(s) in terms of invoice(s) raised by them even though those seller dealers did not deposit the collected tax with the Government.",

“3. ... The High Court vide impugned judgment and order(s) found respondent(s) bona fide purchaser dealer(s) who had paid taxes in good faith to registered seller dealer(s) and, therefore, entitled to the benefit of ITC and, accordingly, allowed the said benefit to them after due verification of invoices.",

“7. In light thereof, as we find that there is no dispute regarding the selling dealer being registered on the date of transaction and neither the transactions nor invoices in questions have been doubted... we do not find a good reason to interfere with the order of the High Court directing for grant of ITC benefit after due verification. The appeals lack merit and are, accordingly, dismissed.”,

7. National Plasto Moulding vs. State of Assam ((2024) 21 Centax 182 (Gau))

“1. ... the controversy involved in these writ petitions is squarely covered by the decision of the Delhi High Court in the case of On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi... wherein it was categorically held that a purchasing dealer cannot be punished for the act of the selling dealer in case the selling dealer had failed to deposit the tax collected by it.",

“4. Before the Delhi High Court, the validity of section 9(2)(g) of the Delhi Value Added tax Act, 2004 was under challenge. The said provisions of the Delhi Value Added tax Act are analogous to the provisions of section 16(2)(c) and 16(2)(d) of the Assam Goods and Services tax Act, 2017 as well as section 16(2)(c) and 16(2)(d) of the Central Goods and Services tax Act, 2017.",

“7. Having gone through the above referred judgments, we are of the view that the controversy raised in this batch of writ petitions is squarely covered by the decision of the Delhi High Court in the case of On Quest Merchandising India Pvt. Ltd. ... Hence, the show-cause notices impugned in the present writ petitions and the consequential orders are set aside. However, the Department is free to act in those cases, where the purchase transactions are not bona fide, in accordance with law.”,

8. M/s Sahil Enterprises vs. Union of India (W.P.(C) 688/2022, Tripura High Court)

“19) In our opinion, there is a failure by the Parliament, while enacting Section 16 (2)(c) of the Act, to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the Act and those that have not. Therefore, there is need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers.",

“20) The purchasing dealer cannot be asked to do the impossible, i.e., to identify a selling dealer who will not deposit with the Government, the tax collected by him from purchasing dealers, and avoid transacting with such selling dealers."

“22) So section 16(2) (c) of the Act places an onerous burden on a bona fide purchasing dealer."

“35) It ought not to be interpreted to deny ITC to purchasers in a bona fide transaction and should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue."

“57) For all the aforesaid reasons, the Writ Petition is partly allowed as under: ... (b) But Section 16(2) (c) of the Act ought not to be interpreted to deny ITC to purchasers in a bona fide transaction like the petitioner and it should be read down and applied only where the transaction is found to be not bona fide or is a collusive transaction or fraudulent transaction to defraud the revenue.”,

Conclusion

Disclaimer

The information contained in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. Each case requires specific evaluation based on facts and applicable laws. Readers are advised to seek professional advice before taking any action.