ITC of Bona Fide Purchaser Cannot Be Denied for Supplier’s Upstream Default – Mechanical Invocation of Section 74 Held Unsustainable- Allahabad High Court

Date & Year of Judgment

09 September 2025 
WTAX(A)_389_2023
This judgment firmly reiterates that bona fide purchasers cannot be penalised for alleged upstream supplier irregularities and that Section 74 cannot be invoked mechanically.

Case Reference

M/s Safecon Lifescience Pvt. Ltd. vs. Additional Commissioner Grade-2 & AnotherWrit Tax No. 389 of 2023Before the Allahabad High Court 
WTAX(A)_389_2023

1. Main Issue Involved

    Whether ITC can be denied to a bona fide purchaser merely because the supplier’s suppliers allegedly defaulted in depositing tax.
    Whether proceedings under Section 74 of the UPGST Act can be initiated in absence of specific findings of fraud, wilful misstatement or suppression of facts.
    Whether reliance on intelligence input without independent verification is legally sustainable.
The Court addressed both substantive ITC entitlement and jurisdictional misuse of extended limitation under Section 74.

2. Sections and Rules Discussed

  • Section 16(2)(c), CGST/UPGST Act
  • Section 74, UPGST Act
  • Section 11A, Central Excise Act (pari materia)
  • CBIC Instruction No. 05/2023 dated 13.12.2023
  • Supreme Court in Continental Foundation Joint Venture Holding v. CCE
  • Allahabad HC in Khurja Scrap Trading Company
  • Allahabad HC in Solvi Enterprises
The Court harmonised GST provisions with established excise jurisprudence and binding CBIC instructions to restrict arbitrary Section 74 action.

3. Facts of the Case

  • Petitioner engaged in wholesale trading of medicines.
  • Purchased goods from M/s Unimax Pharma Chem, a duly registered dealer holding valid GST registration and drug licence at the time of transaction (April 2021).
  • Tax invoice issued, e-way bill generated, transport bilty produced.
  • Payments made through banking channel.
  • Supplier filed GSTR-1 and GSTR-3B; tax reflected on portal.
Proceedings under Section 74 were initiated based on intelligence input alleging that the supplier had purchased from certain firms whose registrations were cancelled earlier.
ITC was denied on the reasoning that the supplier’s purchases were doubtful.
The denial of ITC was based not on petitioner’s transaction but on alleged irregularities in the supplier’s upstream supply chain.

4. Petitioner’s Submissions

  • At the time of transaction, supplier was validly registered.
  • All statutory conditions under Section 16 were fulfilled.
  • Goods physically moved; documents produced.
  • Payment made via banking channel.
  • GSTR-1, GSTR-3B filed and tax deposited.
  • GSTR-2A/portal reflection corroborated compliance.
  • Section 74 cannot be invoked without fraud/suppression.
  • Relied on CBIC Instruction No. 05/2023 dated 13.12.2023.
The petitioner demonstrated full transactional compliance and invoked both statutory architecture and binding CBIC instruction.

5. Department’s Submissions

  • Supplier’s purchases were doubtful.
  • Registration of upstream entities cancelled earlier.
  • Since supplier’s purchases were suspect, petitioner’s ITC claim becomes invalid.
  • Relied on intelligence report from Central Intelligence Unit.
The department sought to extend suspicion in supplier’s supply chain to the bona fide purchaser without rebutting documentary compliance.

6. Analysis and Findings of the Court

A. Bona Fide Purchaser Protection

The Court held:
  • At the time of transaction, the selling dealer was duly registered.
  • Supplier had uploaded GSTR-1 and filed GSTR-3B.
  • Tax payment was reflected on the portal.
  • Movement of goods and payment through banking channel were proved.
  • No material was brought to rebut petitioner’s evidence.
The Court emphasized that:
  • Mere allegation against supplier’s suppliers cannot automatically invalidate petitioner’s ITC.
  • Authorities must verify facts independently before acting against registered dealer.
  • Intelligence input cannot replace adjudicatory satisfaction.
The Court relied on its earlier decision in Khurja Scrap Trading Company, holding that when seller is registered at time of transaction, adverse inference cannot be drawn without cogent material.
The Court clearly separated upstream irregularity from purchaser’s compliance, thereby protecting bona fide trade.

B. Mechanical Invocation of Section 74

The Court observed:
  • No finding of fraud, wilful misstatement or suppression recorded at any stage.
  • Section 74 requires existence of jurisdictional fact.
  • Extended limitation must be strictly construed.
  • Mere non-payment or suspected irregularity does not justify Section 74.
The Court expressly referred to CBIC Instruction No. 05/2023 dated 13.12.2023, which clarifies:
Section 74 can be invoked only where fraud or wilful misstatement or suppression exists and such evidence must form part of SCN.
The Court reiterated that:
  • Proceedings under Section 74 cannot be initiated merely on account of non-payment.
  • Strict compliance of the instruction is mandatory.
The judgment treats Instruction No. 05/2023 as a binding safeguard against routine use of Section 74.

C. Mens Rea Requirement

Relying on Supreme Court decision in Continental Foundation, the Court held:
  • “Suppression” implies deliberate intent to evade tax.
  • Incorrect statement ≠ wilful misstatement.
  • Burden lies on department to prove intent.
No such finding existed in the present case.
The Court reaffirmed that Section 74 is mens rea-driven and cannot operate on presumption.

7. Final Judgment / Operative Directions

  • Order dated 20.12.2022 (Appellate Authority) quashed.
  • Order dated 12.01.2022 (Adjudicating Authority) quashed.
  • Writ petition allowed.
The Court granted complete relief, nullifying both original and appellate orders for absence of jurisdictional foundation.

8. Similar / Related Judgments & Counter Judgments

Supporting Jurisprudence
  • Khurja Scrap Trading Company – Allahabad HC
  • Solvi Enterprises – Allahabad HC
  • Safecon Lifescience Pvt. Ltd. (Earlier Allahabad cases on supplier default)
  • Tripura HC in Malaya Rub-Tech Industries (reading down Section 16(2)(c))
Counter Position
  • Ecom Gill Coffee Trading Pvt. Ltd. (SC) — applicable where transactions are found non-genuine and unsupported by evidence.
Courts consistently protect ITC where transaction is genuine and portal-compliant, distinguishing fraud cases from compliance cases.

9. CA BTA Insights (Professional Takeaway)

This judgment is extremely significant for defending ITC disputes involving alleged circular trading or supplier irregularities.
Key Takeaways:
    Supplier’s supplier default does not automatically defeat purchaser’s ITC.
    Registration status at time of transaction is critical.
    Portal reflection (GSTR-1 → 2A → 3B) is strong evidentiary shield.
    Section 74 cannot be invoked without explicit fraud finding.
    CBIC Instruction No. 05/2023 (13.12.2023) must be cited in all Section 74 challenges.
    Intelligence input must be independently verified.
Drafting Strategy:
  • Always demonstrate movement of goods + banking trail + GSTR reflection.
  • Demand copy of intelligence report relied upon.
  • Emphasize absence of fraud finding.
  • Argue jurisdictional defect where Section 74 invoked mechanically.
The judgment fortifies two parallel doctrines — protection of bona fide purchaser and strict control over extended limitation under Section 74 — making it a strong precedent in ITC litigation strategy. Copy of the judgement is attached.

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