🛡️ When Suppliers Default: How Courts Are Safeguarding Your Rightful ITC

In the intricate maze of GST compliance, one recurring challenge faced by honest businesses is the denial of Input Tax Credit (ITC) due to the default or deregistration of suppliers — often with retrospective effect. This scenario unfairly penalizes compliant buyers for issues entirely outside their control.

But here’s the good news: India’s judiciary is standing up for genuine taxpayers. A series of High Court rulings have firmly established that if you’ve done your part — maintained documentation, paid your dues, and complied with GST laws — your ITC cannot be snatched away.

❓ The Problem: Why Should You Pay for Someone Else’s Mistake?

Imagine this:

• You purchase goods or services.

• You pay the supplier, including the GST amount.

• You claim ITC based on a proper invoice.

Months later, you’re hit with a notice asking you to reverse the ITC — not because of any lapse on your part, but because your supplier didn’t file returns or pay tax and has now had their registration cancelled with retrospective effect.

This situation is not just common — it's unjust. And the courts agree.

The Landmark Rulings: A Shift in Perspective

Across the country, High Courts have consistently intervened to protect genuine buyers. The judiciary has shifted the focus from the supplier's status to the authenticity of the transaction itself.

Here are the core principles established by these landmark rulings:

• Focus on the Genuineness of the Transaction: The Madras High Court, in the case of M/s. Engineering Tools Corporation v. The Assistant Commissioner (ST), held that ITC cannot be denied solely because a supplier's registration was cancelled retrospectively. The assessing officer's primary duty is to examine the documents you provide to confirm the legitimacy of the purchase.

  
  

• The Department Must Pursue the Defaulter First: In the foundational case of Suncraft Energy Private Limited, the Calcutta High Court ruled that before denying ITC to the recipient, the authorities should first take action against the defaulting supplier who collected the tax but did not remit it.

  
  

• A Buyer's Diligence is Key: The courts have repeatedly affirmed that if the buyer can demonstrate that they have complied with all the conditions under Section 16(2) of the CGST Act, their claim cannot be invalidated. This includes possessing a valid invoice and proof of payment and receipt of goods.

How to Prove Your Transaction's Genuineness

The consistent message from the judiciary is that your diligence is your best defense. To withstand scrutiny and protect your ITC, you must be able to substantiate the authenticity of every transaction with clear evidence. We advise maintaining a robust documentation file for all purchases, which should include:

• A Valid Tax Invoice: Ensure the invoice complies with all the requirements laid down in the GST rules.

  
  

• Proof of Payment: Maintain records of payments made through regular banking channels, such as bank statements or UTR numbers, that can be linked to the specific invoice.

  
  

• Proof of Receipt of Goods or Services: This is critical. Keep all supporting documents like e-way bills, lorry receipts, delivery challans, and goods receipt notes.

  
  

In Conclusion: Your Diligence is Your Shield

The clear and consistent rulings from the High Courts provide a formidable defense against the unjust denial of Input Tax Credit. They establish that a taxpayer who has acted in good faith cannot be made to suffer for the defaults of their suppliers.

However, this judicial shield comes with a responsibility. The onus is on you, the taxpayer, to be diligent in your processes and meticulous in your record-keeping. By ensuring every transaction is well-documented, you not only strengthen your compliance posture but also equip yourself with the necessary evidence to defend your rightful claims.