Supreme Court ruling on Input Tax Credit entitlement for bona fide purchasers in India

Supreme Court ruling on Input Tax Credit entitlement for bona fide purchasers in India

Legal precedence for bona fide purchasing dealers to claim ITC when selling dealer defaults

In a landmark judgment, the Supreme Court of India has upheld the right of bona fide purchasing dealers to claim Input Tax Credit, even if the selling dealer fails to deposit the collected tax with the Government. This ruling, issued in the case of Commissioner, Trade and Tax, Delhi vs. Shanti Kiran India Ltd., brings significant clarity on the issue of ITC entitlement, affirming that the purchasing dealer’s right cannot be negated due to the selling dealer’s failure to meet their tax obligations.

Background of the Case

The case arose from a dispute between the Commissioner, Trade and Tax, Delhi, and Shanti Kiran India Ltd. The matter involved whether a purchasing dealer, who had paid tax to a registered selling dealer under valid invoices, could still claim ITC if the selling dealer had failed to deposit that tax amount with the Government.

Under Section 9(2)(g) of the Delhi Value Added Tax Act, 2004, it was argued that ITC could only be allowed if the tax collected by the selling dealer had been deposited with the Government. Since the selling dealers in this case had defaulted on payment, the Commissioner contended that the purchasing dealer was not entitled to ITC. However, the respondent’s counsel argued that the transactions were genuine, involving registered sellers with valid registration at the time of sale. The respondent had paid the tax in good faith and received proper invoices.

Court’s Observations and Analysis

The Supreme Court considered arguments from both parties, with particular attention given to the precedents set by the Delhi High Court. In a similar case, On Quest Merchandising India Pvt Ltd. vs. Government of NCT of Delhi, the Delhi High Court had already addressed the issue by interpreting Section 9(2)(g) of the DVAT Act. The High Court had ruled that denying ITC to bona fide purchasers violated Article 14 of the Constitution, as it would unfairly penalize innocent dealers for the defaults of others.

The Court emphasized that the remedy in such cases lies with the department's ability to take action against the defaulting selling dealer, rather than denying the purchasing dealer their rightful ITC. The Bench, comprising Justice Manoj Misra and Justice Nongmeikapam Kotiswar Singh, also observed that in the present case, the selling dealers were registered at the time of the transactions, and no evidence of fraud or collusion was found.

The Judgment

Upholding the judgment of the Delhi High Court, the Supreme Court ruled in favour of the purchasing dealer, Shanti Kiran India Ltd. The court concluded that the respondent was entitled to claim ITC after proper verification of the invoices. The judgment affirmed that the failure of the selling dealer to deposit the collected tax with the Government could not be grounds for denying the ITC claim of a bona fide purchaser. The Court also directed that any pending applications related to the case should be disposed of accordingly, signalling a clear position in favour of fair tax treatment for legitimate purchasers.

Key Takeaways

Bona Fide Purchasers’ Rights Protected: The Supreme Court’s decision ensures that legitimate purchasers cannot be penalized for the tax defaults of their sellers.

No Impact on ITC for Genuine Transactions: As long as the purchasing dealer engages in a legitimate transaction with a registered seller, the failure of the seller to deposit the tax with the Government does not affect the purchasing dealer’s entitlement to ITC.

Constitutional Safeguards: The ruling reinforces that denying ITC to bona fide dealers violates the principles of fairness and equality under Article 14 of the Constitution of India.

Focus on Seller's Accountability: The Court clarified that the remedy for non-deposit of tax by the seller lies with the tax authorities, who should take action against the defaulting seller, not the purchasing dealer.

Importance of Proper Invoices and Valid Registration: The judgment underscores the importance of maintaining proper documentation and ensuring that the selling dealer is registered with the tax authorities at the time of sale.

Implications for the Business Community

This judgment provides significant relief to businesses that engage in genuine transactions but find themselves impacted by the tax defaults of their suppliers. It reinforces the principle that businesses acting in good faith, with proper documentation and legitimate dealings, should not be penalized due to the actions of others in the supply chain.

For businesses, this ruling provides much-needed clarity on the process of claiming ITC, ensuring that they are not unduly burdened by technicalities outside their control. It also reinforces the importance of maintaining robust records and ensuring that suppliers are properly registered.

The Supreme Court’s ruling in Shanti Kiran India Ltd. is a significant step towards ensuring fairness in the application of tax laws, particularly concerning the entitlements of bona fide purchasing dealers. By safeguarding the right to ITC, the judgment ensures that legitimate businesses are not unjustly penalized for the failings of others. This decision is a victory for taxpayers and sets a clear precedent for similar cases in the future.